In the biopharmaceutical industry, companies in the pre-revenue stage face unique capital management challenges. The CFO in the Know series delves into how these companies maintain a stable cash flow for clinical trials and drug development through innovative financial strategies. This article focuses on the practices of companies such as INmune Bio, AVROBIO, and BioXcel Therapeutics.

Overseas R&D: Leveraging Tax Rebates and Exchange Rate Advantages

INmune Bio is conducting multiple cancer treatment trials at contract testing laboratories in Canada, Australia, and the United Kingdom. The reason is that these countries' governments offer generous tax rebates for testing conducted locally. David Moss, CFO of the company, stated, "These are not tax credits, but actual cash rebates. For every dollar we spend there, we can get up to 50 cents back in cash, which can be reinvested in R&D." In contrast, the United States offers tax incentives for qualifying orphan drug research, but in the form of tax credits, which only reduce tax liability.

Additionally, INmune Bio also capitalizes on arbitrage opportunities arising from exchange rate differences. "Your dollar can go further," Moss added. Moving some operations overseas is just one of the ways that pre-revenue drug companies control costs and demonstrate prudent capital management to investors.

Industry Context: Rising Bankruptcy Rates and Capital Outflows

Although bankruptcies among biopharmaceutical companies are not common, the number of Chapter 11 filings in the industry increased last year. According to BankruptcyData, 11 biopharmaceutical companies filed for bankruptcy protection last year, up from an average of 4 per year over the past decade. One Wall Street firm calculated that the industry experienced net capital outflows of nearly $9 billion, as reported by BioPharma Dive. Evercore ISI analyst Josh Schimmer commented, "The market is more unforgiving than ever; they no longer give second chances like they used to."

Financial Stewardship: Ensuring Efficient Use of Capital

In this environment, CFOs must assure investors that the company is managing capital efficiently. Richard Steinhart, CFO of BioXcel Therapeutics, told CFO Dive, "Investors want to communicate with the CFO to ensure funds are being used as promised and to confirm the team's ability to do so."

AVROBIO, headquartered in Cambridge, Massachusetts, is working on gene therapy for Fabry disease (a lysosomal storage disorder) and has also outsourced some work overseas to enhance capital efficiency. The company collaborates with contract manufacturing organizations (CMOs) in multiple countries to produce lentiviral vectors (the 'carriers' for gene therapy). CFO Erik Ostrowski said, "From day one, this has been the company's focus. Producing gene therapies in a scalable and cost-effective manner has always been an industry challenge." Its CMO partners use closed, automated dishwasher-sized chambers in cleanrooms for production, thus "eliminating the need for us to invest in high-cost physical manufacturing facilities." The gene therapy is in Phase 2 trials, with 4 patients already dosed and 4 to 8 more expected before the trial concludes.

Ostrowski emphasized, "The goal is to provide patients with a functional copy of the missing gene in a single treatment." This could offer the medical community an attractive alternative to the current standard of care, which requires patients to visit clinics twice a week for enzyme replacement therapy. "We believe the potential of a one-time curative therapy could bring immense benefits to patients and the healthcare system."

Efficient Data Analysis: AI Accelerating R&D

BioXcel Therapeutics' Steinhart is compressing existing research review costs by leveraging an artificial intelligence platform developed by its parent company 15 years ago. The platform enables researchers to extract results from peer-reviewed papers much faster than traditional methods, efficiently incorporating early-stage research into their own programs. "The AI platform can process hundreds of papers a day, whereas a good drug developer might only read one a day," Steinhart said.

The parent company, BioXcel Corporation, based in New Haven, Connecticut, opens the platform to other companies but grants its subsidiary exclusive rights for two drug categories: neuropsychiatry and immuno-oncology. Steinhart said the company began studying acute agitation five years ago and could immediately see 'secondary and tertiary associations' through the AI platform. The research ultimately pointed to dexmedetomidine—a drug administered intravenously for acutely agitated patients—which could gain broader use if delivered in a less invasive manner. AI 'established the connection to dexmedetomidine,' Steinhart said. 'It suggested that if we could turn this invasive intravenous drug into a non-invasive one and treat acute agitation, it could be promising because of the mechanism of action. That's exactly what we did.' The formulation the company tested is administered sublingually, which is less invasive for patients who are already highly agitated.

The company completed the Phase 1b/2 trial for BXCL50 last September and is now working to release Phase 3 trial results for patients with schizophrenia and bipolar disorder by mid-2020. "We have a very capital-efficient business model, which is one of the reasons we don't have to wait 10 years to develop drugs," Steinhart said. "We move faster, and so far the model is working."

Simplifying Capital Structure: Avoiding Financing Spirals

INmune Bio's Moss says that utilizing R&D tax rebates outside the United States is part of his cost-streamlining strategy, while he insists on keeping the capital structure simple. "In today's world, with massive amounts of money flowing into stock markets and companies, the capital structure is often forgotten," he said. Moss believes capital simplicity is a hallmark of his financial approach and a reason the company can withstand market shocks. "The way Wall Street works is that once you do a financing—what we call a 'bad' financing—they do another one that at least replicates the bad financing and makes it worse. So you get into a spiral that's hard to escape."

To ensure the company's financing avoided the 'bad' category from the start, he used an all-common-stock structure in its initial public offering in early 2018. This way, the company's value is transparent, all investors have equal standing, and he and his two partners do not face the risk of ceding control to investors who may not focus on the company's long-term interests. "If you have common stock and debt, and the debt and preferred stock come with covenants... you can lose the ability to control your own destiny," he said.

The company plans to conduct two Phase 2 trials this year: one for the soluble TNF inhibitor INB03 (targeting tumor growth in advanced cancer) and another for the LIVNate DN-TNF inhibitor (targeting non-alcoholic fatty liver disease), and expects to complete a Phase 1 trial for Alzheimer's disease. Additionally, it plans to initiate two Phase 1 trials for other cancer types. "There's a lot on the plate in one year," he said. Each drug will eventually undergo Phase 3 trials—the largest, most rigorous, and most expensive—before regulatory submission. Moss estimates Phase 3 trial costs between $50 million and $100 million, which will change the type of investors the company can attract. "As we progress, investors become more institutional because they can write $50 million checks," he said. This reinforces the importance of not compromising the capital structure.

This series is supported by BMO Financial Group, one of the largest diversified financial services providers in North America, with leadership in commercial, corporate, and investment banking. For more financial expertise, visit its website. BMO has no influence over CFO Dive's reporting.