Purinex, Inc. What us Purinex’s business? A biotech company, with heavy uses in R&D. They use small molecules to work as an agonist or antagonist in the body. The drug they are developing would be used in diabetes patients or to prevent sepsis. Therapeutic compounds based on its purine drug-development program How would you describe its business strategy? They seem to have a product-based business strategy, with their product relying heavily on research and development surrounding their compound purine. The purine once combined with other drug compounds would be sold to a company or made in partnership with a company, and they make revenue off the production of the drug which includes the purine compound. Alliance with big pharma- Until alliance, seek short-term finance What do you think are the founders’ goals and vision for the company? Their mission statement is: A company’s goals usually coincide with the mission of a company and supporting that mission. I would think their first goal is to raise funding so they can continue the work they do. They need to pass clinical trials; decide when and how they want to receive funding like an IPO or private sell/acquisition. (Exit Strategy) Continue to develop their drug for both diabetes and sepsis to the standards of the FDA, without undesirable outcomes What is the source of Purinex’s value? Intellectual-property portfolio consisting of 35 patents pending or issued in the purine field. Currently they have a leg up in the sense that they are already seeking funding for expansion and an opportunity to go public. The development of their purine products in diabetes and sepsis treatment. In diabetes, a series of proprietary antagonist molecules that showed great progress in preclinical trials Purinex, Inc. In sepsis treatment, one of their agonists has shown limited side effects in animals, proven safe in Phase 1, and is fast acting and effective in treating sepsis Overall, What are the firm’s technologies and how successful could they be? See above. 40% chance for Diabetes revenue could be $4 billion a year 60% chance for Sepsis revenue could be $500 million a year They have a promising drug candidate, so there’s an opportunity to seek alliance with a larger pharmaceutical or biotechnology company. The larger company could provide up-front fees, R&D funding, milestone payments, royalties, and possibly copromotion rights. Based on past deals, at least $5-$10 million up front, and funding for other areas mentioned Key to Success: Get Alliance, Short-term Financing What is the likelihood of success? 75% chance that Purinex would secure a partnership with a pharmaceutical company for either sepsis or diabetes, sometime during the next 4 to 12 months. With a 60% probability that there would be a deal for sepsis if the partnership occurred, and 40% for diabetes. With a 25% chance delay if they don’t get an alliance, leading to a down round. If a partnership did not occur, there would be a 95% probability that a different partnership with a third company for the diabetes application would occur a year later. Finally, a 5 percent chance of failure. What is the problem facing Purinex’s CFO Gilad Harpaz? An early-stage biotechnology firm needs sufficient access to capital. Seeking an alliance with a larger pharmaceutical or biotech firm. They have a broad range of technologies under development, with two having application appropriate for partnership deals with a larger pharmaceutical company. They have initiated discussions with several large well-capitalized pharmaceutical companies regarding a collaboration for both compounds, two companies came forward, one for the sepsis treatment, the other for the diabetes treatment. He has to choose between three options: VC, Angel Investor, or Wait 6 months Purinex, Inc. What is the urgency associated with his concerns Purinex needs funding, first and foremost, they only have $700,000 cash on hand, and the firm’s burn rate is $60,000 a month. Purinex currently having no sales or earnings, only income from federal research grants. They only have a runway of 11 months. Harpaz does not think they will get a partnership for both drugs, so each deal is mutually exclusive. They are a growth form, so retaining one of the programs (sepsis or diabetes) is important for strategic viability as an acquisition target or as a possible IPO candidate. They will lose ownership potential in a down round, with needing more cash. Harpaz has three options, and each come with their own risks. What are Purinex’s financing alternatives and how do they compare? VC – one time round of financing, 3 months to secure $10 million, with a pre-money valuation of $15 million. However, it would come with a significant number of restrictions. Board appointments, antidilution rights, liquidity, positive and negative covenants. Wait 6 months – Wait for the deals either Sepsis or Diabetes to come through, with owners maintaining control of the company which would be worth $25 million. If they don’t get the deal, they would need funding quickly, and would be forced into a down round, and would have a pre-money valuation of only $8 million Angel Investor – One-time round of financing from several angel investors. They would only raise about $2 million but would have a higher valuation at $17.5 million. It would take 6 months to complete an angel round of financing, the same as waiting 6 months, but there may be a guarantee of money at the end of the 6 months. How would you rank them in sources of cash in terms of their risk and return? From most to least risky and from most to least amount of return High Risk (monetary) High Return (monetary) Wait 6 months VC Angel Investor Angel Investor VC Wait 6 months Purinex, Inc. High Risk (company values) High return (company value) VC Wait 6 months Angel Investor Angel Investor Wait 6 months VC How feasible and attractive is financing via an angel round or a VC round? VC financing is attractive because you get a higher valuation as a company and an enormous amount of money up front, one of the risks is the control you lose in your company. Angel investing is attractive in you only need one round of funding, you control more of your company, you may receive less money, but still enough to survive as a company and finish the testing and drug trials needed and have a higher company valuation than with VC. With Angel investing, the future success may not compare with that of VC investment due to the non-financial benefits you lack from Angel investing. Like leadership and guidance that would prove beneficial. How do you assess the option to wait? The option to wait is difficult but it does hold reason. The goal of this firm should include raising capital and raising it faster than their burn rate. Waiting 6 months involves too much risk. Mainly the firm could lose money, quickly. If the projects are not selected and they are forced into another round of funding, their valuation has drastically fallen. However, if their projects are selected, they stand to make a lot of money, with full control of their company. Imbedded option value, option value is important in uncertainty, which the option to wait is very uncertain *Pre-money helps give insight into how much control the company retains How would you structure the decision among these alternatives? I would structure the decisions based on current need. Prioritization of goals, and which options have the highest return. Even incorporating techniques like the NPV method for mutually exclusive projects. The use of the decision tree method, which showcases visually the options that are available and the amount of money the firm has the possibility of making. Expected value, risk, option value, other motivations Purinex, Inc. Are there any qualitative considerations? How would you incorporate those considerations into the analysis? Clinical trials- making sure the drugs work to help diabetic patients and stop sepsis once started Morality/Ethics – taking money from VC may result in a board that cares about profits instead of patients, and cures. So, cutting corners, changing the ingredients of a drug, making them too expensive for the target patients to afford How would you choose to finance the firm’s growth? The angel investor, keep ownership of company, more funding until one of the deals goes through so we don’t burn through available cash. And a higher valuation than with the VC funding. There is less risk involved and I would not consider the return low, more moderate. HIGH Wait 6 months Angel Investor R E T U R N VC LOW HIGH Risk What do you recommend? What choices does your recommendation make about growth, wealth, and dilution? Take the Angel Investor. Purinex, Inc. *Decisions can be made intuitively but need to be justified analytical. Do the numbers help your case?
