The Funding Landscape for Small Biopharma Ventures, 2010-2015: Trends, Strategies and Priorities

Date: July 22, 2010
Pages: 133
US$ 3,835.00
Publisher: Business Insights
Report type: Strategic Report
Delivery: E-mail Delivery (PDF)
ID: F8B83D20A29EN

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The Funding Landscape for Small Biopharma Ventures, 2010-2015: Trends, Strategies and Priorities
The funding landscape for small and mid-cap biomedical companies has changed enormously over the past two years, driven by recessive public markets and withdrawal of private equity financing. The cost of raising capital has increased, and investors have become very selective about the type of transactions they participate in. Most small biopharma ventures are struggling to raise funds and maintain enough working capital for their clinical endeavours. As with any negative development, there are greater opportunities for both buyers and sellers.

This report investigates the implications of the credit crisis over the next five years and suggests strategies that can improve the chances of raising money without compromising on the inherent strengths of a company or clinical asset. The emerging trends, priorities and strategies of investors are described to help entrepreneurs target the right type of investor and communicate their value proposition in the best possible manner.

Key features of this report
  • The long-term and short-term implications of the credit crisis on investors and entrepreneurs seeking to raise funds from public and private markets.
  • Established and emerging preferences in the actual deal valuation and execution process- both at a conceptual level and in terms of specific inputs that industry professionals will need. Additional insights on the due-diligence process are also provided.
  • Trends associated with “conditional” investments that are better able to share the risks, uncertainties and upsides; especially relevant for alliances between large pharmaceutical companies and smaller biotechnology companies.
  • Insights on the negotiations between deal-makers: their focus areas, issues of concern, preferences in risk-sharing and how these preferences are reflected in the actual deal terms and conditions.

Scope of this report
  • Facilitate communication between entrepreneurs and investors by appraising them of each others priorities, areas of concern and operational constraints.
  • Plan in advance by understanding how such priorities, concerns and constraints will evolve over the next five years.
  • Understand the role of large pharmaceutical companies in funding the clinical initiatives of small biopharma players via options-based deal structures that best resolve the conflicting incentives of the two parties.
  • Understand the exit strategies of healthcare investors and tailor asset valuations and negotiation points accordingly.
  • Use the top-line industry ‘average’ data to shape economic assessments and communication.

Key Market Issues
  • IPOs are not around anymore and private equity funds are struggling to raise capital and yesteryear’s artificially suppressed rates. This has severely restricted the funding options for the majority of small-mid cap biopharmaceutical companies.
  • Large pharmacutical companies, with their AAA credit ratings and stable cash flows, have become the major source of funds for smaller biotechnology ventures via an array of collaborative arrangements like product licensing, co-development, etc.....
  • This situation has greatly improved the bargaining position of the large pharma companies, enabling them to pick and choose from a wide range of relatively lower priced assets to replenish their ailing pipelines.

Key findings from this report
  • Existing investors are reinvesting in assets they have already committed funds to because newer investors are demanding excessively dilutive investment structures that do not favor the existing owners.
  • Small biotech companies are struggling to maintain working capital reserves as private equity investments have been scaled back and the IPO is no longer a feasible source of funds.
  • Both supply and demand-side factors are reducing the earnings potential of biopharma assets. The higher cost of raising capital has fundamentally reduced the capacity to invest in risky drug development assets. Simultaneously, budgetary pressures on healthcare spending are reducing society’s willingness to pay premium prices for therapies that offer marginal improvement.
  • Drug manufacturers are likely to become the primary source of funding for small-mid cap biopharma via a variety of established arrangements such a licensing/ marketing agreements, co-development, joint-ventures or M&A.
  • The financial crisis has not changed the geographic distribution of venture financing in any discernable manner. The US and Canada will continue to remain the hubs of biopharma innovation in the next five years.

Key questions answered
  • How has the financial crisis impacted the funding environment for small-mid sized biomedical companies? What will be the short-term and long-term effects of the crisis for biopharma companies?
  • How do healthcare investors value opportunities in early stage biomedical assets? Are there any preferences by investor type in terms of methodologies, discount rates and cash flow projections?
  • What are the priorities and preferences of different types of private equity funds? What issues should entrepreneurs prepare answers for to successfully negotiate the due-diligence process of private equity investors?
  • How has venture financing changed in response to the credit crisis? Is there a renewed interest in some therapy areas, geographies or stages of the development lifecycle?
The funding landscape for small biopharma ventures, 2010-2015
Executive Summary
Macroeconomic trends and implications
Accelerating biopharma collaboration
Valuing investment opportunities in small biopharma
Priorities and preferences of private investors
Top-line trends in venture financing
Investment choices of most active firms in 2009


Recent events
Supply side factors- higher cost of capital
Demand side factors- Decreased earnings potential
Provider-level constraints
Patient-level implications
Short and long term implications
Non-dilutive funding in an era of excessive dilution
Research grants and government contracts
Incentives of non-profit foundations
Government incentives and associated initiatives
Issues surrounding NDF from non-profit agencies


Accelerating biopharma collaboration
Rapidly evolving deal structures
De-risking R&D via options-based investing
Due diligence in biopharma alliances
Marketing agreement
Licensing arrangement/Product acquisition
Joint venture
Alliance/Corporate partnering
Outright acquisition of a company


Valuation methods and usage
Discounted cash flow
Risk-adjusted net present value
Real options
Assessing commercial potential
Sales potential
Pricing and positioning
Cost of commercialization


Stages of investment
Investors: definition, overview
Distinction between private equity and venture capital funds
Angel investors
Venture capital funds
Mezzanine investors
Venture investors versus buyout investors
Process of getting new investment
Term sheets
Type of security
Board representation
Capital expenditure
Single versus multiple investors
Investor priorities in the new landscape
Market attractiveness and product-market-focus
The organization
Business plan
Assessment of risks
Intellectual property protection


How to use this chapter
Definition of key terms
Venture financing
Early stage
Growth/expansion capital
Later stage
Bridge loan
Private placement
Countries attracting the most venture financing
Recent trends
Distribution of venture financing rounds by investment stage
Recent trends
Further analysis of financing rounds by stage


Most active venture capital investors in 2009
Analysis of investment preferences
Therapeutic areas of focus
Investment destinations by geography
Stage of investments
Two types of venture investors
Corporate Venture Capital (CVC) funds
Emerging role of CVC in Life Sciences
Strategic motivations
Novartis Venture Fund
Novo A/S, Denmark
Independent venture capital funds
SV Life Sciences
Investment focus in 2009
Texas Coalition for Capital


Research methodology


Figure 1.1: Components of government healthcare expenditure in US, 2008
Figure 1.2: Market share of generic medicines in Europe, 2007 (by volume)
Figure 1.3: IPOs have recently reappeared at a low level
Figure 1.4: Grant-making focus of Bill & Melinda Gates Foundation
Figure 2.5: How biotech entrepreneurs hope to deal with the financial crisis
Figure 2.6: Reliance of big pharma on R&D externalization
Figure 2.7: Trends in biotech-pharma deals by development stage
Figure 2.8: Overview of partnering issues
Figure 2.9: Option agreements by top 20 pharma companies (?Phase I)
Figure 2.10: Reliance on the option model varies by company
Figure 2.11: Deal structures and responsibilities
Figure 3.12: Primary valuation methodology by investor type, 2009
Figure 3.13: Assessing the net earnings potential of a medical intervention
Figure 3.14: Assessing revenue potential
Figure 3.15: Pricing and positioning
Figure 3.16: Impact of incoming therapies on payor budgets
Figure 3.17: Development and commercialization costs
Figure 4.18: Company growth stages and funding sources
Figure 4.19: The deal “funnel” at a typical VC firm
Figure 4.20: Sequence of documents
Figure 4.21: Board size: advantages and limitations
Figure 5.22: Geographic distribution of venture financing rounds
Figure 5.23: Trends in geographic distribution of venture financing rounds
Figure 5.24: US investments by region, 2008-2009
Figure 5.25: Total number of financing rounds by stage, 2004-2010
Figure 5.26: Distribution of financing rounds by stage, 2004-2010
Figure 5.27: Trends in financing rounds by stage, 2004-2019
Figure 5.28: Early-stage funding by type, 2004-2010
Figure 5.29: Mid-stage funding by type, 2004-2010
Figure 5.30: Late-stage funding by type, 2004-2010
Figure 6.31: Preferences of top 15 venture finance investors, 2009
Figure 6.32: Preferences of top 15 venture finance investors, 2009
Figure 6.33: Number of deals by investment stage, 2009
Figure 6.34: R&D performance scorecard
Figure 6.35: Novartis Venture Fund investments in 2009
Figure 6.36: Novo A/S ownership structure
Figure 6.37: Novo A/S investments, 2000-2008
Figure 6.38: Novo A/S investments in 2009
Figure 6.39: SV Life Sciences investments in 2009
Figure 6.40: Texas Coalition for Capital investments in 2009


Table 1.1: Non-dilutive sources of funding
Table 2.2: Established and evolving deal structures
Table 2.3: Incentives in a strategic licensing arrangement
Table 3.4: Overview of valuation methods
Table 4.5: Stages of equity investing
Table 6.6: Most active venture investors in 2009
Table 6.7: R&D focus of top 15 venture investors, 2009
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The Funding Landscape for Small Biopharma Ventures, 2010-2015: Trends, Strategies and Priorities
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