Buying Cash

That was one CFO's solution for keeping his small company afloat as it waits for regulatory approval of its product and continues to burn through funds.


CFO Philip Donenberg prides himself on his patience and optimism. After all, firms like BioSante Pharmaceuticals, where Donenberg has worked for more than a decade, often endure for years without seeing revenue. But when his capital-raising options froze late last year, patience was not enough. With about $6 million in the bank, BioSante needed to raise $30 million to $35 million to fund the advertising, monitoring, and testing of three separate clinical trials for its lead product, a female-libido enhancer, before the firm could apply for approval by the Food and Drug Administration.

Bank loans and even private investment in public equity (PIPE) vehicles were out of the question at the time, so Donenberg came up with a creative solution: buy a balance sheet. Pending shareholder approval (a meeting was scheduled for the end of September), BioSante will acquire Cell Genesys, a prostate-cancer drug maker, in an all-stock, $38 million transaction. BioSante has no need for Cell Genesys's nine employees —  although its CEO and a board member will sit on BioSante's board —  and little need for its products, but depending on BioSante's stock price at the close, the merger could net the company between $21.5 million and $23 million in cash. "The primary reason for the merger was their cash," says Donenberg.

It's not as easy as it sounds, of course. Donenberg had to approach a number of cash-rich firms before one agreed to be acquired, and even then, one of Cell Genesys's major shareholders filed a lawsuit (later withdrawn) protesting the merger. BioSante also inherits debt along with the cash, $20.8 million in convertible senior notes due in 2013. Moreover, the deal won't provide all the cash BioSante needs. In early August, it raised $12 million in a registered direct offering (netting the company $11.1 million after fees and expenses) for shares of its common stock and warrants.

While such a strategy is generally "a last-ditch effort" to survive, BioSante effectively bought itself two to three more years, says Matt Gurin, vice president of life sciences at consultancy Hay Group. Other biopharmaceutical firms are in similar situations, he adds, after underestimating the time needed to receive FDA approvals and seeing funds for biotech firms dry up.

Mat Wood, a partner in BDO Seidman's transaction advisory group, says it's unusual for an acquiring company to be as candid as BioSante was in acknowledging its interest in a target's cash. Still, in the current marketplace it can be an effective alternative for raising capital, he says. Then again, how many companies are out there just sitting on a pile of cash they don't need?


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