Case Study: Purinex, Inc.
The case asks for evaluation of different financing options. Gilad Harpaz is Purinex’s CFO and he needs to determine which one from the three options provides lowest risk, highest company value, and short term cash for operations. Purinex is a biotechnological company that has 35 patents pending in pharmaceutical field. It is one of the raising stars that may develop new drug for specific use in diabetes and sepsis. Company has 14 employees. Monthly burden is $60000; company has available cash of $700000 which will last up to 12 months.
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.
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, partnership seems to be the way to go. Partnering with a larger company seems to be the market trend, whereas, VC funding seems be declining. Purinex will need some additional cash to fund R&D and other daily operations. When it comes to deciding which partner to choose, CFO should look not only at the proceeds from the partnership, but also at the portion of business that Purinex will be giving away. In this case, it is more lucrative to partner with sepsis partner. It provides comparable cash as the diabetes partner, but promised cash flows are much smaller. Diabetes drug sales are estimated at $4 billion, whereas sepsis drug sales would be only 0.5 billion. Diabetes drug therefore seems to be a lot stronger “cash cow” and giving up large portion of future proceeds would not be smart solution. Purinex is in need of relatively small cash, when compared to future cash flows. Up-front cash of 5 million dollars should be good at least for 24 months. If sepsis drug passes the Phase II testing, there will be additional revenue out of milestone portion of the deal.
It is quite risky to solely rely on the partnership deal. If the company waits six months and the partnership deal would not go through, value of the company would drop tremendously to $8 million or less. To hedge the risk and avoid possible down-round scenario, Purinex should raise additional capital from Angel investors. $2 million should provide enough cash for additional 12 months of operations. Perhaps it would be enough to raise only one million and wait until the partnering deal goes through. This would give the company enough security not to worry about future R&D expenditures, and at the same time, it does not lower the value of the company as much. If Purinex could raise additional one million from its Angel investors and at the same time initiate the deal with sepsis partner, the value of the company would be somewhere between 20 to 24 million in six months. Partnering gives angel investors assurance of repayment, or preferred right to IPOs. In case that the partnering deal will not go through, Purinex has to secure additional funds from angel investors and risk the value at $17.5 million. It is still better and less risky solution than the VC option.
. CASE FACTS
Purinex was a drug-discovery and -development company based in Syracuse, New York, that sought to commercialize therapeutic compounds based on its purine drug-development platform. Purine was a naturally occurring molecule that played an important role in numerous biochemical processes. Purinex had developed a process for creating small molecules that acted as selected agonists (activators) or antagonists (blockers) for specific purine receptors in the cell membrane. Purinex’s goal was to develop products that evoked a receptor-specific pharmacodynamic effect without producing undesirable outcomes that could result from interactions with other receptors. The company...
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