Useful Advices - Business

There are several structures that Private Equity funds (also known as venture capital funds) use when they give the green light to fund a company. The basic structures for private companies are co

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

mmon stock and convertible preferred stock. These structures usually contain an anti-dilution provision, so the lead investor doesn’t start out purchasing say 40% of your company for $4,000,000 and then end up w

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

th only 5% because you dilute his stock position with subsequent financing rounds.

1. A Common Stock. Common Stock funding structures are pretty simple. The company and investor agree on a dollar

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

amount to be funded and the percentage of stock, also called the equity position, the investor will receive. Most private companies, however, will find they have very little bargaining power with private equit

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

funds. Usually, it is the money that dictates the terms of the financing structure. Part of the reason is that if you don’t like the deal terms you don’t have to take the money. Another reason is that Private E

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

uity firms know which structures work for them and which ones don’t.

2. Preferred Stock. Private Equity firms use Preferred Stock structures the most. The Preferred Stock is convertible into Comm

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

on Stock, usually anytime at the option of the holder. The convertible Preferred Stock can be convertible into either a fixed number of shares of Common Stock or a certain percentage of the Common Stock outstand

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

ng on a future date. Most Preferred structures also have a built in dividend. The dividend could range from 6% to 12%. This allows the Private Equity firm to receive some return on its investment before the Ex

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

t Strategy is used.

3. Debt Financing with an Equity Kicker. Another possible structure, if your company is already operating and profitable, or close to it, is debt financing with an equity ki

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

cker. Although this structure will be difficult to get from a Private Equity firm, it is worth exploring.

You are more likely to get this kind of financing from Angel investors. Maybe even family and friend

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

would even provide this type of financing if the amount is not too large and you have good cashflow. Say you feel $200,000 can get you over the hurdle and profitable. Structure the $200,000 as a 3 to 5 year l

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

an and give the investor 10% of your company in common stock. The number of shares and percentage you give the investor/lender is based on the size of the loan and the value of your company. I only used 10% as

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

an example.

4. Convertible Debt.Some investors will structure their funding as a convertible note or convertible debenture. This security is convertible at their option into Common Stock of the co

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

pany. Usually they will not convert until the Common Stock is trading and they can get out of their position.

Smart investors will also use what is called a "4.9% Clause". I have used this many times fo

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

my private investor and hedge fund clients. Certain securities laws require investors that own 5% of more to make certain filings with the U.S. Securities & Exchange Commission (SEC). This allows investors to g

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

et around that requirement since the 4.9% Clause does not allow the investor to own more than 4.9% of the company at one point in time.

Also, if an investor owns more than 10% of a company they are deemed an

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

"Affiliate" and a number of other rules kick in. An investor can remain more nimble with his investment without having to comply with these regulations. The 4.9% Clause also benefits the Management Team. If

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

the investor can't own more than 4.9% of the company it is very difficult for the investor to take over the company or make management changes.

5. Reverse Mergers. A Reverse Merger is when an exi

.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de

sting private company merges into an existing public company with a stock symbol, which is usually a “shell company”. A shell company is a public company that although still in existence and having a stoc

elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip

symbol, is no longer operating a business. The business plan obviously failed and that company went out of business, but the public entity or shell still exists. This is the key ingredient in the Reverse Merger

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

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Useful Advices - Private Equity and Venture Capital Financing Structures

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