The Ultimate Decision – Financing, Strategic Alliance, or Bankruptcy

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Unfortunately, a lot of companies find themselves in this position at various times in their life.  We’ll use the Biotech industry and a publicly traded company as an example of why these choices are important.  In general any biotech startup will have gone through a significant amount of money even before they get their product out to market.  It’s during this phase that the company needs to decide how to stay afloat until they can commercialize their product.

Should the company finance the drug commercialization process itself or should it find a strategic alliance partner to help fund the project?  If the company doesn’t make the right decision, it could result in a serious cash crunch during the wrong time which could cause the company to go bankrupt. 

Let’s use Sarepta Therapeutic, Inc. (SRPT) as a real life example.  In its 2012 fourth quarter, the company reported over $110 million in cash net of debt.  Currently its stock price is in the low 30’s and it has recently developed a very successful drug, eteplirsen, which battles Duchenne Muscular Dystrophy.   The company has proven that it can finance large sums of money. 

If the company were to finance commercializing its new drug, it would need to add approximately 50 percent to what it thinks it will need to get commercialization under the slowest FDA approval scenario.  The company could finance that into cash right now by charging between $25 to $30 per share.  Obviously, there’s a down fall as it would dilute the current stock by as much as 50 percent.  This would not be a good approach for shareholders and at the end of the day, the board of directors are required to protect shareholder value. 

Now let’s look at finding a strategic partner.  Even though Sarepta could finance, partnerships have proven successful in the biotech industry.  For example, the Canadian company Med BioGene (MBI) was at the brink of bankruptcy two years ago.  The company made the decision to partner with Precision Therapeutics to commercialize its drug, LungExpress Dx now called GeneFX Lung.  It received the cash it needed from Precision and to pay off its debt and Precision will commercialize the drug this summer.  Once the drug is commercialized, MBI will receive another cash payment from Precision and may never need to finance if sales perform well. 

When the product starts selling, MBI will receive royalty payments as much as 7 to 9 percent and Precision pays 100 percent of the costs to commercialize.  MBI will not have many expenses when it starts receiving royalty and will be able to grow its base revenue.  The company only owes royalty payments to the University Health Network.  When GeneFX Lung reaches $10 million in sales per year, MBI will have a positive cash flow.   

A strategic partnership looks like the way to go.  Shareholder value is not depleted and the company will have the ability to pay off debts and not have to pay for the cost to commercialize its product.  These two companies are excellent examples of managing development-stage biotech corporations effectively by maximizing shareholder value and returns. 


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