Main Subject - Business

Let us first examine the various parties involved in a financing transaction. On one side of the playing field there is the private company in the process of raising capital. On the other side there are the investors. Investors ma

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

y include, family and friends, Angel Investors, Private Equity Firms (also known as Venture Capital Firms) and Hedge Funds.

Keep in mind that negotiating a Financing Structure truly is an art. Your Management Team needs to

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

Examples of combination products may in

think three steps ahead just like in a chess game. Although the majority of Private Equity Firms may use the convertible preferred stock financing structure most often, there is a wide range from firm to firm on what the f

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

nal structure will look like.

Here are some tips to think about when structuring your financing to help Level the Playing Field:

1. Voting Control. Giving up voting control is not a bad thing. If you can fu

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

ther expand your business and ultimately the net profit, so that your reduced percentage of ownership in the company will actually be worth more than it is now, that should be viewed as a good thing. Large Private Equity Firms wi

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

Combination pro

l probably require voting control if it is a large funding and especially if you are a start-up. For example, say there are 3 key management people in a company who currently own 20% each of a company that is valued at $5,000,000,

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

but they will be reduced to 10% ownership once they are funded. If the company used the funds wisely and increased its value to say $15,000,000 then although management lost control, their value actually increased.

2. Supe

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

Preferred. If Management has to give up the majority equity position in the company, see if the investor will let you maintain voting control. This way the investor does not have control over business or management deci

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

ions and the Management Team technically maintains control of the company. This can be accomplished through the use of what I call a “super preferred”.

3. Long Term Employment Agreement. If the private equi

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

y firm won’t go along with the super preferred idea see if they will agree to 3 year employment agreements for management so management feels safe with the funding arrangement and not being replaced 6 months after funding (assumin

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

you have given up voting control). Management Teams feel very uneasy when an investor has voting control. They are always worried they will be replaced after all their hard work building up the company. This concern clearly needs

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

Following aspects would a

to be addressed and covered.

4. Pre-Qualify them as a Suitable Investor. Try to get as much information about their financing structure before you give them too much confidential information or spend too much time

dd to the challenges in developing combination products:

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

and effort with them. Just imagine spending four (4) grueling months of discussions and due diligence with a particular private equity firm. Then you learn they don’t fund any companies unless they get at least 70% equity and vot

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

ng control when your Management Team already agreed amongst themselves that they would never give up voting control.

5. Always ask for a “Clawback”. A clawback provision allows you to buyback shares from the invest

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

r at a minimum price if you achieve a certain milestone, thereby increasing your percentage of ownership and voting rights in the company. Here’s an example. If you reach $4,000,000 in gross revenues in the second year after fun

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

ing, then your company may repurchase 10% of the shares from the private equity firm for a nominal value, like $.10 per share.

6. Subsequent Rounds of Financing. If they won’t fund you the full amount you are looki

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

Professional from academic institutions, pharmaceutical industries, health care indust

g for see if they will fund you in a second and third round if you hit certain milestones based on gross revenues or net profits. Private Equity Firms shouldn't have a problem agreeing to incentive based financing in a second or e

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

en third round.

7. Get a Good Attorney. Get a good venture capital attorney experienced in representing clients in these types of transactions. If you ask him what a “clawback” or “super preferred” i

.

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

and he doesn’t know then look for another attorney. Spending a little more money for a good attorney will save you money in the long run.

8. Get a Good Accountant. Get a good tax accountant who may be able to mak

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

Companies that provide selfless information through particip

a few simple suggestions in the financing structure. It may help you tax wise if you get warrants or stock bonuses structured a certain way. Better to plan ahead and know the tax implications before you finalize the transaction

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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