Biotechs scavenge for funds

By Toni Clarke

BOSTON (Reuters) - With little chance of raising money in the public markets, biotechnology companies are increasingly accepting funds from sources they might once have disdained -- and giving up more of their profits to get it.

Royalty financing, project financing, reverse mergers and structured financing deals that would have previously been seen as second or third-tier options, are now receiving greater respectability.

"The options that were once seen as less desirable and a court of last resort are now being employed in a more pragmatic way to keep the blood flowing," said Dr. Harry Tracy, publisher of the monthly journal NeuroInvestment.

In the world of biotech financing, traditional relationships between public and private investors are being turned upside down as investors seek safer havens and banks close their doors.

"If you are a private company you may be looking for public solutions, and if you're a public company you may well be talking to venture capitalists," said Joshua Muntner, executive director of healthcare investment banking at Oppenheimer & Co.

Private investors such as ProQuest Investments, Clarus Ventures, OrbiMed Advisors and Vivo Ventures have recently put money into an array of public companies, including Threshold Pharmaceuticals Inc THLDD.O, Achillion Pharmaceuticals Inc (ACHN.O) and Avanir Pharmaceuticals (AVNR.O).

Meanwhile, public companies with cash but no products are being acquired by private companies with products but no cash.

"Reverse mergers, which were once considered to be at best tertiary financing vehicles, have now achieved acceptance and offer an all-important monetization route for venture capitalists," said Steve Brozak, an analyst at WBB Securities.

That's not to say there isn't plenty of money available for biotechnology companies with promising products. Big pharmaceutical companies are desperate for new drugs to fill their pipelines.

And the public markets still open their doors to a select few: earlier this month Vertex Pharmaceuticals Inc (VRTX.O), which is developing a promising hepatitis C drug, said it had agreed to sell 7.5 million shares at $25.50 a share to raise $191.3 million.

But the big-risk, big-reward mentality that used to permeate the industry has been scaled back. Companies give up greater chunks of themselves in return for funding, or borrow on harsher terms. Venture investors no longer count on the big payouts that used to come with an initial public offering.

"Our expectation is that we are going to have to carry these companies further and longer," said Dan Janney, managing director at San Francisco venture capital company Alta Partners. "There's no doubt it puts pressure on the returns."

Pharmaceutical companies, though willing to pay top dollar for later-stage products, are not hurling money at earlier-stage products.

"I think the disruptions in the capital markets may shift some leverage to the big pharmas," said Jack Capers, a partner in the corporate practice group at King & Spalding. "In the past an early-stage company that had the IPO option had greater leverage when negotiating with a pharma company. They don't have that now."

But even pharmaceutical companies are are looking to hedge their bets.