Recently, the Gilmartin biotech team hosted a webinar with Silicon Valley Bank (SVB), discussing debt financing for emerging biotech companies. If you were unable to attend, you can watch a replay of the conversation. Gilmartin Group’s managing director Laurence Watts and principal biotech Stephen Jasper interviewed SVB’s managing directors Kate Walsh and Shawn Perry about the current world of debt financing and if biotechs need to partake. Both Walsh and Perry are part of the Life Sciences and Healthcare department at SVB. Walsh holds a focus in biopharma and tools and diagnostics, and Perry is the head of credit solutions. We recommend watching the full webinar to capture all of the insights Walsh and Perry shared, but here are a few central points we wanted to highlight.
At what stage would SVB lend debt to an early-stage biotech company?
SVB works with companies at all stages of development. Perry explained that when focusing specifically on early-stage companies, SVB will entertain debt facilities once a potential client completes its Series A round. At this point, the company can start to think about how they can benefit the potential client. SVB analyzes how they can complement the client’s overall capital strategy.
What are “good use” cases for debt at a biotech?
More often than not, SVB works with debt facilities for a biotech company that has recently closed a Series A, B, or C round. Such companies seek debt financing to provide additional runway to their pipeline when they encounter inevitable delays in clinical trials. Perry noted, “It can be nice to have a debt facility that can give you 3-6 months of additional runway.” In addition, SVB helps companies fund any capital expenditures, including funds for manufacturing and singular or multiple asset acquisitions.
Does a reputational angle accompany debt financing–do only “bad” biotechs raise money for debt?
“No,” said Walsh. She would argue that the strongest biotech companies are using debt capital to lower their blended cost of capital. She then took the opportunity to emphasize that debt should be complementary to a company’s equity strategy. It should never be competing with it, and it is prudent for a biotech to take on the right amount of leverage to prepare its business properly. Walsh and Perry speculated that any negativity that accompanies debt financing would be a product of misuse. Walsh continued, “Over-leveraging can impede you from raising equity rounds. Many companies are board-specific when taking on debt at the early stages.” She noted that many venture capitalists are enthusiastic about taking on debt and use it at any given opportunity, while others use it selectively.
At the end of the day, it’s a conversation each biotech must have with its board to understand their views and how they plan to implement debt. Perry dove deeper into this explanation, stating, “The negative instances occur when companies take up too much debt.” He specified that SVB is challenged to determine how they might best benefit the biotech company and avoid leveraging too quickly when this occurs.
What are the prerequisites for lending?
With prerequisites, SVB’s goal is to complement a biotech’s equity round by positioning themselves to “generally come in alongside an equity financing or shortly thereafter,” stated Perry. He explained that, often, biotech companies do not seek debt financing until they actively need revenue support. This, however, would be the most challenging time for SVB to step in. Walsh and Perry urged listeners to think about “taking on debt when you don’t think you need it.” Debt should be viewed as an “insurance policy” to give a company additional time before running into more significant financial deficits. Perry continued, “We are always looking at the syndicates of these companies as well. There are phenomenal companies in the space that are bootstrapped by family offices, but that said, those are generally not the types of syndicates who borrow from SVB.”
Generally, SVB has a longer track record with venture capitalists and crossover or investor firms. With its borrowers, SVB always aims to dive deep into the company’s financial demands, identifying its IP and defense level. If the IP appears weak, SVB will typically opt to take a different angle and look at the biotech’s liquidity position, its syndicate or competitive landscape. Perry stated that SVB must examine these aspects to contemplate a debt facility.
Are loans typically paid back out of future equity financing? Is this mandated?
SVB does not explicitly mandate companies to pay back loans. Typically, they are repaid through future financings. An exception to this would be an acquisition. Here, as money is required, it is typical for a biotech to pay off the loan at the time of the acquisition. However, Perry noted he has biotech clients in which SVB holds an ongoing relationship where they feel comfortable letting the acquirer assume the debt, but that is a rarity. With future equity financing, that’s a point where SVB will take a fresh look at a company’s debt facility and look into providing incremental debt on top of their existing loans. This will ensure that a company uses equity proceeds to further its business, not repay debt.
Throughout the webinar, SVB established the importance of each biotech company understanding its own financial goals and restraints, establishing clear communication with its board of directors, and acting proactively to seek out debt before running into financial hardship. SVB strives to offer appropriate amounts of debt to suit each company’s individual needs. Based on the discussion, it is clear that SVB wants to see its clients succeed. As stated above, “The strongest biotech companies are using debt capital to lower their blended cost of capital.” Debt can be immensely beneficial when used at the right time, in the right way.
To hear the full conversation, be sure to watch the replay. If you have questions about how we strategically partner with our clients, contact the Gilmartin team today.
Rachel Mahler, Analyst