The Finance 101 of Funding the Life Science Mission – Convertible Bonds and Non-Dilutive Financing

You’re publicly traded and it’s time for some more money to keep things moving forward. Let’s go get some post-IPO capital through either complex convertible bonds or much simpler Non-Dilutive Financing.

Convertible bonds are a hybrid security that offers investors the option to cash it in at maturity or convert it to shares of the company. Because of this chance to significantly profit at the end of the bond’s term, they offer lower interest rates than traditional bonds.

A convertible bond is much like mixing stock options and traditional bond financing. The company issues the note (debt) that pays a low annual interest rate (coupon rate) with maturity typically at five to seven years. The note holder now has the option to either get paid back in cash at maturity or convert the bond value into some percentage of stock (the conversion ratio). The conversion ratio is a value set at the time of issuance that is published in the bond indenture (bond contract). The ideal outcome is that the stock has appreciated substantially and the bondholder realizes a gain exceeding the bond’s face value.

This is a low-risk investment for investors with a lot of potential upsides as it is a way to participate in future share value but with the significantly lower downside risk that comes with holding a note.

Why Converts?

They raise a substantial amount of capital and are attractive to investors that are betting that the stock price will appreciate above the conversion price. They are effectively issuing the stock at a premium. They are still a debt though and best used when positive future cash flows are highly likely. A classic use would be funding the launch of a newly approved drug.

The conversion to shares will also save the company cash but can risk dilution of the share price depending on how investors view the company’s savings. Converts are highly complex and an advisor who can walk you through the subtleties will maximize your experience.

Non-Dilutive Financing

There is no such thing. Period. Any funding is an exchange that causes your shareholders to own less of your company. Never get fooled by such talk.

That said there are many ways to raise money without selling shares:

  • Partnerships for development candidates
  • Geographic commercial rights financing
  • Royalty stream sales
  • Sale of assets

These are all valid sources of capital and, obviously, the least expensive exchanges for funds for the company if they involve either assets or rights that the company would not use or exploit on its own.

Convertible bonds and Non-Dilutive Financing can both be great ways to raise capital for your post-IPO company. There are two funding options always to be considered.

David Johnston CFO, MBA, is the principal of dbj consulting, a consultancy of finance and strategy for the life sciences industry. He has his MBA from the University of Michigan. David Johnston also serves on the boards of multiple non-profits.

Read David Johnston’s full article to learn more about biotech financing here:

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