ATM Offerings Provide Alternative Approach to Raising Capital

September 25, 2012 by Todd Wyche

Life sciences companies have a number of options at their disposal to raise equity capital through different financing vehicles, including conventional follow-on offerings, registered directs, and private investments in public equities (PIPEs). While these have a long history of raising capital for emerging life science companies the cost of capital of these financing tools can be prohibitive. In contrast, many companies, particularly those with a strategic and forward-thinking financing approach, successfully accomplish their financing goals by utilizing an at-the-market (ATM) offering, which involves selling newly-issued shares to the existing market at market prices via a broker-dealer over an extended period of time.

Limitations of Traditional Financings

There is no question that the traditional capital-raising strategies have been effective and beneficial in providing companies with methods to raise capital in a short period of time. There are risks, both internal and external, that arise when these traditional and sometimes costly tools are the only options in a financial toolkit. For example, external factors such as a volatile equity market can pose a challenge if a company is forced to finance during a time when its stock price is trading at low valuations relative to its history. Internal or company-specific issues can emerge when a company plans financings around milestone events such as potential partnerships or data announcements that may not turn out as expected. Either of these situations could delay the financing or result in it not being as successful as initially hoped or planned. In addition, these tools can cost the company up to 35% of the raised capital. This includes the average discount to the prior closing price of about 7.5%, underwriters’ fees of roughly 5% and warrants, the value of which can average 24% of a transaction or higher.

Unique Benefits of an ATM

With their different approach to raising capital, ATM offerings allow companies to avoid the costs and risks that accompany more traditional financings. By selling shares in amounts and at prices determined by the issuer, and incrementally over a period of time into the existing trading market, ATMs allow for greater control and flexibility in capital raising activities. This allows companies to sell shares only on days that are advantageous for the company. Another aspect of their flexibility is that ATMs do not preclude the use of other financing vehicles. An ATM is able to work as part of a larger toolbox of options ’ each addressing specific needs at specific times. This means that companies can employ traditional financing tools when a bolus of capital is required while over a longer period of time gradually raising capital via an ATM.

ATMs are excellent financing tools for strategic and forward thinking CFOs. A CFO who anticipates his company’s financial needs in advance, can employ an ATM to raise capital over an extended period of time. This removes the risk that market conditions may not allow for an optimal capital raise at the desired time. In the end the cost savings are significant when you compare the average underwriting fee for an ATM, which is the main cost, of 3.8 percent with the 35 percent cost associated with traditional offerings. Considering all of these factors, it becomes easy to understand why this option has become increasingly popular with companies in all sectors, including life sciences.

One example of a successful at-the-market offering that we like to share involves Cardium Therapeutics (NYSE MKT: CXM).

As Cardium has reported, in fiscal year 2011, at-the-market transactions through Brinson Patrick provided the company with $4.5 million in net proceeds and in first quarter 2012 at-the-market net proceeds totaled $1.9 million. The funds are being used to support Cardium’s business plan which includes the commercialization of its recently FDA-cleared Excellagen advanced wound care product, initiation of a Phase 3 registration study for the company’s Generx cardiovascular DNA-based angiogenic product candidate, and launch of its in-house MedPodium Nutra-Apps product line.

Christopher J. Reinhard, Chairman and CEO of Cardium, stated, ’With the shifting dynamics of the capital equities market, including new legislation under the JOBS Act, we believe the use of at-the-market facilities can serve as flexible adjuncts to the more traditional financing vehicles now available to public companies and potentially lower the overall cost of capital. Small cap companies serve as important engines of innovation and job creation and having a mix of equity sources available helps to support and nurture this important sector of the economy.’

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