Borrowing Over Brokering: How Life Science Companies are Finding Cheaper Financing Options in Ample Loans

Facing the stagnant IPO market and declining venture investments, biotech and life sciences firms are skipping the usual financing pathways and borrowing instead. They are meeting lenders who are well-financed, leading to shorter margins and improved loan documentation for commercializing drugs and treatments. This signals a shift from past conditions where companies had limited access to these resources.

Although loans to these firms tend to be highly crafted, loan spreads can range from S+650 basis points downwards. Lower-quality borrowers may achieve a spread of S+800 bps, according to market insiders. This has led to yields amounting to low teens for these borrowers.

This market ‘feels a tad barbelled,’ comments Runway Growth Capital’s CIO, Greg Greifeld. High-quality firms have access to deeper, more easily available capital, and spreads have narrowed. Some lenders are prepared to entertain weaker covenants.

Just like the market for LBO finance, competition for enticing biotech, medtech, and life sciences deals has heightened. Lenders are under ever-growing pressure to dispense capital. Simultaneously, deal flow for these sectors has been hampered by regulatory uncertainties under the recent administration, leading to extended timelines for drug approvals.

Lending in this industry is unique, often requiring in-house scientific expertise from lenders. A number of lenders have been active in this arena including, the specialist lenders such as RA Capital and Perceptive Advisors, asset managers such as Blue Owl, Blackstone, Oaktree, and Sixth Street, and companies such as SLR Capital Partners, OrbiMed, and Oxford Finance.

Since several borrowers are yet to generate positive EBITDA, lenders secure their loans against collateral such as inventory, cash, intangible assets like patents, and sometimes, even personal assets.

Covenants are usually limited and don’t commonly include leverage—or cash flow–based terms used in middle-market lending to private equity-backed companies. Financing often includes synthetic royalty structures, where lenders are promised a portion of future sales when a product is commercially viable.

Life sciences startups often seek capital to fund new drug and devices development before they become profitable. However, this space saw a slowdown in recent years due to a shift in investor risk appetite and focus on AI, according to PitchBook associate analyst Ben Ricco.