Biotech And Pharmaceutical Spinouts: Maximize your assets' potential in a context of increasing earning pressures

TABLE OF CONTENTS

EXECUTIVE SUMMARY 3

Introduction 3

Market context 3

Planning a spinout 4

Key steps to spinout creation 6

From spinout to IPO 7

INTRODUCTION 20

What is this report about? 20

Who is the target reader? 20

CHAPTER 1 MARKET CONTEXT OF THE SPINOUTS 21

Introduction 21

Key findings 21

Under huge earning pressures, biotechnology and pharmaceutical companies consider spinouts as increasingly attractive options 22

Earning pressures drive biotechnology and pharmaceutical companies to focus their business on core assets and reduce their cash burn 22

The perception of spinouts is changing 22

Spinouts emerge an innovative strategy to access new markets 23

The possibilities for spinout deals are larger than ever 24

The number continues to increase 24

Spinouts are well suited to develop in Europe 24

Pharmaceutical companies also create their own corporate venture funds, and invest in asset management 24

Spinouts are exciting opportunities for investors 26

Large life-science equity funds invest large sums in spinouts 26

Investors are motivated by spinout investments as they reduce burden on their time and lead to quicker and safer returns 27

CHAPTER 2 PLANNING A SPINOUT 29

Introduction 29

Key findings 29

Choose the right divestment strategy for your assets 30

Evaluating assets 31

Divestiture strategies can be tackled from financial and strategic angles 32

Datamonitor can provide an strategic analysis to assets divestment 35

Asset identification remains generally a top-down and opportunistic approach 37

Bottom-up asset identification create additional spinout opportunities 37

Spinning out assets remains an ad-hoc process 40

The main drivers of spinout creation are leveraging assets of low strategic importance and exploiting under-utilized research assets 42

Biotechnology and pharmaceutical companies consider spinouts to leverage technologies of low strategic importance 43

Spinouts exploit under-utilized research assets� 44

�and improve the return generated from assets 44

Companies gain access to niche markets� 45

�and opportunities for staff outplacement 45

Long and complex processes and loss of control on assets can deter parent companies to create spinouts 47

Spinning out a company is a long a complex process 48

Parent companies fear the loss of control on their assets 49

Senior management holds an obsolete, negative view of spinouts 50

Acrimonious relationships with employees are a risk for the spinout and parent company 52

Mature biotechnology and large pharmaceutical companies spin companies out for different reasons 53

Biotechnology companies spinout assets for access to finance 53

Pharmaceutical companies go down the spinout route to refocus their strategy and promote entrepreneurship 53

Valuing the deal: use the right tools to prove your mature assets are worth large investments 54

Spinouts� mature assets attract high initial financing 54

Discounted cash flow remains best practice to value spinout deals 57

Risk evaluation: independent players hold more skeptical views on clinical trials success 61

CHAPTER 3 KEY STEPS TO SPINOUT CREATION 65

Introduction 65

Key findings 65

Datamonitor developed a process to spin out a company 66

Key steps to take towards a successful spinout 66

Involve key external stakeholders when needed 67

The five things you need to do to create a spinout company 68

Board members� support is the key starting point of a successful spinout 69

The assemblage of a multidisciplinary spinout team gives a clear identity to the spinout and facilitates future spinout creation 71

Find the right spinout champion 73

Spinning out clearly separated and defined assets eases the process 75

Have conflict-management systems in place 76

Understand stakeholders� role to build a fruitful collaboration 79

External stakeholders come in at different stages of the spinout process 80

Relationships between investors and pharmaceutical companies remain difficult, but investors can bring significant value to spinout deals thanks to their networking capabilities 83

Biotechs� smaller and more flexible structures impact the spinout process 84

Biotechnology CEOs have a more direct influence on spinout decisions 84

Biotechnology are smaller structures, making spinouts quicker and more informal 84

Limited resources impact the spinouts from biotechnology companies 84

Biotechnology companies are experienced in dealing with investors 84

CHAPTER 4 FROM SPINOUT TO IPO 86

Introduction 86

Key findings 87

Spinouts benefit from incubation before their independence 88

Opportunities offered by incubation 88

Incubation is a period of handing over, not watching over 89

Management of remaining ties is critical to spinouts� independence 90

Parent companies can keep certain opt-in rights and stake in their spinout company to leverage some of the spinout�s success 90

Lingering ties can be a burden for the parent company, liabilities are a threat for the spinout company 91

Spinout management must adopt a biotechnology and entrepreneurial management style 93

An IPO provides a good exit opportunity for investors, but don�t rush it 94

A rapid way to return on investments 94

Investors are often patient to get higher returns if going public becomes difficult 95

�or opt for alternative exit strategies, like M&A 96

What you can expect from spinning out assets 97

Spinouts bring financial and strategic benefits to parent and spinout companies 97

Spinouts create value for their parent company and in the region they are implanted 98

Spinout companies yield typical returns between 2x and 5x 99

Remember the following points to spinout successfully 100

Key points of conflicts 100

Make the spinout attractive for investors 101

Opt for the right key performance indicators 102

CASE STUDY: BIOXELL 104

Introduction 104

Key findings 104

BioXell: key facts 105

A strategic decision from Hoffmann-La Roche 106

When it spun BioXell out, Roche was focusing on core assets� 106

�expanding its exposure to new technologies while reducing risk� 106

�and enhancing R&D productivity 106

The involvement of key players 107

BioXell�s creation was driven by entrepreneurial scientists� 107

�and was backed by large, experienced life-science funds 107

A good example of a bottom-up opportunity championed by scientists, and recognized by the parent company 107

Experienced PR firms made BioXell visible after its creation 107

An attractive package for top-tier investors 108

Attracted by a talented leadership, an exciting technology platform and promising assets, inventors injected �63m ($75m) in BioXell in three financial rounds 108

This financing of BioXell is enough to last well into 2007 108

An attractive spinout cluster 108

A fruitful interaction with investors 109

BioXell�s board of directors represents its main investors� interests 109

BioXell�s chairman is a good example of the strategic advantages spinout companies can gain from their relationships with experienced investors 109

Carefully managed ties between Roche and BioXell 110

Roche gave BioXell appropriate tools to support its activity� 110

�and kept a limited number of ties with BioXell 110

Additionally, Roche had fostered close links with potential collaboration partners by choosing to partner with companies that it has spun out, such as BioXell 110

A supportive incubation and an efficient success factor monitoring 111

BioXell is incubated inside Roche�s facilities 111

After the spinout, several KPIs were put in place to measure the success of BioXell 111

On a promising path to IPO 112

On May 25 2005, BioXell signed a drug development deal with Merck & Co. 112

The deal is worth up to $150m, bringing BioXell a step closer to a stock market flotation 112

APPENDIX 113

Definitions 113

Research methodology 113

Questionnaire 114

References 121

Bibliography 121

Relevant links 122

Further reading 123

Licensing and portfolio management team 124

David Abramson � Lead Consultant 125

Mohit Jain � Managing Consultant 126

Philippe Fabre � Managing Consultant 126

Romain Lasry � Consultant 127

How to contact experts in your industry 128

LIST OF TABLES

Table 1: Spinout that were identified by internal staff of the parent company 38

Table 2: Selected spinout deals, listing parent company, date of the deal and initial investment made by investors 54

Table 3: Research costs for a DCF evaluation (in $m) 58

Table 4: Sales and marketing costs for a DCF calculation (in % of sales) 58

Table 5: Clinical trials success rates, by phase 61

Table 6: Clinical trials cumulative success rates 63

Table 7: List of spinouts that went public 95

Table 8: KPIs for spinout companies 102

LIST OF FIGURES

Figure 1: Complementary forces drive biotechnology and pharmaceutical companies and investors on a path to common success 4

Figure 2: Leveraging assets of low strategic importance and exploiting under-utilized assets are the main drivers to spinout creation 5

Figure 3: Key steps to drive out a successful spinout 6

Figure 4: Spinning assets out benefit the parent company and the spinout 8

Figure 5: Spinouts are one option among several divestiture strategies 30

Figure 6: Options to divest assets 31

Figure 7: Financial or strategic motives drive different divestitures 32

Figure 8: Companies in need to focus or need to react are the most likely to spinout assets 35

Figure 9: MultiVariate analysis of Bayer�s efficiency and profitability before its 2004 spinouts shows the company needed to refocus 36

Figure 10: Assets are often identified top-down by portfolio management teams; however significant opportunities are identified by entrepreneurial staff 37

Figure 11: Leveraging assets of low strategic importance and exploiting under-utilized assets are the main drivers to spinout creation 42

Figure 12: A complicated process and the fear of losing control on assets deter companies to go down the spinout route 47

Figure 13: Discounted cash flow take into account sales, costs, discount, risk and lead to a precise value of the spinout deal 57

Figure 14: First part of the DCF calculation requires experience in sales forecasts, as well as research and marketing costs calculation 58

Figure 15: The second part of the DCF calculation revolves around discount factor and risk estimations 59

Figure 16: The value of a spinout deal is calculated using a bottom up DCF evaluation 60

Figure 17: Clinical trial absolute success rates: consulting firms are more skeptical about Phase I clinical trials success 62

Figure 18: Clinical trial cumulative success rates: consulting firms and FDA predict lower overall success rates than pharmaceutical companies 63

Figure 19: Example of risk-adjusted valuation of a Phase I developmental compound 64

Figure 20: Key steps to drive out a successful spinout 66

Figure 21: When to involve external players 67

Figure 22: Board support is vital to start a sound spinout process 69

Figure 23: Once the board approval is secured, the creation of a spinout advisory team lays to foundation of a successful spinout 71

Figure 24: The ideal spinout champion, driving the process, should be an experienced team manager and a respected scientist 73

Figure 25: Three main conflict zones along the course of spinout creation 76

Figure 26: Implement solutions at the main points of conflict 77

Figure 27: The importance of external stakeholders varies along the course of spinout creation 80

Figure 28: Investors usually have an extensive network and can bring in management consultants, lawyers or even scientists to further assist the spinout creation and support 83

Figure 29: From creation to IPO: spinout companies are created, then incubated before becoming independent. They eventually can go public or can be acquired 86

Figure 30: After the spinout, a few ties such as opt-in rights, equity sharing and liabilities remain between the parent company and its spinout 90

Figure 31: IPOs offer good opportunities to investors to make significant returns on their large capital investments in spinout companies 94

Figure 32: Spinning assets out benefit the parent company and the spinout 97

Figure 33: Spinouts create value in their region of implantation, bring focus to their parent company and boost entrepreneurial spirit in the new company 98

Figure 34: Milestones to deal successfully with spinout�s conflicts 100

Figure 35: Make your spinout attractive for investors 101

Figure 36: BioXell is a successful spinout company 105

Figure 37: Datamonitor Healthcare Consultancy expertise 124

Figure 38: Datamonitor Healthcare supports our clients in� 125