War Stories II: Sunesis Hunkers Down and Gets Creative to Stay Alive

(MoneyWatch)  The hallways at the recent BioPharm America conference in San Francisco were filled with biotech CEOs swapping war stories about how their companies almost -- but not quite -- bit the dust a few months ago.

Michael French of MDRNA spun a tale of painful turnarounds, delayed partnerships and destroyed PIPE dreams, all saved by a massive asset monetization push.

Another good story came from Daniel Swisher, president and CEO of Sunesis Pharmaceuticals, a discovery services turned cancer development company.

Sunesis went public about a month after Hurricane Katrina hit in 2005, during what Swisher called one of the more challenging biotech fundraising environments. "Now I look back fondly on those times," he joked during the conference.

His company's stock price had been on a downward slide since the IPO, so when he needed to raise cash in mid-2008 he figured it would be through a venture-backed PIPE. But two weeks after he started fundraising, Lehman Brothers collapsed.

Sunesis' strategy, in Swisher's words, was to "hunker down." The company had already cut 60 percent of its staff to focus its limited resources on Phase II cancer drug voreloxin, but by the J.P. Morgan healthcare conference in January 2009 it was down to its last $10 million and "starting to run out of cash," Swisher said.

Fortunately, the company had some venture capitalists that were interested in doing a PIPE, and Sunesis was willing to get creative with the deal structure to help close the financing. After what Swisher called "excruciating" due diligence, Sunesis ended up with a tranched $43.5 million financing that began with a $10 million stock and warrant sale, followed by $5 million more, with the remainder to be invested in common stock at the discretion of the majority of convertible preferred stock holders.

Survival Lesson: "Bring your investors into the tent," Swisher advised. Don't shy away from less traditional financing structures. And make the hard cuts before you reach the end of the rope.