The case involves evaluating different financing options. Gilad Harpaz, Purinex’s CFO, must determine which of the three options offers the least risk, highest company value, and short-term cash for operations. Purinex is a biotechnology company with 35 pending patents in the pharmaceutical field. It is a rising star and has the potential to develop a new drug for diabetes and sepsis. The company currently has 14 employees.
Monthly burden is $60000; company has available cash of $700000 which will last up to 12 months. Solution Company should proceed with two options at the same time, of course, if this is possible. Those are pursuing the partnership with a “Big Pharma” company and get additional cash from Angel investors. 1. Ultimate solution out of those available is to increase the value of the company to its maximal potential. Not only the company would increase its value to $25 mil, but also gets the financing for funding the operations.
Therefore, it appears that collaboration is the preferred route. Collaborating with a larger company is currently the popular trend in the market, while VC funding is on the decline. Purinex will require additional funds to support its research and development efforts and other daily operations. When deciding which partner to select, the CFO must consider not only the financial benefits of the partnership but also the portion of Purinex’s business that will be relinquished. In this scenario, it is more advantageous to partner with the sepsis partner. While it offers a comparable amount of funding as the diabetes partner, the predicted cash flows are significantly smaller.
The estimated sales for diabetes drugs are $4 billion, whereas sepsis drugs would only reach $0.5 billion. Due to this significant difference, diabetes drugs are considered a much stronger “cash cow.” It would not be wise to give up a large portion of potential future earnings. In comparison, Purinex requires a relatively small amount of cash when compared to its future cash flow. An upfront payment of $5 million should be sufficient for at least 24 months. If the sepsis drug successfully passes Phase II testing, there will be additional revenue from milestone payments in the deal.
Depending solely on the partnership deal is very risky. If the partnership deal does not happen after waiting for six months, the company’s value would decrease significantly to $8 million or less. To protect against this risk and prevent a potential down-round situation, Purinex should secure extra funding from Angel investors. Obtaining $2 million should provide sufficient funds for an additional 12 months of operations. However, it may be possible to raise just one million and wait for the partnering deal to be finalized.
By securing funding from its Angel investors and initiating a deal with a sepsis partner, Purinex can ensure the company’s future R&D expenditures without significantly decreasing its value. This strategy would increase the company’s value to an estimated range of 20 to 24 million within six months. Partnering with a sepsis partner also provides assurance to Angel investors for repayment and a preferred right to IPOs. However, if the partnering deal falls through, Purinex would need to obtain additional funds from angel investors and potentially risk lowering the company’s value to $17 million. Nonetheless, this option is still considered better and less risky than pursuing venture capital.
Purinex, a drug-discovery and -development company located in Syracuse, New York, aimed to commercialize therapeutic compounds using its purine drug-development platform. Purine, a naturally occurring molecule, played a crucial role in various biochemical processes. Purinex successfully pioneered a method to produce small molecules that functioned as targeted agonists (activators) or antagonists (blockers) for specific purine receptors found in the cell membrane.
Purinex aimed to create products that would have a specific effect on receptors without causing any negative effects that could arise from interactions with other receptors. The company had 14 employees and operated a chemistry laboratory near its main office. Purinex possessed a collection of intellectual property, which included over 35 pending or already issued patents related to purine. The company intended to test its newly developed receptor-targeted medications through clinical trials, in order to address various possible applications.
In June 2004, Purinex, a company with multiple promising drugs in development, faced a crucial milestone. Within the next four to twelve months, an opportunity arose for Purinex to establish a partnership with a major pharmaceutical company. This partnership would allow Purinex to develop one of its leading compounds into a drug for treating the most lethal and prevalent global diseases. Gilad Harpaz, the chief financial officer of Purinex, was confident that if the partnership deal materialized, the company would be well-equipped to fulfill its mission.
Additionally, it was essential to secure a deal as it was almost necessary for any future initial public offering. This exit strategy was appealing to a number of the company’s investors. Harpaz also believed that the company had two choices: either try to secure financing now or wait until it had a partnership deal. He has three options to consider for the company.
If Purinex chooses to obtain funding from a venture capital firm, there will be various limitations imposed. These include preferences for board appointments, anti-dilution rights, liquidity, participation, as well as positive and negative covenants. Purinex must first determine the specific type of venture capital they desire for their one-time funding round. In the case of Purinex, they are seeking mezzanine financing, which is slightly above start-up financing. While Purinex is making remarkable progress in the field of biochemistry, bringing in a venture capital firm would inevitably impose restrictions on some of its processes.
Purinex would become an all equity firm if it chose venture capital funding. However, it would still need to seek approval from the venture capital firm for decision-making.
If Purinex chose to wait for six months to determine the outcome of either partnership deal, it would expose the company to a significant level of risk. This is a result of the potential scenario where both deals fall through, thus forcing the company to undergo a down round. Conversely, if one of the deals were successful, it would place Purinex in a highly advantageous position.
For the purpose of the case, suppose that one of the two deals was successful. What would be the impact on Purinex? If the sepsis partnership was successful, Purinex would receive an upfront payment of 5 million, milestone payment of 108 million (undiscounted), and royalties of 10 percent of revenues. Let’s analyze the sepsis deal. In our analysis of the Purinex case, we have concluded that the angel investment option for Purinex’s sepsis or diabetes drugs maximizes the firm’s present value based on the structure we developed to evaluate available options.
The calculated firm value with the angel options is $41,981,505. The initial step involved in the process was to assess the value of the partnership deals. There is a 75% likelihood that Purinex will secure a partnership deal within the next 4-12 months. Out of these prospective partnerships, there is a 60% chance that it will be for the Sepsis medication and a 40% chance for the Diabetes medication. To determine the value of each exclusive partnership, we considered the upfront value of Sepsis and Diabetes as $5 Million and $8 Million, respectively. Each deal also included significant undiscounted milestones.
In order to calculate the Milestone NPV, we allocated the milestone sum based on the timeline provided in exhibit 1 on page 430. We estimated that the FDA review and approval process for the Sepsis drug would take approximately 10 years, while it would take 13 years for the Diabetes drug (starting from the median preclinical trial time length for diabetes) due to the different phases of development for each drug. We evenly distributed the milestone cash flow over these time periods to discount the cash flow of each payment and obtain an accurate Milestone NPV.
The deals included royalties based on projected annual sales of $500 million for Sepsis and $4 billion for Diabetes. Given that only 5-10% of drugs in clinical trials receive FDA approval, we estimated a 10% chance for each drug to generate royalties from the annual sales. To determine the present value of these perpetual royalty streams, we discounted them over a period of 10 years for Sepsis and 13 years for Diabetes, considering that FDA approval is required before any revenue is generated.
The Sepsis drug’s value is $48.566 Million. The payment structure includes $5 Million up front, $108 Million in milestone payments spread out and discounted over 10 years, and 10% royalties of the $500 Million. The probability of occurrence is 10% and the entire value is discounted over 10 years.
Similarly, the Diabetes drug’s value is $45.077 Million. The payment structure includes $8 Million up front, $80 Million in milestone payments spread out and discounted over 13 years, and 12% royalties of the $4 Billion. The probability of occurrence is 10% and the entire value is discounted over 13 years.
Considering a 75% chance of occurrence for either deal, the combined value of these two deals is $47.7 Million.
Harpaz estimated a 25% likelihood of the partnership falling through. In the event of failure, he believed there was a 60% chance of securing another partnership for the Sepsis drug and a 40% chance for the Diabetes drug. The option to wait was limited. We analyzed three options for the Sepsis drug: waiting for 6 months, seeking angel investors, or approaching a VC firm for funding. We ultimately deemed the VC approach as our least desirable investment choice due to potential down-round financing and loss of company control.
Our initial option was to wait for six months, resulting in an updated value of $37,377,800. Consequently, the option to wait was valued at $4,603,705. However, waiting would mean forfeiting the opportunity to find angel investors. In case we couldn’t secure a third deal, we would have to approach a VC firm, estimating the company value at $8 million for both the Sepsis and Diabetes drug. Alternatively, our next choice was to seek Angel Investors. According to Harpaz’s estimates, the angel investors would offer a 95% likelihood of securing 50% of the original value for the Diabetes drug deal ($22.539 million), with a 5% chance of not securing a deal for the diabetes drug.
According to Harpaz, if we receive angel investments, the estimated value of the company would be $17.5 million for both diabetes (with a 5% chance) and sepsis. The value of the angel investment option was $2,853,705, which raised the total company value to $41.98 million. Instead, we considered finding a venture capital firm for investment. The pre-money valuation of the firm was estimated at $15 million. Harpaz believed that a round of VC funding would increase the value of each Big Pharma deal by 10%. However, due to significant restrictions associated with VC funding, we decided to use a dilution multiple of 10%.
Our model showed a negative value for this option. However, after thoroughly analyzing and considering each option, we have determined that the Angel option is the most beneficial in terms of financing the firm and maximizing its value today. One important factor in this decision was Purinex’s 11 months worth of cash and their need to be adequately funded. Additionally, if the firm had sufficient capital, they would have a greater likelihood of securing a collaboration with a major pharmaceutical company and obtaining a better deal as a result of their increased credibility. This collaboration is presented as the ultimate goal of the firm. (p. 429)
The Angel investment would provide sufficient funds for approximately two years, considering the current cash burn rate of $60,000 as well as government subsidies. This timeframe would allow ample opportunity to secure a third party agreement for either drug. Although the venture capital deal could potentially elevate the value of a pharmaceutical deal by 10%, it would also entail a change in the company’s ownership, which was incorporated into our initial model. Notably, there would be no investments that lower the company’s valuation, ensuring that all shareholders maintain both their value and control of the company.
Delaying a decision on the current deals for 6 months may not have a monetary cost, but it poses a significant opportunity cost. It is considered risky as securing funding is crucial for Purinex, Inc., a pharmaceutical company with promising drugs in development. The CFO, Gilad Hapaz, is anticipating a partnership with a major pharmaceutical company within the next 4 to 12 months. Such a partnership would allow Purinex to advance one of its key compounds into a drug.
The company is facing insolvency due to its lack of sales or earnings and insufficient cash reserves, with only enough funds to sustain operations for 11 months. The expenses exceed the income primarily because of the high research and development costs associated with developing an antagonists program for the treatment of diabetes and sepsis. Purinex, Inc is a young and growing company that is actively seeking capital to expand. They aim to achieve this through partnerships with large pharmaceutical companies or by attracting investment from venture capitalists. It’s important to note that Purinex has already undergone the development process for a preclinical stage antagonists program targeting diabetes and sepsis. Moreover, the program has successfully completed a phase 1 clinical trial.
Harpaz believed it was unlikely that Purinex would establish a partnership deal with a larger pharmaceutical company for both sepsis and diabetes, although it had such deals for two other conditions.
