The typical biotech timeline goes something like this: venture capital funding -- series A, B, C, D, etc. -- followed by an IPO (more money), followed by additional cash raises through secondary offerings.
Developing drugs isn't cheap. Raising cash is a necessary evil that unfortunately results in dilution for shareholders.
Fortunately, some biotechs have found a way to help investors keep a little bigger share of the pie.
Selling off the useless stuff
CytRx has been the king of specialization lately. The biotech sold the shares it still had in its spinoff RXi Pharmaceuticals, raising $17 million dollars. CytRx also let go of another spinoff, SynthRx, and sold off its molecular chaperone assets to Orphazyme. The cash raised will help the company fund its cancer drug program.
A little help from a friend
Nonprofits can also be a source of funding for companies. Vertex took money from the Cystic Fibrosis Foundation. Ditto for Biogen Idec from the Juvenile Diabetes Research Foundation. And even big Johnson & Johnson
Grabbing money from a platform
Companies lucky enough to have a platform capable of developing multiple drugs can raise cash by licensing out their technology.
Similarly, Alnylam Pharmaceuticals'
Dilution in disguise
Licensing out drugs is another way to draw upfront cash and potentially reduce the rate that cash is burned through if the licensor picks up some or all of the development costs. But out-licensing drugs ultimately has the same effect as raising cash by selling shares since current investors own less of the out-licensed drug than they did before the partnership.
That isn't to say that every partnership is a bad idea. For small drug developers, a partnership is often a much better choice than raising cash to push through to the next phase of development. Just don't forget you're giving something up when a company you're invested in signs up a development or marketing partner.
Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of GlaxoSmithKline, Johnson & Johnson, and Exelixis. Motley Fool newsletter services have recommended buying shares of GlaxoSmithKline, Vertex Pharmaceuticals, Novartis, Johnson & Johnson, Pfizer, ImmunoGen, and Exelixis, as well as creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.