CFO Philip Donenberg prides himself on being patient and optimistic — necessary traits, he says, for any executive at a pharmaceutical product-development company.

After all, companies like BioSante Pharmaceuticals, where Donenberg has worked for more than a decade, often endure years without seeing revenue, riding on the hopes of products that may not even get regulatory approval to go to market. But when companies including his saw their capital-raising options dwindle or disappear in the latter half of last year, patience was not enough for Donenberg.

BioSante needed either a buyer or the promise of fast cash last year. But no one was offering either, and prospects turned even worse as the credit crisis peaked in the latter half of 2008. So Donenberg began seeking an alternative means of financing. “It’s not easy keeping a company funded and to keep product development moving when you don’t have revenue,” he told CFO.com.

Donenberg estimated BioSante needed to raise $30 million to $35 million to fund the advertising, monitoring, and testing of three separate clinical trials for its lead product before the company could apply for its approval by the Food and Drug Administration. Called LibiGel, the product would basically serve as the first equivalent of Viagra for women, Donenberg says, designed to treat sexual dysfunction in women.

The final phase of testing for the gel takes time and money: BioSante has to run two, six-month-long clinical trials with 1,000 women using either placebos or LibiGel, and another, year-long trial with at least 2,400 women to test for cardiovascular and breast-cancer risks. “BioSante is spending $4 million to $5 million a year on drug development, and they had only a year’s worth of cash left. They had to do something,” says Matt Gurin, vice president, life sciences, of consultancy Hay Group, who does not work with BioSante but recently reviewed the company’s financials.

Donenberg’s solution: buy another company, biotech firm Cell Genesys, and consume its cash balance, in order to keep his company running long enough — he hopes — to get LibiGel tested, approved, and to market, all before the bulk of the acquired company’s debt comes due in four years.

Pending shareholder approval at a meeting at the end of September, BioSante will acquire Cell Genesys in an all-stock, $38 million transaction. While other firms are acquired for their particular product, or to gain market share, this deal will be done with only one goal in mind: “The primary reason for the merger was their cash,” says Donenberg.

BioSante has no need for Cell Genesys’s nine employees — although its CEO and a board member will sit on BioSante’s board — and little need for its products. However, Donenberg says his company plans to eventually monetize some of the assets and will have a 16% equity stake in a former Cell Genesys subsidiary that develops gene therapies for neurodegenerative disorders.

Announced in June when BioSante had about $6 million in cash and cash equivalents and Cell Genesys had approximately $36 million in cash, the merger will give Cell Genesys’s shareholders a 39.6% stake in BioSante, with 0.1615 of a share of BioSante’s common stock. Most important, in return, depending on BioSante’s stock price on the closing date of the deal, the merger could net BioSante between $21.5 million and $23 million in cash.

Indeed, in a recent regulatory filing, BioSante said one of the main reasons for the deal was that “the cash resources of the combined company expected to be available at the closing of the merger would provide BioSante sufficient capital to maintain its projected business operations through at least the next 12 months.”

The downside: BioSante will acquire Cell Genesys’s debt. Cell Genesys has $20.8 million in convertible senior notes due in 2013. However, ever the optimist, Donenberg is confident LibiGel — one of four BioSante products — will get FDA approval by the end of 2011, enabling the company to go to market and presumably make back that amount and more before it has to pay up. The debt due in 2013 “is not a concern to us,” says Donenberg.

Still, BioSante will have to deal with $1.2 million in convertible senior notes that come due in 2011 and pay $0.7 million in interest on the debt in the meantime. Moreover, the company needs more cash than the Cell Genesys deal will provide. Earlier this month, BioSante raised $12 million in a registered direct offering (netting the company $11.1 million after fees and expenses) for shares of its common stock and warrants.

In essence, Donenberg has, at least for now, gained some cash and time. “BioSante bought itself two to three more years,” Gurin tells CFO.com. Other biopharmaceutical companies are in similar situations, he adds, after underestimating how long testing and FDA approvals will take (the process has become a lot harder in recent years), and seeing funds for biotech firms in general dry up in recent years.

“As companies think they’re getting closer to the finish line, the pot of gold they thought would be there might be three to four years away,” says Gurin. “They run out of cash and have nowhere to go without capital and equity.”

Cash for Sale
Down from 302 employees at the end of 2007 to 9 working in a downsized office space by June of this year, Cell Genesys had been looking for a buyer since a prostate cancer drug failed safety testing last year. The company considered “several merger opportunities,” according to a statement by CEO Stephen Sherwin. The firm did not respond to CFO.com’s request for comment.

BioSante has been hurting financially as well. It lost $8.7 million in the first half of this year and has been burning through cash. Its sole revenue has come from licensing transactions and royalties. The firm expects to incur “substantial and continuing losses for the foreseeable future” as it continues to be in wait-and-see mode for LibiGel, according to a regulatory filing.

Moreover, BioSante failed to find a buyer for itself or for the licensing of LibiGel last year. In the fall, Donenberg considered other financing avenues, such as a registered direct offering or a PIPE (private investment in public equity), but those options weren’t available during the height of the credit crisis. And a bank loan was out of the question since BioSante doesn’t have any tangible assets to put up as collateral. “It was like tumbleweed rolling down Main Street,” says Donenberg. “No one would take a meeting with us.”

Instead, Donenberg turned to regulatory filings and scrutinized the balance sheets of peer companies, looking for cash-rich firms whose market values had tanked to below their cash balances. With the help of Oppenheimer & Co., he called some of the promising companies, but was rejected. “I learned to be resilient and persistent,” he says. “You can’t hide under the desk in a fetal position.”

While Donenberg believes the deal he was looking for would bring the acquired company’s shareholders a “win-win” by tapping into BioSante’s product portfolio, some of his initial prospects’ shareholders wanted their company to liquidate rather than give up cash to another firm. “It wasn’t that they didn’t want to merge with BioSante; they didn’t want the company they had invested cash with to merge with anyone,” says Donenberg.

In fact, as the negotiations between BioSante and Cell Genesys were going on, a major Cell Genesys investor, Tang Capital Partners, protested through a lawsuit, claiming the firm was insolvent and should act in the best interest of its creditors. Tang later withdrew the lawsuit.

Donenberg says the merger-for-cash concept could work for other companies in a situation similar to his. However, “if you have cash or are expecting revenue or will be generating cash flow in the near future,” he says, “it doesn’t make sense.”