Exploring alternative funding arrangements in an unpredictable life sciences IPO market

Talking points

• Ongoing regulatory turbulence has made life sciences IPO activity unpredictable.
• This IPO market uncertainty has pushed many life sciences companies to explore alternative funding options.
• Life sciences companies should weigh the benefits and trade-offs of these funding alternatives to meet needs ranging from immediate cash flow to sustained research and development (R&D) support.

Funding is like oxygen for a life sciences company, particularly in its earlier stages, fueling growth through each stage of its journey. Given the long road to Food & Drug Administration (FDA) approval, most companies rely on multiple rounds of venture capital (VC) funding to keep progress moving. As the stakes rise, they may look to an initial public offering (IPO) for the larger capital needed to achieve important milestones and advance late-stage drug development. Traditionally, an IPO also lets VC firms cash out and reinvest in the next wave of early-stage companies.

But what happens when IPO funding is not available to you? That’s the challenge many life sciences companies may face as recent policy shifts, among other socioeconomic factors, have increased market uncertainty and changed the IPO strategy of many investors. This uncertainty has left a major funding gap for many, making it difficult for some companies to secure financing and for VCs to access capital for investing in new startups.

In this blog, we’ll explore four alternative financing options that can help companies bridge these funding gaps. Each approach comes with its own benefits and challenges, depending on a company’s development stage, financial needs, and strategic goals.

Family offices

Family offices, which manage the wealth and investments of high-net-worth families, are increasingly active in funding life sciences companies. Thanks to their private structure and substantial resources, they’re often willing to take on the high risks of life sciences companies. This is especially true when investments align with their personal values or philanthropic goals, such as supporting treatments for unmet medical needs or rare diseases.

Unlike VCs, family offices can offer more flexible investment terms and structures when investing in debt, equity, or hybrid instruments since they aren’t tied to institutional risk-and-return profiles. Their longer investment horizons allow sustained collaboration through extended periods of drug development and commercialization. Many family offices also prefer a hands-on role in the company’s growth and strategy, which is important to consider when pursuing this type of funding.

License and collaboration agreements

Another effective funding approach for life sciences companies can be forming or expanding collaborations with third parties for drug development or commercialization. These relationships allow life sciences companies to share the costs and risks associated with advancing new drug candidates.

Typically, these collaborations involve the exchange of up-front license fees, reimbursements for certain R&D costs, milestone payments, and future royalties. These payments can help ease the financial burden of bringing products to market. But keep in mind that companies often grant these parties exclusivity rights related to use of the technology for specific targets or indications. This usually includes the ability to sell any product developed and commercialized under the agreement in certain territories or jurisdictions.

Sales of future revenue

Life sciences and biotech companies can increase cash flow by selling a share of their future revenue such as product sales or royalties in exchange for up-front funding. This approach lets them finance operations or development but means sharing future earnings once products reach the market.

Investors typically look at how soon a product might launch, its chances of regulatory approval, and expected revenue when considering this kind of arrangement. Meanwhile, life sciences companies weigh the agreement’s terms and costs against other funding options. It’s also worth noting that royalty purchase agreements can sometimes create accounting challenges or unexpected results.

R&D funding arrangements

With an R&D funding arrangement, an investor helps cover R&D costs in exchange for repayments—but only if the funded R&D programs succeed and earn regulatory approval. Usually, the life sciences company keeps all IP rights to any resulting compounds, and the investor is not repaid if the compounds are not successfully developed and commercialized. This approach can provide needed support during early research phases without diluting shares of existing equity holders. However, like future revenue sales, these deals can be complex to set up and can lead to unexpected outcomes.

What role can Deloitte play?

Alternative funding arrangements often involve unique terms and complex accounting. Deloitte’s Capital Markets Transactions business can advise you as you navigate the ecosystem of funding possibilities. We bring extensive experience in life sciences accounting, including various industry-specific funding arrangements. To learn more, visit our website or connect with your Deloitte adviser. Don’t hesitate to reach out with any questions.

The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances.

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