You did it! You stared-down the odds against you as an innovator in biotech. You navigated the risks of developing your novel and value-adding product. On top of that you successfully acquired and made use of various forms of funding to grow your business.

But now you’ve reached a point where government grants, business competitions, business angels, venture capitalists, and credit cards are no longer suitable for continued growth and scalability of your company. You are ambitious and now need a financing option to suitably match your ambition, so what are some of the options available to you? In this blog post we introduce you options open to late-stage biotech companies. Those with valuations already in the €100’s of millions range, who want to truly scale operations (including financing later-stage clinical trials) and don’t want an exit by an acquisition from a larger biotech or a pharmaceutical company.


Post-series C funding essential to successfully continue point-of-no-return clinical trial

Venture capital (VC) funding can accelerate the development of biotech startups. In return for a significant equity stake funding is provided through series A (€1.7M-12.8M), B (6M-26M) and C (>26M) rounds. To spread risk, VC’s often form investment syndicates with business angels, family offices, and other VC firms. Syndication typically happens at funding rounds past series C where new investors such as hedge funds come at play. This is due to the significant budgets of typically €50M for series D and €100’s of millions for series E.

Most startups do not need to go beyond series C as exit routes will be followed. However, some biotech companies will opt for this route to postpone going public and increase their valuation, knowing that significant investments are required in the future. A recent Nature Medicine paper (by May, 2019) pointed out the median cost of clinical trials: $19M with a 100-fold cost difference either side of the spectrum.


Mezzanine as the non-listed and manageable alternative to accelerate

What is it and who provides it?

Mezzanine financing uses a hybrid model of debt and equity financing. It can be of high utility for companies that require rapid or overall high cash flows to be used for aggressive business expansion. Private equity firms often provide such finance vehicles to receive interest and the right to convert the debt into an equity option in the case of a default. Main providers of mezzanine financing are main suppliers seems to be Bain Capital Credit, ICG, LFPI Group, Cerberus Capital Management, and Northwestern Mutual Capital.

Why is it provided?

In contrast to equity capital private equity firms may providing mezzanine due to a steady stream of income. Though much lower than equity would provide, the speed of acquiring the cash from those you lend money to is much more rapid. It is also a market response from providers of cash to those who want cash but do not want to a) significantly dilute ownership and b) a standard loan since that may upset existing shareholders since providers of pure debt get preference if a company liquidates, which is always a inherent risk for biotech startups.

Who is it for?

For more matured biotech companies mezzanine finance is an attractive option to fund a specific project or acquisition. Until debt maturity date, only interest payments are due. In contrast to another venture capital round and regular debt this makes mezzanine attractive for long-term financing for companies that yet start to have a positive cash flow by offering of services or products to the market.

The Pros

Mezzanine is non-dilutive (i.e. no new equity stakes are issued) to company ownership as long as the company is not in default and repays the debt and (steep) interest rates. Mezzanine debt is generally longer-term compared to other debt. Moreover, mezzanine financing is tax deductible for the borrowing company, thus serving as a tax-shield. Regular debt brings a re-prioritization of who gets cash first (the banks). Besides, mezzanine financing is more manageable than other debt structures because borrowers may figure their interest in the balance of the loan. If a borrower cannot make a scheduled interest payment, some or all of the interest may be deferred.

The Cons

The issuer of mezzanine is subordinate to other debt holders but is senior to other equity stakeholders in the business. On top of the high interest rates (often between 12 – 20% per year), this makes it a less attractive option for long-term financing in case there is a high risk of default.

Cash flow negative companies are unlikely to attract mezzanine. This makes it unsuitable for pre-revenue biotech startups that depend on clinical trials and do not have co-existing products.


Going public (IPO) to gain substantial growth capital

What is it?

An initial public offering (IPO), or ‘going public’, is a common exit strategy for many equity-holders of a biotech company. With an IPO, shares are made available for public investors for the first time. The process of IPO involves underwriters. There are investment bankers or consultants required to lead the deal, and others to aid in the valuation process and look after investor relations. Investor relations are important for the company going public since generating interest in the upcoming IPO can help mitigate undersubscription to the shares. Regulatory compliance and restructuring of the board of directors to help make the company more attractive to public investors are other key elements. The board mostly would require a new type of experienced C-level professional. A CEO and CFO who understand the needs of companies post-IPO and how to best manage public shareholders. After adequate marketing and an investment roadshow, an IPO date is selected and shares are issued with underwriters having the option to purchase additional shares after the close of the IPO date.

Why and who is it for?

The purpose of an IPO is to raise significant levels of capital. This capital can be used for company expansion, or even to fund a much-needed clinical trial. For example, Black Diamond, a glioblastoma drug development company, became the first biotech of 2020 to announce an IPO instead of post-series C financing to fund a stage ½ clinical trial.

The Pros

Going public is a great way for a biotech company to enter the public market and gain substantial capital if the IPO is a success. Having a public valuation is beneficial for future acquisition deals. The costs of capital for equity and debt is significantly lower. Going public also provides the opportunity to raise additional funds via secondary share offerings.

The Cons

Besides that going public can be costly and time consuming, IPO’s come with significant risks. Many public investors may be too risk-averse for investing in a biotech without any previous clinical trial data. Hence intelligent engagement and expectation management with future shareholders are key. The stock price of publicly-listed biotechs is highly sensitive to new information. There also is a risk of not meeting the expected amount of capital. Having all the company’s finances public, and an enhancement of regulatory and compliance risks (such as private securities class action lawsuits and shareholder actions) puts a lot of pressure on the firm.



At this point you might be wondering: “what type of late stage financing works best for me?” Unfortunately, no clear answer can be given, as this will be highly dependent on the context and your ambitions. Having shed light on the typical Pros and Cons of the different flavors available, we hope to inspire, those with the potential, to have a horizon post Series C.

This is the first article in a series that will cover a variety of topics related to corporate finance in the Life Sciences and Health sector specifically.


Our expertise

INNFLOW is the corporate finance boutique of the PNO group and is focused on sustainable financing and advisory in the sectors Life Sciences & Health, Energy & Climate and for tech driven Scale Ups specifically. Our team consists of entrepreneurial finance professionals who move quickly along the integrated domains of innovation, consultancy and finance. Our commitment is to provide long-term financial consultancy services, founded upon integrity, accelerating business growth through a quality dedicated service.


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