Those that adapt to change will survive

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By Daniel Pharand

There have been a number of trends in the biotech funding world since its last bubble and bust in the early 90’s. Those were the trends that attracted funding from venture and angel investors. Some of you who have been around for awhile will surely remember some of these. Here are just a few.

Remember these:
“It takes management”. There can be great technology but if there is no management then it is a racing car without a race car driver. Even a mediocre technology with great management will result in the biotech getting funded. This model would require the full C Level Team. The Chief Executive Officer, the Chief Finance Officer, the Chief Science Officer, and the Chief Operating Officer.

The problem here is when financing dries up, like in these days, then it is a racing car and a race car driver without gas!

“You need innovative therapeutic technologies”. No veterinarian, no medical device, no diagnostic just something a large pharma would want.

Well that’s over! Investors now want to see sales and profit or close to making some. What else? Veterinarian (what a growing market that deserves an article on its own), medical device and diagnostic are just that.

“The company needs to focus” on registration of one indication in order to optimize the cash.

When that failed then the company really crashed.

“The company needs a platform technology” that can lead to a multitude of application.

Maintaining such technologies required enormous funding and investors quickly lost confidence after one or two failures.

“The company needs an IP strategy developed by high price US lawyers.” This strategy is a very expensive endeavor that leaves little money and resources for anything else.

More recently the “RTO” (reverse take over) or SPACs (special purpose acquisition companies in the US) craze. This created public companies with poor liquidity and usually left them as orphan status on the trading floor of the exchange. One of the major problems with this source of financing is that many venture funds’ by-laws prevent them from investing in public companies.

This restriction is quite unfortunate since this provides for great valuations.

Here are a few more buzz words that attracted financing:
“Early Stage and Late Stage,” which meant something different to everyone.

“Blockbuster,” which has been rarely seen emerging out of the Canadian Biotech scene.

These days these trends or buzz words are not sufficient to attract money anymore.

New Trends
One of these new trends is “Project Base Financing”. This model is in its infant stage and may prove to be a challenge in itself. The theory is that ventures would invest in “Projects”. These projects would be administered virtually while outsourcing would be the flavour of the day. A team of C Level experts would guide the technology through its value building milestones from product development through its licensing out. The objective would be to have a number of projects being directed by the same team. This would certainly optimize funds for product development.

Is there a project deal flow market? The answer is without a doubt yes. The deal flow would come from biotechs themselves, like the Platforms referred to above, that do not have sufficient funds to explore other indications. Another contributor would be the biotechs that went bust. Even pharma becomes a source through their mergers with spin outs of projects that are no longer in their marketing focus.

The success of Project Base Financing will depend on the experience of the team and its ability to guide the projects through their development stage. The success will depend on the C Level Team that can concentrate within a very particular niche since it would never have the breadth of experience to take on projects in different sectors.

One solution to this dilemma is to have these projects run by CROs (Contract Research Organization). Of course the CROs must have this strategy in their business model. They have the wide experience and ability to drive these projects through their development path in a very cost efficient way. The deal structure can consist of simple risk and reward sharing model.

Another increasingly popular financing trend is the conversion of sweat equity by service providers. This has many advantages aside from the obvious of reducing the burn rate.

Some of these advantages are having the service provider with a stake in the company and thereby sharing the same goals of success as the other shareholders. This practice usually increases the confidence level of other investors or potential investors. Of course the largest service provider in a Biotech is its own CRO. The service provider now has the opportunity to participate in an interesting upside.

Therefore those that can adapt to changes will gravitate towards these types of creative and innovative financing tools and CROs will offer this new financing tool.

Daniel Pharand, C.A. is a Chartered accountant with over 25 years of experience in the pharmaceutical, biotech and life sciences industries with a proven track record. He currently serves as a Principal of Cato BioVentures and as Chief Financial Officer of Cato Research, as well as Chief Strategic Officer and Chief Financial Officer of Cancer Advances. Mr. Pharand was the Chief Financial Officer of Pharmacia Canada and of Pharmacia KK (Japan).

He subsequently became an entrepreneur with a successful Canadian distribution company of innovative pedicular screws systems in orthopaedic therapies. Pharand later was involved in the Biotech Venture with Innovatech Grand Montréal over his five years as Portfolio Manager. Pharand has also acted as a director and has served on various boards for more than 30 publicly traded or life sciences corporations, including Corautus Genetics Inc. (NASDAQ: VEGF), Bio 1 Inc. (now TSX-V: ARU), LAB International Inc. (TSX: LAB) and Mistral Pharma Inc. (TSX-V: MPI).