Companies in emerging industries such as the life sciences are constantly looking for funding, but uncertainty in the capital markets has made this a time-sensitive, challenging and expensive process to execute.
The capital markets, particularly over the last few years, and especially for research and development-intensive biopharmaceutical companies, have been unpredictable, making timing of financings difficult. There are uncontrollable variables, both internal, such as clinical trial results, and external, such as regulatory changes and market sentiment, that can impact funding activities. Finally, the cost of capital can be quite expensive for typical offering vehicles such as private placements and registered directs when one considers the price discount on new shares, the downward pressure on the share price when the offering is announced and the dilutive effect of warrants. A CFO might benefit by implementing a longer-term financing strategy that encompasses several financing vehicles rather than a single event-driven financing as a strategy to mitigate these issues.
One such vehicle is an at-the-market (ATM) offering. An ATM is an offering of newly issued shares into the existing trading market. This type of offering requires a Form S-3 registration statement to be filed, pursuant to Rule 415(a)(4), with the U.S. Securities and Exchange Commission. It enables the issuer, through the services of a broker-dealer acting as an agent, to sell stock into the market over a period of time determined by the issuer at a minimum price that is also determined by the issuer. If managed effectively by the agent, the shares are sold at the prevailing market price. There is no offering discount. There are no warrants. Unlike a line of credit, the shares are not sold to previously identified parties at a discount to the volume-weighted average price (VWAP), but they are sold at the market price. This results in a lower cost of capital compared to more traditional financing approaches.
In addition, an ATM provides the company with more control on the timing of capital-raising. It is complementary with other financing activities, so one could supplement a more traditional financing with an ATM. Therefore, ATMs are tools for companies that are seeking to build solid, long-term financing strategies incorporating several financing vehicles that provide flexibility and reduce the overall cost of capital.
ATMs have been employed by companies with a wide range of profiles. Market capitalization ranges run from small emerging biotechnology companies below $100 million to large, multinational, multi-billion dollar energy and auto companies. What they have in common is a broad and long-term financing strategy that includes ATMs.
Avanir Pharmaceuticals, a life science company that employed an ATM, is an example that illustrates the flexibility afforded by ATMs. Avanir Pharmaceuticals was looking toward a Prescription Drug User Fee Act (PDUFA) deadline for its lead candidate, dextromethorphan/quinidine (Zenvia), with an expectation of a Food and Drug Administration (FDA) approval. The company planned a financing to coincide with the event. Management was seeking a financing vehicle that could quickly access the equity market and that could take advantage of an expected significant increase in liquidity and price of the stock. It was determined that an ATM would be the best financing tool because of its low cost of capital and its ability to offer stock without a discount to the market price.
Unexpectedly, Zenvia received an approvable letter from the FDA. More clinical work was required. This unexpected outcome demonstrated the flexibility of ATMs. The company required capital to be able to respond the FDA’s approvable letter. Avanir was able to access the equity market without offering shares at a discount to the market price, nor issuing warrants. The company raised more than $16 million in under six months. The drug, now branded Neudexta, was approved in November 2010. The ATM put in place by Avanir was a key part of the company’s strategy enabling the company to acquire the capital to complete the work and gain approval of the drug.
There is a misperception in some companies that ATMs are a financing option of last resort. This is incorrect. In fact, one could argue that a forward-thinking strategic approach to financing would include an ATM because of its beneficial attributes.
For example, Capstead Mortgage, a real estate investment trust (REIT), makes leveraged investments in residential mortgage pass-through securities. The company had funded its investments through more traditional funding vehicles but their execution used a lot of executive time and unnecessarily diluted current shareholders with price discounts. The company employed an ATM financing facility because it was flexible, low profile, reduced dilution to current shareholders and cost less than traditional funding alternatives while still enabling the company to complete its funding objectives. This $1 billion market capitalization company – its market capitalization was a few hundred million dollars when it activated its first ATM – was one of the first to use ATMs as part of their financing strategy and they continue to use them today. This was not a case of last resort financing but an example of a company that carefully considered its financing options and chose a vehicle that would accomplish its goals in the most efficient and cost-effective manner.
ATMs are a valuable financing option that should be considered as a part of every CFOs toolkit. Management teams are able to control the timing of the facility, and, thus, ATMs provide flexibility when raising capital. They can minimize capital markets uncertainty because they can be executed rapidly. They minimize the cost of capital because shares are sold into the market in a manner that does not impact the stock price, and there are no warrants to dilute current shareholders. For those executives looking today for a diverse though complementary financing strategy, ATMS should be considered one of the approaches.
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