Purinex Case Study

Purinex Case Summary

Company Background:

Purinex Inc. is a pharmaceutical drug discovery and development company based in Syracuse, New York. Its specialty is the purine platform where it developed two promising drug treatments for the battle against sepsis and diabetes over the last couple years. Purinex has 14 employees, one chemistry laboratory, and more than 35 pending or issued patents in the purine field.

Pharmaceutical Industry:

The pharmaceutical industry produces over $530 billion in annual sales with growth higher than most other economic sectors and the biotechnology sector revenues grew from $8 billion to $40 billion from 1992 to 2003. Because the discovery and development of new drugs takes so much time, money and resources, many big time firms partner with smaller firms with developing drug opportunities from the biotechnology sector as a way to find new drug candidates instead of investing heavily in their own research and development. Research and development accounts for around 40% of all revenues in the industry due to the long and risky drug development and approval process. Drug development is estimated at $880 to $897 million per compound and 75% of R&D costs. Some estimate the process takes around 10-18 years with only 5%-10% of drugs approved for marketing. Small biotech firms sometimes do not have the funds available to support the development of their research so partnerships with big firms end up working out for all parties. Large pharmaceutical firms can offer up-front fees, R&D funding, milestone payments, royalties and sometimes even co-promotional rights in exchange for the rights to the drug. Early-stage biotechnology firms need easy access to capital for their research and development, which is usually obtained through individual angel investors or venture capital firms. Venture capital represented the largest funding source with $2.6 billion in 2003 and $2.8 billion in 2003 but the attractiveness of the market is decreasing with lower premiums than before.

Problems:

Purinex only has a cash balance of $700,000 and with a burn rate of $60,000 a month it can only survive for another eleven months on its own without any cash inflows. It currently has a financing decision ahead and the CFO presented three possibilities: 1) Venture capital financing could create $10 million in three months and a premoney evaluation of $15 million. This would increase the amount of a deal for either the sepeis or diabetes drug by 10% but would place operational and financial restrictions upon the company. 2) Angel investing of $2 million could be obtained in six months with a premoney valuation of $17.5 million, which is higher than the venture capital valuation and would come with less operating and financing restrictions. 3) Purinex could wait 6 months