For TearScience, royalty financing offered a new investor option

February ended with big funding news in the med tech world: HealthCare Royalty Partners' commitment of up to $70 million in debt financing to TearScience, the North Carolina maker of a dry eye treatment device and system. But the type of financing the company secured--royalty funding--is just as noteworthy.

The funding mechanism--a type of debt financing that doesn't require a company to give up warrants or equity--is relatively common in the biotech and pharma worlds and has been around for years. In the device world, however, royalty funding appears to be unusual. But TearScience CEO Tim Willis and CFO Nichole Wicker told FierceMedicalDevices that the trend might be changing.

"A lot of the funding has decreased in the venture capital world," Wicker pointed out. "And it seems like the [money] is going toward these funds."

As Willis and Wicker explained, royalty funding doesn't require companies to give investors any warrants or equity. It's basically debt financing for companies that aren't startups, have an advanced product and may even be generating commercial revenue. It's ideal, they argued, between venture financing and a full-fledged bank loan.

With those criteria in mind, the privately financed TearScience appeared to be a fine candidate for royalty funding. Wicker noted, for example, that the company has raised more than $60 million in venture funding over three rounds. Importantly, TearScience is also generating revenue in the U.S. and elsewhere with its LipiFlow thermal pulsation device to treat evaporative dry eye and its LipiView Ocular Surface Interferometer, which measures the absolute thickness of the lipid layer of a patient's eye tear film.

But the process to obtain royalty funding was much more rigorous than anything TearScience had experienced before.

"Let's put it this way: The in-depth analysis and review that [Healthcare Royalty Partners] did was more in-depth than what we had from the venture folks," Willis explained to us. "To me, it was another level."

Willis recommends that other medical-device companies pursue the funding mechanism if they are far enough along, but he urged them to keep a few things in mind.

"One, you are going to have to be in the revenue," Willis said. "Two, you are going to have to have a large market opportunity. And three, your profit-and-loss statement has to be what I call at the upper end of performance, from a standpoint of gross margins--all those type of things."

Also, Willis recommends that companies looking for this kind of funding start early.

"If you are a medical-device company and in a revenue space you should be looking at it," he said, "and you should start looking 9 to 12 months before you think you will be needing money." -- Mark Hollmer (email | Twitter)

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