financing alternatives for biotechnology companies: … m dobmeier 09-12.pdf · financing...

Speaker 5: Eric L. Dobmeier of Seattle Genetics, Inc. Page

Seattle Genetics_July 2005Law Seminars International | Biotechnology | 9/27/07 in Seattle, WA

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Financing Alternatives forFinancing Alternatives forBiotechnology Companies:Biotechnology Companies:

A Case Study of Seattle GeneticsA Case Study of Seattle Genetics

Eric DobmeierEric DobmeierChief Business OfficerChief Business Officer

““Life science startups are the only companiesLife science startups are the only companiesthat are forced to define their corporate strategythat are forced to define their corporate strategyas a function of their financing rather than toas a function of their financing rather than togather financing in accordance to a previouslygather financing in accordance to a previouslywell-defined corporate strategywell-defined corporate strategy””

- Steven Burrill - Steven Burrill Stanford Technology Venture Lecture Series Stanford Technology Venture Lecture Series



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Seattle GeneticsSeattle GeneticsCorporate OverviewCorporate Overview

Biotechnology companyBiotechnology companyfocused on monoclonalfocused on monoclonalantibody-based therapiesantibody-based therapiesfor cancer & autoimmunefor cancer & autoimmunediseasesdiseases

Founded in 1998Founded in 1998 Located in Bothell, WA Located in Bothell, WA –– outside of Seattle outside of Seattle ~180 employees~180 employees Publicly traded (Nasdaq: SGEN)Publicly traded (Nasdaq: SGEN) ~$700 million market capitalization~$700 million market capitalization

Non-HodgkinNon-Hodgkin’’s lymphomas lymphoma

SGN-35SGN-35

SGN-30SGN-30

SGN-33SGN-33

SGN-40SGN-40 Multiple myelomaMultiple myeloma

Chronic lymphocytic leukemiaChronic lymphocytic leukemia

AML, MDSAML, MDS

SGEN Product PipelineSGEN Product PipelineLead AgentLead Agent

PreclinicalPreclinical Phase IPhase I Phase IIPhase II

Anaplastic large cell lymphoma (ALCL)Anaplastic large cell lymphoma (ALCL)

HodgkinHodgkin’’s diseases disease

HD, CD30+ hemat. maligHD, CD30+ hemat. malig..

Genetically engineered antibodyGenetically engineered antibodyAntibody-drug conjugate (ADC)Antibody-drug conjugate (ADC)

GlobalGlobalcollaborationcollaboration

withwithGenentechGenentech

NationalNationalCancerCancerInstituteInstitute

CD70+ hemat. CD70+ hemat. malig.malig.SGN-70SGN-70



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Traditional Biotech Financing SourcesTraditional Biotech Financing Sources

Stage

Am

ount

($)

Grants

Angels

Venture Capital IPO

PIPEs

Follo

w-O

n Pu

blic

Offe

rings

Strategic Alliances Con

vert

ible

Deb

t

Source: SHI Capital—MaRS BioEntrepreneurship Lecture Series, May 14 2007

SGEN Funding SourcesSGEN Funding Sources

$0

$10

$20

$30

$40

$50

$60

$70

$80

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

YTD

$ in

mill

ions

$ in

mill

ions

Serie

s B

Serie

s B

IPO

IPO

PIPE

PIPE

Mar

kete

d Fo

llow

-On

Mar

kete

d Fo

llow

-On

Serie

s A

Serie

s A

18% 11%

53%

18%

$37M$37M

$188M$188M

$64M$64M

$66M$66M

$355M$355M

Bou

ght D

eal

Bou

ght D

eal

Private EquityPrivate Equity

Technology LicensingTechnology Licensing

Public EquityPublic Equity

Product PartneringProduct Partnering

Gen

ente

ch S

GN

-40

Dea

lG

enen

tech

SG

N-4

0 D

eal

Other capital sources include:Other capital sources include:

•• Government grantsGovernment grants

•• Employee stock option exercisesEmployee stock option exercises

•• InterestInterest



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Government GrantsGovernment Grants Grants can provide modest amounts of capital usuallyGrants can provide modest amounts of capital usually

for early-stage biotechsfor early-stage biotechs U.S. Small Business Administration (SBA) recentlyU.S. Small Business Administration (SBA) recently

reinterpreted SBIR grant eligibilityreinterpreted SBIR grant eligibility SBA rules have always required grantees to have <500SBA rules have always required grantees to have <500

employees and be at least 51% U.S.-ownedemployees and be at least 51% U.S.-owned New interpretation requires at least 51% ownership by U.S.New interpretation requires at least 51% ownership by U.S.

individualsindividuals Excludes venture capital funds, institutional investors, etc.Excludes venture capital funds, institutional investors, etc.

Effectively prevents most venture-backed and public biotechsEffectively prevents most venture-backed and public biotechsfrom receiving SBIR grantsfrom receiving SBIR grants

BIO is working with Congress to introduce changes toBIO is working with Congress to introduce changes to15 U.S.C. 638 to alleviate this issue15 U.S.C. 638 to alleviate this issue

““No biotechnology company ever went out ofNo biotechnology company ever went out ofbusiness due to dilutionbusiness due to dilution”” --Attributed to many --Attributed to many

Equity FinancingsEquity Financings



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1998 Angel Financing1998 Angel Financing SGEN spun-out of Bristol-Myers Squibb in 1998SGEN spun-out of Bristol-Myers Squibb in 1998

Many biotechs start as Many biotechs start as ““science projectsscience projects”” But SGEN had several clinical-stage programs andBut SGEN had several clinical-stage programs and

substantial IP and technology assets when it wassubstantial IP and technology assets when it wasfoundedfounded

First financing ($1 million) from angel investorFirst financing ($1 million) from angel investor $500K-$1M can be hardest capital to find$500K-$1M can be hardest capital to find

Too small for most VCs and too large for most angelsToo small for most VCs and too large for most angels Most angel financing is for less than $500KMost angel financing is for less than $500K

““Chicken and eggChicken and egg”” problem problem Angels tend to invest locally and be relativelyAngels tend to invest locally and be relatively

passive (compared to VCs)passive (compared to VCs)

1998-1999 Venture Capital Financings1998-1999 Venture Capital Financings Series ASeries A——$7 Million led by OVP Venture Partners,$7 Million led by OVP Venture Partners,

Sofinnova Venture Partners and Suez VenturesSofinnova Venture Partners and Suez Ventures Series BSeries B——$30 million led by Bank of America Ventures,$30 million led by Bank of America Ventures,

Cascade Investments (Bill Gates) and Vulcan VenturesCascade Investments (Bill Gates) and Vulcan Ventures(Paul Allen)(Paul Allen) All Series A investors also re-uppedAll Series A investors also re-upped Genentech participated too (part of partnering deal)Genentech participated too (part of partnering deal)

Typical venture capital deal structureTypical venture capital deal structure Reps and warrantiesReps and warranties Preferred stock with liquidation preference, anti-dilution protectionPreferred stock with liquidation preference, anti-dilution protection

and voting provisionsand voting provisions Board representationBoard representation Registration rightsRegistration rights Right of first offerRight of first offer



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Venture Capital Financing: Pros and ConsVenture Capital Financing: Pros and Cons

Take substantial time to manageTake substantial time to manage Often lack operational experienceOften lack operational experience Primarily financially (often short-Primarily financially (often short-

term) motivatedterm) motivated IRR demands exit strategyIRR demands exit strategy

Pressure to go public or do M&A toPressure to go public or do M&A tocreate liquiditycreate liquidity

Can provide strategic depth andCan provide strategic depth andadd rigor to decision-makingadd rigor to decision-making

High cost of capital (dilution) dueHigh cost of capital (dilution) dueto strong valuation pressureto strong valuation pressure

Usually comes with lots of Usually comes with lots of ““bellsbellsand whistlesand whistles””

Can invest substantial $Can invest substantial $’’s overs overseveral rounds of financingseveral rounds of financing

Demand involvement and controlDemand involvement and control Can provide validation andCan provide validation andindustry connectionsindustry connections

ConsConsProsPros

2001 Initial Public Offering2001 Initial Public Offering

Raised $53 million in March 2001 led by JPRaised $53 million in March 2001 led by JPMorgan, B of A and CIBCMorgan, B of A and CIBC

Offering took place after the Offering took place after the ““bubblebubble”” burst burst Very few Very few biotechsbiotechs went public in 2001 went public in 2001 Offering range adjusted downwards from $11-$13 toOffering range adjusted downwards from $11-$13 to

$8-$10; priced at $7$8-$10; priced at $7 Simultaneous investments by strategic partnersSimultaneous investments by strategic partners

Genentech bought $2 million as part of IPOGenentech bought $2 million as part of IPO Helpful for marketing effortsHelpful for marketing efforts

Medarex bought $2 million in a private placementMedarex bought $2 million in a private placement Integration issues (new Regulation D release in AugustIntegration issues (new Regulation D release in August

2007)2007)



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Going Public: Pros and ConsGoing Public: Pros and Cons

Interacting with investors, analystsInteracting with investors, analystsand bankers takes a lot of time awayand bankers takes a lot of time awayfrom running the businessfrom running the business

Increases public awarenessIncreases public awareness

Significant valuation pressure forSignificant valuation pressure forearly-stage IPOsearly-stage IPOs

Compliance with SEC regulations,Compliance with SEC regulations,including Sarbanes-Oxley, isincluding Sarbanes-Oxley, isexpensive and time-consumingexpensive and time-consuming

Managing disclosures is challengingManaging disclosures is challengingand can have competitiveand can have competitiveramificationsramifications

Access to public markets enablesAccess to public markets enableslarger and more efficient fund-larger and more efficient fund-raising strategiesraising strategies

Stock price volatility can be difficultStock price volatility can be difficultto manageto manage

Low volume and limited public floatLow volume and limited public floatoften hamper liquidityoften hamper liquidity

Creates liquidity for investors andCreates liquidity for investors andemployeesemployees

ConsConsProsPros

2003 Private Investment in Public Equity (PIPE)2003 Private Investment in Public Equity (PIPE)FinancingFinancing

Raised $40 million led by JP Morgan Partners andRaised $40 million led by JP Morgan Partners andBaker Bros. InvestorsBaker Bros. Investors

Public company sells unregistered stock generallyPublic company sells unregistered stock generallyat 7-10% discountat 7-10% discount Subject to securities law restrictions on resaleSubject to securities law restrictions on resale

ConsiderationsConsiderations Pre-set price with no market riskPre-set price with no market risk

Still risk of market disclosureStill risk of market disclosure Often comes with control provisions, registration rights,Often comes with control provisions, registration rights,

etc.etc. Generally smaller $ size than marketed follow-onsGenerally smaller $ size than marketed follow-ons Nasdaq shareholder approval requirementsNasdaq shareholder approval requirements



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2004 Marketed Follow-On Financing2004 Marketed Follow-On Financing

Raised $62 million led by B of A, CIBC andRaised $62 million led by B of A, CIBC andWR HambrechtWR Hambrecht

ConsiderationsConsiderations Enables large capital raiseEnables large capital raise Often effective at raising investor awareness,Often effective at raising investor awareness,

diversifying investor base and increasing publicdiversifying investor base and increasing publicfloatfloat

Multiple banks can participateMultiple banks can participate Rewards covering analystsRewards covering analysts

Offering document and roadshow take significantOffering document and roadshow take significantmanagement timemanagement time

Company bears market risk while on the roadCompany bears market risk while on the road Average file-to-offer price decline of 5-15%Average file-to-offer price decline of 5-15%

2004 Marketed Follow-On Stock Performance2004 Marketed Follow-On Stock PerformanceStart of roadshow

($10.66)Pricing($8.25)



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2006 2006 ““Bought DealBought Deal”” Raised $43 million through B of A and CIBCRaised $43 million through B of A and CIBC Also known as a Also known as a ““block tradeblock trade”” or or ““overnight dealovernight deal”” Banks buy stock directly from the company at aBanks buy stock directly from the company at a

discount (usually 5-10%) and then resell directly todiscount (usually 5-10%) and then resell directly toinvestors (often within 24 hours)investors (often within 24 hours)

ConsiderationsConsiderations Requires effective S-3Requires effective S-3

New SEC rules on well-known seasoned issuers (New SEC rules on well-known seasoned issuers (WKSIsWKSIs) simplify) simplifythis for companies with >$700M non-affiliate market capitalizationthis for companies with >$700M non-affiliate market capitalization

No management roadshow or offering documentNo management roadshow or offering document Little company control or input into which investors participateLittle company control or input into which investors participate DoesnDoesn’’t increase public float or diversify investor base as mucht increase public float or diversify investor base as much

as a marketed dealas a marketed deal Banks bear market risk, but resale may still have negativeBanks bear market risk, but resale may still have negative

impact on share priceimpact on share price

Strategic AlliancesStrategic AlliancesA Biotech-pharma deal is like A Biotech-pharma deal is like ““a dance between ana dance between anelephant and a fleaelephant and a flea”” --Ed Saltzman, President of Defined Health --Ed Saltzman, President of Defined Health

““In biotech, partnering is such sweet sorrowIn biotech, partnering is such sweet sorrow”” --Daniel Levine, SF Business Times --Daniel Levine, SF Business Times



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SGN-40 Genentech CollaborationSGN-40 Genentech Collaboration

GenentechGenentechLeader in antibodyLeader in antibody

therapies fortherapies forcancercancer

Strong hematologyStrong hematologyfranchisefranchise

CommercialCommercialinfrastructureinfrastructure

Seattle GeneticsSeattle GeneticsExclusiveExclusiveworldwide licenseworldwide licenseagreementagreement

Phase II compoundPhase II compound

Option to co-Option to co-promote in U.S.promote in U.S.

GenentechGenentechprovides:provides:

$60M upfront$60M upfront

>$800M in milestones>$800M in milestones

$20M of milestones$20M of milestonescommittedcommitted

in first 2 yearsin first 2 years

Pays all costs of R&D,Pays all costs of R&D,manufacturing andmanufacturing andcommercializationcommercialization

Will pay increasingWill pay increasingdouble-digitdouble-digit

royalties startingroyalties startingin the mid-teensin the mid-teens

Financial Impact of Product PartneringFinancial Impact of Product Partnering

-200 0 200 400 600 800 1000

NPV to Licensor ($ in millions)

Unpartnered

Co-dev Deal

Out-license

= Mean NPV Given Success = Mean NPV Overall = Mean NPV Given Failure

10% 90%

90%

90%

10%

10%



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$0

$5

$10

$15

2001 2002 2003 2004 2005 2006 YTD

2007

Cash Equity

ADC Technology DealsADC Technology Deals ADC licenseesADC licensees

More than $60 million generatedMore than $60 million generated Future revenue streams from milestones and royaltiesFuture revenue streams from milestones and royalties

50:50 co-development50:50 co-developmentagreements:agreements:

$$’’s from Technology Licensings from Technology Licensing

$4.5$4.5

$10.8$10.8

$13.8$13.8

$11.0$11.0$9.6$9.6

$4.3$4.3

$8.9$8.9

$ in millions$ in millions

Typical Licensing Deal StructureTypical Licensing Deal Structure

R&DR&D

UpfrontUpfrontpaymentpayment

DevelopmentDevelopmentmilestonesmilestones

RoyaltiesRoyalties

SalesSalesmilestonesmilestones

FeesFees::R&D supportR&D support

Material supplyMaterial supplyAnnual maintenanceAnnual maintenance

Clinical TrialsClinical Trials CommercializationCommercialization

DealDealsignedsigned INDIND ApprovalApprovalGLPGLP

toxtox Ph. IPh. I Ph. IIPh. II Ph. IIIPh. III



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Strategic Alliances: Pros and ConsStrategic Alliances: Pros and Cons

Majority of alliances failMajority of alliances fail Termination of an alliance by a partnerTermination of an alliance by a partner

can taint a product or technologycan taint a product or technology

May increase overall chance ofMay increase overall chance ofsuccesssuccess

Provides validationProvides validation

Supporting collaborations can distractSupporting collaborations can distractinternal teams from focusing oninternal teams from focusing onproprietary programsproprietary programs

Non-dilutive financing alternativeNon-dilutive financing alternative

Licensor relinquishes some amount ofLicensor relinquishes some amount oflong-term value potentiallong-term value potential

Partnering deals may reduce orPartnering deals may reduce oreliminate M&A possibilitieseliminate M&A possibilities

Generates near-term cash flow andGenerates near-term cash flow andlonger-term milestones and royalties tolonger-term milestones and royalties tooffset internal R&D costsoffset internal R&D costs

Loss of control over R&D, regulatoryLoss of control over R&D, regulatoryand commercial decision-makingand commercial decision-making

Potential for IP issues, misuse ofPotential for IP issues, misuse oftechnology and generation oftechnology and generation ofunfavorable dataunfavorable data

Supplements internal resources forSupplements internal resources forclinical trials, manufacturing andclinical trials, manufacturing andcommercializationcommercialization

ConsConsProsPros

Roads Not Taken by SGENRoads Not Taken by SGEN

Venture PhilanthropyVenture Philanthropy Venture DebtVenture Debt Exotic Financing AlternativesExotic Financing Alternatives

Special purpose entities (SPEs)Special purpose entities (SPEs) Off-balance sheet joint ventures, SPARCS, SWORDS andOff-balance sheet joint ventures, SPARCS, SWORDS and

RDLPs largely eliminated after EnronRDLPs largely eliminated after Enron

Royalty dealRoyalty deal Symphony CapitalSymphony Capital

Convertible DebtConvertible Debt M&AM&A

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