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
