Pharmacyclics: Financing Research & Development

Pharmacyclics is a pharmaceutical company that manufactures drugs that will improve existing therapeutic
treatments mainly for cancer, arteriosclerosis, and retinal disease. They were considering a $60 million
private placement in February 2000 just before the launch of their new drug Xcytrin. That drug was in the
FDA approval stage 3 or phase 3. Company had an option of either seasoned equity offering (SEO) as the
share of PCYC closed at $78.75 on 25 Feb 2000 or they could go for private placement. So far company
had issued funds from both SEO and private placement. The firm was incorporated in 1991 and the first
round of funds were raised convertible preferred stocks worth 2.7 million in the month of April 1992. Firm
additionally raised funds from-
December 1992 7.7 million (Venture capital)
June 1994 7.6 million
July 1995 5.6 million
In Oct 1994 firm came with IPO at $12 to raise 26million. The second funding came through private
placement which came in Nov 1994 at $14 to raise 8.1 million. Another offer came in Feb 1997 to raise
16.3 million at 419 per share. The last fund raised was in Feb1998 at $21.75 to raise 40.8 million.
As of June 1999 PCYC had 4 drugs in pipeline which would incur huge cost to get approvals form FDA.
One of their drug for oncology could cost 100 million in just Research and Development.

Private Placements
Private Placements is an alternative way of raising capital. A private placement involves the sale
of securities to a small number of selected investors that include wealthy accredited investors,
large banks, mutual funds, insurance companies and pension funds.
Since private placements are offered to small number of investors, they are exempt from
registering with SEC and also the company does not have to register a draft prospectus with SEC,
which makes it time-saving and less cumbersome than an IPO. It is far less expensive and investors
often expect higher returns because of the high risk involved.
Now, Dr. Miller had to decide whether PCYC should proceed with the private placements now or
wait until the Phase 3 Clinical trial for Xcytrin was complete. The decision depended upon two
factors-
1. Funding needs of the company
2. Valuation of the share
Private placement offerings are securities released for sale only to accredited investors such as
investment banks, pensions or mutual funds. Some high-net-worth individuals may also purchase
the shares through these options. Companies using private placements generally seek a smaller
amount of capital from a limited number of investors. A private placement issuer can sell a more
complex security to accredited investors who understand the potential risks and rewards,
allowing the firm to remain as a privately-owned company and avoiding the need to file annual
disclosures with the SEC. Private placements can also be done quicker than IPOs. For a
company that values its position as a private entity, they don't have to sacrifice that privacy but
can still gain access to liquidity, or cash, from the deal. Marketing an issue may be more difficult
for private placements, as these investments can be quite risky with lower liquidity than publicly
traded securities. The drugs sector is composed of more specialized industries, including drug
delivery, drug manufacturers - major, drug manufacturers - other, drug-related products and
drugs - generic industries. So, the Pharmaceutical industry is highly leveraged industry as
compared to the industry, which means that if a company has a high D/E ratio, the company
generally tends to have a high level of debt per each dollar of shareholders' equity. Some
industries are capital intensive, which leads to high D/E ratios. It is typically favourable for
investors to invest in companies with low D/E ratios. So, if the company goes for a SEO
(Seasoned Equity Offering) the investors wouldn’t buy the shares. So, the company should go for
private placement by offering higher yields to the limited number of investors.

The greatest benefit to a private placement is the company's ability to remain a private company.
The exemption allows companies to raise capital while keeping financial records and financial
status of the company private without disclosing information to the buying investors. A business
obtaining investment through private placement is also not required to provide any ownership or
seat on the board of directors or a management position to the group of investors. There is no loss
of ownership or control over operations and financial management in private placements, unlike
with a venture capital deal, which makes it attractive for the company.
Hence, after considering all the advantages of Private Placements, PCYC should go for private
placements for raising the 60 million funds required for the stage 3 approval.