A Crash Course in the Basics of Finance in Biotechnology

finance basics terms biotech5 1

Getting your head around intricate biotech research and technology can be difficult enough, without having to contend with financial figures and jargon.

With news coming out thick and fast, you might be switching from the first market approval of a CAR-T therapy to the latest strategy

to protect crops from pests to a new anti-Parkinson’s drug. It can be hard to keep up with all the science, let alone all of the business and finance terminology too.

Biotechnology harnesses powerful biological processes to develop products that improve our lives and the planet we live on. But, of course, the time, money and effort that goes into developing these potentially life-changing products deserve a financial reward – and that is where business and finance come in.

Here, we have put together a crash course to help you understand any financial terms you might come across in our articles, allowing you to relax and enjoy our wonderful content.


Fundraising Series

Split into 3 main rounds – A, B and C – fundraising series really are as easy as 1, 2, 3.

Series A fundraising is used to ‘optimize’ the product that is being developed. Series A often raises $2-15M (€1.7-12.8M), but biotech ‘unicorns’ can achieve higher than this, as Bayer and Ginkgo Bioworks did when they raised €84M for their plant microbiome technology. At this stage, the main investors tend to be venture capitalists (VCs), who generally receive their money from wealthy investors, investment banks and other financial institutions.

Series B helps the company to reach the next level. Typically, it will help a biotech to conduct Phase II studies, but also to look at another cancer indication in the case of Genenta or to complete a Phase III trial in the case of Iterum Therapeutics. At this stage, companies generally raise between $7-30M (€6-26M), with money again coming from VCs.

Series C comes when a company is ready to scale up its business. The company will be established, meaning investment is relatively low risk, so hedge funds, investment banks and private equity firms will now be willing to get involved, taking over from venture capitalists. 

But, fundraising doesn’t necessarily stop there! It can continue all the way up to round G depending on the route taken by the company.

 

Fundraising series can also be a good indicator of a company’s value. A pre-money valuation does not include money raised during the latest round of financing, while a post-money valuation will take this into account. A successful fundraising could give a company’s value a particularly big boost, whereas a company could be damaged if it struggles to reach its fundraising goal.

Return on Investment

Return on investment, or ROI, measures the amount of return that an investor receives in comparison with their initial investment. This gives an idea of the efficiency of investment, which helps investors to compare different investment options. ROI can be calculated simply using the equation below:

ROI = (Gain from Investment – Cost of Investment) / Cost of Investment

Although ROI is very popular thanks to its simplicity, it does have a number of limitations, including being unable to take into account the duration of the investment.

Stocks

A shareholder buys stocks in a company to become the owner of a part of it and have rights to its assets and earnings. As the shareholder buys more and more shares in a company, they begin to have a bigger say in its actions. There are two main types of stocks:

  1. Common stocks allow the owner to attend and vote at shareholder meetings and receive dividends.
  2. Preferred stocks do not give buyers the right to vote at meetings, but instead, gives them a higher claim on assets and earnings.

The value of a biotech’s stock is volatile, going up or down following clinical trial results, major investment in the field or even political unrest in the company’s country.

Market Cap

Market capitalization or ‘cap’ is the total market value of a company’s outstanding shares. It is calculated by multiplying the number of shares that the company has on the market by the price of a single share. It is often used to determine the size of a company and helps investors decide which companies to spend their hard earned cash on, as company size helps to determine investment risk and return.

Initial Public Offering (IPO)

An IPO signals a company’s switch from being private to public, as it places its first set of stocks on the financial market. The stocks will be available on one of the global markets, for example, the London Stock Exchange, Brussels Euronext, or even across the pond in the US on Wall Street or Nasdaq. This will determine who invests in the company and the capital made available to it.

But, before going public, the company must tick a few boxes:

  • A strong team in place ready to go public.
  • Audited financial statements using IPO-accepted accounting principles.
  • Anti-takeover strategies.
  • Independent board of directors.
  • Appropriate timing of going public.


Dilutive and Non-Dilutive Funding

Funding often comes in exchange for stocks that the investor will receive in return. This is dilutive funding as the owners of the company will see their equity diminish. In contrast, non-dilutive funding sees a company receive financing but the owners do not see their pieces of the company get smaller. This often comes in the form of business loans or government grants.


Now you know everything you need to about finance in biotechnology, go and find out what’s been happening in the biotech world today!


Images – Vintage Tone, Alexander_P, Nataliia K, Lemeny, ScandinavianStock, cigdem/ shutterstock.com

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