All ways of raising capital entail risk. But for life sciences companies, employing credit strategies may be less risky than the alternatives.
Turning to venture capital typically requires giving up a slice of the company and a big portion of projected revenues. Raising capital through issuing shares often prompts shareholders to sell. By contrast, credit-based strategies such as royalty monetization and structured debt preserve shareholder value and owner control.
But loans must be repaid–and repaid on time. “These strategies work best when there is a pathway to generate enough revenue to eventually hit profitability and service their debt,” says Luke Düster, principal at Capital Royalty, which offers credit to life sciences companies.
A whole host of issues can impact revenue streams, including competitive pressures, problems with reimbursement, and manufacturing challenges. Companies that do have trouble with debt repayments sometimes resort to raising additional equity. But CR typically structures its deals so that the debt is manageable even if revenues are 50 percent below forecast, Düster says. (Equity investors typically have much higher performance expectations.) Furthermore, many of CR’s partners plan to be sold or make public offerings within five years, at which time the debt is fully repaid. “We give enough leeway through our long-duration [terms] and our interest-only period to get to that exit point,” Düster notes.