Financing MicroCap Biotechs

miStAKeS to Avoid

A friend of mine recently suggested I write about my experiences and mistakes I’ve made while trying to finance micro cap companies I’ve run over the last 25 years. There are many potential pitfalls when raising capital and every company will have its own set of issues. Below are some of the most common.

Do yoUr HoMEwork

Before approaching investors or the market there are a few key items you should have in hand:

• How much do you need to raise? This number should be large enough to get comfortably to the next milestone investors would want to see. • What are the milestones or inflection points you are going to base your pitch on? • What type of financing are you willing to accept? PIPE? Convertible debt? Other? • A well thought out and appropriate pitch deck designed to be modified for different groups.

It is extremely important the deck is short, to the point, and spells out exactly the what, why , how and who about the company and the market. Even if the deck is sent ahead of the call or meeting it is imperative that the actual pitch is practiced and doesn’t sound like you are reading off the deck.

TrUST yoUr GUT

We’ve all been approached by groups that say they can get the financing done easily even after you’ve already been turned down by several reputable investment groups. Many of these “bottom feeders” are only interested in getting a retainer fee and stringing you along with the hope that someone they introduce you to ends up on their “tail” for a future financing.

Also, if proposed deal terms seem too good to be true – they probably are. This goes back to doing your homework. You need to understand what the market is offering for financing a company similar to yours.

DiLUTion or FinancinG?

We’ve all heard from Board members and investors about the perils of doing a financing which could cause substantial dilution. In my opinion, this is a myth and has no real value in the strategy. If the company meets its milestones and the technology proves itself, then dilution won’t matter. The valuation of the company will increase and either the dilution won’t matter or the company can execute a reverse stock split. If the company fails, it also doesn’t matter. Just to be clear, I’m not advocating outrageous financing that would give away the company for a small amount of capital. I am saying I’d rather have 50% of a company worth $100M than have 100% of a company worth $5M because it didn’t have the capital to execute the development plan.

Also, if you are a private company your valuation expectation may be in for a shock. Even if you raised capital at a higher valuation previously, there is a good chance the valuation could be lower during this raise. This depends on whether you’ve met previously announced milestones, market environment, therapeutic area/market size and most importantly how desperate are your immediate capital needs. (see next section below). In my experience, it is appropriate to negotiate the valuation. However, if there is only one term sheet on the table you may be compelled to take the deal.

raiSE capiTaL wHEn iT’S noT iMMEDiaTELy nEEDED (iF poSSiBLE)

The absolute worst time to raise capital is when you have little or no capital left in the bank. I’ve been in Board meetings where I presented a term sheet to the Board from an investor and the feedback was “We have money now we should wait until we finish this trial and then raise capital at a better valuation and less dilution”. To me, this is like playing Russian roulette. How many clinical trials have failed to reach their primary endpoint or even worse barely met the endpoint? If this occurs how will you raise capital to do the next trial even though your team has determined what the issues were and know how to fix them for the next trial.

John N. Bonfiglio PhD MBA and has over 30 years’ experience in the biotech/pharmaceutical industry Including over 20 years as a C-level executive in the biotech industry.

Dr. Bonfiglio started his career with 11 years at Allergan pharmaceuticals. He spent 3 years at Baxter HealthCare before starting a career in small biotech companies. He rose to the position of CEO at Peregrine Pharmaceuticals where he turned around the financially strapped public company.

Dr. Bonfiglio was named COO at Cypress Bioscience while the company was reinventing itself as neuro-pharmaceutical company. He then joined the Immune Response Corporation as CEO and was responsible for raising over $50M and restarting clinicals in the HIV and MS areas.

As CEO at Argos Therapeutics a privately held oncology company, he raised $35M through a series C financing. His tenure at Argos produced clinical data which led to an IPO and subsequent financings.

Following Argos, he became President and CEO at Oragenics in Tampa, Fl. Here he completed two strategic deals with Intrexon Corporation, raised $29M relisted the company on the NYSE:MKT and refocused the company on new novel and proprietary antibiotics

Dr. Bonfiglio was the COO at TapImmune where he was responsible for starting a clinical program, raising capital and relisting the company on Nasdaq. The company is now known as Marker Therapeutics (MRKR -Nasdaq).

Dr. Bonfiglio has held independent Board positions at GT BioPharma (GTBP), Microlin and Genprex (GNPX).

He recently joined Sequella a private company developing new therapies for Multi Drug Resistant tuberculosis as an executive Board director.

To reach Dr. Bonfiglio: bonfiglio.john@gmail.com

HirE THE riGHT oUTSiDE TEaM(S)

No man is an island. In this environment it’s nearly impossible to raise capital without a great team assisting you. Assuming your internal team was hand-picked by you and the Board, picking the right external team is paramount. I have used Investment Relations (IR) firms for many years to help get me in front of of the right investors. Not all IR firms are created equal. Again do your homework! Ask the candidate company for references and follow-up with calls. Many of these firms call on the same people repeatedly and it’s difficult to get traction when they are inundated with companies.

Likewise with investment bankers. There are of course very reputable investment banks ranging from the well-known larger firms to the small boutique firms. Some of the smaller firms are spinouts from the larger ones and have great contacts and investors that have invested with them before. A good first move is to use search engines to look into the names of the primary bankers in the company. It’s amazing what a simple search can turn up about past issues. Make sure the terms of engagement meet with your needs. I usually want a six month engagement with a six month tail. The tail has to be in writing and agreed to by you and the company. Some forms will try to put companies on the tail that they spoke to on the phone but you have not talked to directly.

It is clear there are many other issues that need to be addressed which I’ll save for another time. The important thing to remember is in most cases raising capital requires a good team, hard work and perseverance. I remember being in grad school and thinking I could never be a great salesman because I hate rejection. Then as an active CEO I’ve been rejected by more investors than I could imagine! Keep pushing and keep working!