How to Raise Capital: What Can We Learn from Skyepharma?

B&M: Do you want to start by quickly giving us your company story, your elevator pitch?

PG: The business is all around generating long-term royalties and milestones so it’s a reoccurring revenue model. We’ve got propriety technologies and proven skills that combine together to undertake complex developments for partners. On the oral side there are a number of technologies that are in the process of refreshing at the moment with some internal ideas, and on the inhalation side there’s both metered dose and dry powder inhaler developments for asthma and COPD. So it’s playing from the track record of that as well as the technologies to develop some of the most complex products in the world in the oral and inhalation space.

B&M: First of all congratulations on the placing and the raising of £112m. For those unfamiliar with the placement, what was the rationale behind the decision to raise the capital in the first place?

PG: In simple terms we were carrying a large amount of convertible debt for many years that 2 years ago we changed so it became non-convertible bond debt, with a large amount to be paid off in 2017. That was putting shackles on the business because we were spending most of our time generating the cash mountain to pay the bonds. At the same time so many things had happened with the business, there was so much positive news, we believed the time was right to raise equity to pay off the bonds and we were able to negotiate a discount with bond holders that saves us £25m over what we would have spent between now and 2017. So we went to the market effectively saying if we raise the equity we’re going to save £25m and by the way, here’s a good story.

B&M: Once you were committed to the placements how did you lay the groundwork and what was involved in that process?

PG: Actually we moved very quickly, we’d been reviewing other potential options for refinancing the debt and we concluded that actually an equity raise was the best solution, so we made the decision in early February in principle and concluded the deal by the end of March with the announcement. We already had advisors lined up with the in-house brokers, Singers, to do the fundraising exercise and we had all the accountants and lawyers lined up from previous work we’d done so we could move very quickly.

B&M: Did you find any particular challenges in doing so, what was the most difficult thing about making the move?

PG: In the scheme of things it was relatively straightforward because the story is very good. Probably the biggest complication was that we were trying to complete our annual accounts at the same time as doing the fundraise, so when I said to the team I want to do this and I want to do it quickly, there were a few gasps and concerns as it was going to be really challenging to finalise annual accounts as well as produce a full prospectus and go on the road show and do everything else. But we did that, including having the complete reports and accounts ready for printing on the day we announced.

B&M: What were the key success factors to making the placement so successful, obviously you’ve got a very good story, you demonstrate what resonates very well but if you had to distil the elements what would they be?

PG: There’s always credibility of management in a story so, do investors believe the story or does it sound like it’s hyped too much? My style is to tell it as it is. There’s good awareness of the company after all we’ve been around, we’ve met quite a lot of investors, I’ve met a lot of investors with other hats on in the past in other sectors so that can help as well. Our brokers did a really good job, they undertook concurrent research and prepared the appropriate supporting documentation. They had experienced sales people on the road supporting the story and specialist sales people with healthcare knowledge and analysts who could support as well, so it was a combination.

I think the market conditions helped. At the time it was quite a buoyant market, there were a lot of IPOs on the road and what resonated with generalist investors was they’d seen businesses that were raising large amounts of money but didn’t yet have an approved product, didn’t have significant revenues or maybe no revenues, were losing money and there were some that required faith that everything was going to come though. Against that, we were coming in with a story in a sector where it didn’t need that faith in potential approvals, it just needed understanding the basic messages. Those who were probably more cautious on those more early-stage business actually were quite refreshed by our story.

B&M: What do you think are the ingredients to growth, the key success factors for you at Skyepharma?

PG: I think it’s understanding our place in the world, there’s no point thinking that the grass is greener in different business models so we understand what we’re good at, we understand what our embedded core skills are and its leveraging those and we’re well respecting in the industry when we’ve got a new oral drug delivery platform technology and we knock on doors of big pharma, we will get to talk to the right people because they know we can deliver. One of our ideas is to look at little micro acquisitions and you guys might come across those type of things so the typical 2 or 3 man spinout from University, probably very technically driven, probably could have really good ideas and these guys could knock on the doors of Novartis and Sanofi and people forever and they’ll never get a transaction and they’ll never know why and it’s a whole range of skills. We have the medical regulatory, the quality, the commercial, the public management a whole range of skills beyond the technical that can provide assurance to the customer that we’ll deliver and that someone in a big pharma looking to invest in something they don’t want to take a risk, if it fails it’s their failure so they’ll go for the safer bet so if we find those micro acquisitions and we validate them and say yes that technology is good we can probably get a tremendous leverage out of it.

B&M: Is there any advice you might give a biotech that’s currently ready for a placement of their own?

PG: I think it depends entirely on the strength of the story. You’ve got to pick the right timing of the story having enough proof of concept. Ideally you go in with a reasonable degree of corner stone support.

We went into the fundraise knowing that we had half the funds that we needed if we wanted though, we didn’t in the end need that much from those investors but we could have got half from 2 investors so I think it depends very much on the story and the stage of the business and the more you’re at the early stage the more it depends on market conditions. I believe we’d have got this away in most market conditions, the pricing may have been a bit weaker, but we had to price at the average price at the time we priced it, no discounts at all.

B&M: Let’s talk about the market conditions. Do you think the current space for successful placements IPOs represents a significant upturn in the fortunes in the UK biotech industry?

PG: I think there has been a shift because for a number of years, investors, generalist investors in particular, were cautious about the sector because they’d had their fingers burnt a number of times and they didn’t feel they had to enter the sector so they would perhaps stick more with med tech and so on and they would keep away from businesses where there were big binary events based on approvals. I think now companies are coming through that show that you can actually make money in the sector, that’s helped the sentiment generally and we’ve probably helped it further with our story as well, so in a way success breeds success, so I think that’s really helped get generalist investors back on side.

B&M: Are you currently optimistic then about the funding environment going forward for the next 5 or 10 years?

PG: I’m a natural optimist but it’s weaker now than it was 3 months ago, there’s no doubt it’s more difficult right now and these things do tend to go in cycles and it can get knocked very easily, so there’s no certainty. I think there’s been a change going on for 7 years. I’ve seen change over the last 2 years for generalist investors being prepared to invest in good businesses in this segment that wouldn’t have invested, I’d probably have to go back to 2008 because nobody invested in 2008, so 2007 there was probably a wariness amongst UK generalists to invest in the sector and now there’s a greater propensity to invest because of the successes that have happened.

How to Tap into the Purse Strings of Generalist Investors

B&M: Let’s talk about the generalist investors. What sort of role do you think they will have to play in the biotech industry?

PG: In London is the main source of money so if you’re looking at equity markets you need to have stories that work for generalist investors and it could be quite a complex story but it’s the job of the management to sort of cut a complex story down to something that can be understood. During the roadshow we met an investor who had an oil rig picture on his desk that was from a previous meeting and then he’s looking at a pharmaceutical company and trying to understand how you develop a product like ours, so they’ve got to be pretty agile. But it’s the major source of money in the UK, there’s very few specialist investors and there’s only small amounts of money available, there’s more of that in the US.

B&M: What do you think is the key to unlocking the generalist investor’s cash piles? How do you get the message through to them and convince them of the value?

PG: I think it’s believability that’s going to generate the returns, generate cash and that’s part of the way the story is presented. Anyone can draw a hockey stick curve and say that’s what’s going to happen, generalist investors aren’t going to buy that message they want feet on the ground and say well it might not happen. There’s no point going to a generalist investor and saying this is going to get approved next year, you’d have to say we’ve got 5 shots on goal and there’s an 80% chance of each one getting approved.

So, What’s Keeping This Biotech CEO Awake at Night?

B&M: What’s the most exciting thing for you at the moment? What’s making you get out of bed in the morning and say yes I really want to come to work and do this?

PG: It’s just exciting that there’s always new news and there’s always something happening on some other launch or further growth or a bit more information on development, another partnership we can enter into.

It’s great because there are multiple opportunities all the time. I spent half my career in growth businesses and half in restructuring and it’s far more fun in growth than it is restructuring, no one thanks you for structuring, you rescue a business yeah great, no one says fantastic job. Growth can be self-rewarding, you see the top line growing and the bottom line growing and you can then think of other things you can do with that capability.

B&M: Let’s talk about challenges. What are the things that are keeping you awake at night?

PG: I wouldn’t say there was anything particularly. I think the major challenge we face at the moment is probably transitioning the business from a real cost constraint environment which we had do for a number of years while we were waiting for these things to come through and bringing them through to growth mode and it’s a transition in mind set of a business. People are not used to even asking to be able to take on some more resource whereas now we’re saying to them you’ve not only got to ask, you’ve got to do it and I don’t want you to come to me and say I wasn’t able to do that great idea for 3 months because I was too busy doing something else. You’ve got to come to me and say the way of doing this is to take on an extra resource from here so it’s a mind set change which needs managing carefully, you can let it get out of control the other way and that’s no good either but I think there is transition to make and it’s all about recognising the stage a business is at and what kind of mind set we need and then how you’re going to develop people.

I’d like us to become more innovative, again innovation comes from people having space and time to think and we’ve got some really good innovators in the business but there’ll be built in additional innovation skills because people are too busy doing their day job to think so again, that’s the second stage. Once they’ve got used to the idea of growth, then there’s the next stage of idea of innovation.

B&M: What are you concerns about the biotech industry?

PG: There’s inherent inefficiencies, it’s hard to get your head around you’d have a highly capable salesman knocking on the doors of GPs selling their own product and not really selling but promoting it and yes you’d need the information for the doctors, they’d need to understand what these medications do, it gets down to the patients as part of the reach to patients but is inherently a tremendous inefficiency. The idea that you might spend 20% - 30% of sales on getting the product to market to getting to draw parallels with other industries, it would be unthinkable to spend that sort of money and there are other ways as tools emerging to communicate and educate and I think this is going to have to get into the 21^st Century, that with reduced prices and opportunities as well.

B&M: Do you have any ideas or thoughts on how that inefficiency and funding gap can be closed?

PG: There’s a number of things that would help, more certainty on the regulatory pathways would help, more harmonisation on regulatory pathways would help enormously, more predictability of pricing reimbursement because you can develop a really good drug but if you don’t get pricing reimbursement on it, you’ve lost your return. So more assurance of how the return is going to arise would make it easier to get that funded. There are some specialist investors in quite an open space that can fund those things. I’m not sure that it’s a shortage of money I think it’s the shortage of assurance that it’s worth taking the bet.

This article was featured in the June edition of Drugs & Dealers, Biotech and Money’s exclusive magazine.To get access to 10 other executive interviews like this one and feature articles, download for free the magazine.

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