For companies in need of cash, there are only three ways to get said cash: a share offering, a partner for your product, or a decision to borrow cash. Each form of financing has its own benefits and drawbacks, and it really depends on the individual company as to which route is the best one to take.
Young, developing biopharmaceutical companies without positive cash flows like Exelixis
Yesterday after the market closed, Exelixis announced just such a share offering for at minimum 9 million shares and with an option to sell up to 10 million shares. The bad news for existing shareholders is that when the offering is completed they will own a smaller piece of the Exelixis pie, but the good news is that now the company has extra cash to continue operating at full throttle.
Some sort of financing was a must for Exelixis. With five drugs expected to be in full-blown phase 2 trials and another three in phase 1 trials by year's end, the company would be hemorrhaging cash faster than MC Hammer.
Exelixis does have a deal with GlaxoSmithKline
Exelixis' management estimated that by the end of 2006, the company would only have $130 million left in the bank compared to the $210 million in the vaults at the beginning of the year. At this rate of cash burn, Exelixis' scientists would be out of a job (or accepting IOUs for paycheck) by 2008 if Glaxo didn't exercise its option on Exelixis' compounds.
Assuming all the shares in the offering and over-allotments are sold, I'd expect the deal to bring in no less than $80 million (after fees) to Exelixis, which would buy the company another year of operations even absent the Glaxo deal.
The important thing to remember here is that dilution is simply part of the territory for biotech investing. What really matters is whether Exelixis' management receives good terms on the financing, and that the company has enough cash to continue running all its expensive clinical trials on time.
Exelixis is a
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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.