24 Dec 2019
Upscaling for growth in life sciences. Part 1
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Managing the financing process well to upscale for growth in life sciences is an integral part of the CEO’s role, which we explore in this interview.
Michaël Mellink, Senior Partner Life Sciences at Odgers Berndtson’s Amsterdam office, interviews Erik van den Berg, CEO AM-Pharma and co-founder of Lava Therapeutics and Hans Schikan, co-founder of Pharvaris in the newest addition to the Executive Search series ‘From Science to Entrepreneurship’.
What is the role of momentum in the financing process?
Erik van den Berg: Every deal, and every financing deal has its momentum. You have to generate interest with road shows and assist investors through their due diligence efforts. It is always a challenge to attract a credible lead investor and to align sufficient followers to join a term sheet. The process usually takes a number of months up to a year. Creating traction, preferably competition and fear of missing out are ingredients to manage the timelines to closing of the financing round.
"Every process has its own dynamics and you have to recognize that in order to be able to proceed to closing. You can be selling forever without ever having sold anything"
Hans Schikan: The development of new drugs is a rather risky affair. Most of the candidate drugs that are being developed in the very early pre-clinical phase will not make it. Also, there is market risk. The market can unexpectedly look different, competitors can be added. Generics, i.e. drugs with a significantly lower price may come up, which means that your proposition may fit less in your envisaged market segment. And then there are financial risks. Attracting funds may be difficult or impossible, in part due to external market conditions. For that reason, keeping momentum in both the development as well as in any financing process is essential. When money is on the table, take it. Preferably you finance a company when the value of your shares is higher, e.g. on the back of good news to minimize the dilution inherently connected to the issue of new shares, but you always have to take into account the various risks mentioned before.
Getting solid long term shareholders on board is often more important than the element of dilution. The question is really whether you want to have a big piece of a small cake, or a smaller piece of a bigger cake. Often, the latter is better. When it comes to timing, make sure that you have at least one year of cash before going for a new financing round. If you start financing too late, you can end up with your back against the wall which does not make your negotiation position easier. It’s important to always create options.
"Creating options is one of the most important goals that you can have as a company"
When does it make sense to consider an IPO?
HS: It is difficult to pinpoint the right time to go public and it will be different for each company, whereby the market environment is also a critically important factor. Generally speaking though, there are a few conditions which should be met, one of them being that you have the right team in place, not in the last place when it comes to your finance and accounting organization. Another important consideration is whether you have a sufficiently attractive and compelling business case with a clear strategy. After all, one of the key reasons for going public is to gain access to the capital markets, but in order to do so, you must attract new shareholders who are willing to share your risk in exchange for an expected return on their investment.
When is the right time for a trade sale?
EvdB: Traditionally the best moment for an exit is after the conclusion of the phase-II proof of concept study of the lead asset and project risk has been substantially reduced. What also plays a role is the investor basis. Investors typically need to find an exit ~5 years after their investment, and that can drive the exit timing. A trade sale is one of two options for that. Nowadays, there’s a trend in Europe to continue financing for longer, so that you can grow into a commercial company. Then, an IPO as an exit is an option.
HS: Good companies are not for sale, good companies get bought. That is an important point. The moment you set up a company with the sole purpose of having it acquired, the basis for having more options to consider, is just smaller.
"To choose a good time for a trade sale is actually very simple"
The right moment for an exit is hard to define. It depends on many factors, and eventually it is the shareholders who decide whether they want to sell their shares or not. However, as a company, you should have a strategy in place to maximize value in a possible exit route. Here again, it is important to create optionality and to be able to choose. With only one option on the table, it will be far more difficult to negotiate from a position of strength.
Nevertheless, in general terms, the right time for a trade sale is quite simple. If you and your shareholders are convinced that the offer for the shares in the company is substantially better than the anticipated value of those shares, also in the longer term, then the time is right.
In part two of this series, we delve deeper into the CEO’s role in the financing process, as well as the importance of the CFO and the board.