Lemons into Lemonade

OFF-THE-SHELF R&D

For a new or small biotech firm, the unwanted assets of another company can form the foundation of their enterprise without the time, money, and risk needed to carry a target through the discovery process. Avera Pharmaceuticals, Inc., in San Diego, was created in 2002 specifically to develop neurological and psychiatric products from discovery research generated at other firms. Its first target was a series of neurological blocking agents acquired from GlaxoSmithKline.

Source: Burrill & Co.

Large pharmaceutical and biotech companies also win because they may have hundreds of potential compounds – many of them generated by the genomics revolution of the late 1990s – but no time or resources to explore them all. Spinning out the development process to a fledgling company allows the established firm to focus on its most promising therapeutic candidates, while maintaining some potential upside, since most companies hold significant stakes in the companies they've spun out, if the compound becomes a hit.

"In an R&D organization the size of ours, we create certain assets that ultimately are found not to fit with our strategy going forward. Rather than leave these assets on the shelf, we are now applying more effort to making them available to others," says Richard Koenig, a spokesman for GlaxoSmithKline. "The objective is to get value for investment in everything we create, and to deliver more medicines to patients through our partners like Avera as well as ourselves."

Spin-outs are attractive to big companies because undeveloped assets are often difficult to value and would make little impact on the bottom line if they were sold for cash, says Nicholas Galakatos, a partner in Clarus Ventures and MPM Capital, the venture firm that structured the Biovitrum spin-out. A spin-out can also prevent corporate embarrassment. "Pharmaceutical companies simply do not have enough cash to pursue every lead that is in front of them," he says. "If someone else wants to dedicate a career and the career of colleagues in taking that one asset forward and has a success, you would look a little silly for giving it up. But if you share in the upside you look pretty smart – and most people would rather look smart than silly."

HOW TO SPIN

For the entrepreneurial company, the hardest part of a spin-out is making sure the asset up for grabs has potential. "One has to do their homework very, very carefully to understand the pros and cons of each compound with the data available, and the data available is typically not sufficient to make a definitive decision. That's where experience in the pharmaceutical industry becomes critical," says Galakatos. Burrill says spin-outs are difficult because the assets coming out of a company are often complicated by patent issues and clinical concerns.

Cultural issues can also be a problem, says Julie Eskay-Eagle, managing director of September Ventures, a life-sciences investment firm based in Connecticut. "You want to be careful of bringing a group of people together into a company who want to spin-out, but don't have the knowledge or drive to be entrepreneurs because they're used to being in Big Pharma," she says. Another potential pitfall: the possibility that a compound has been licensed out for royalties in different indications that could diminish its value, says Eskay-Eagle.

Michael Lack, chief operating officer of Avera, says to make a hand-me-down asset into a star requires a detailed plan before the deal is signed. "You have to know how you expect to proceed and what you will do differently to succeed," he says. In many cases, an unwanted compound is not a dog, but simply homeless in a large operation, often because its original champions have moved on to other parts of the organization or another company. "Usually the case is that it's just not a priority," says Lack. "They might have made some mistakes or chosen an incorrect path in the development process and they understand that now, but it's too late to change and the company as a whole is no longer interested."

Lack says that, during negotiations, his company forms a strategy for developing the cast-off asset with the original innovator, "but you don't necessarily share that with them." What can a small, startup company do to salvage a research project that failed in the hands of a massive, experienced pharmaceutical company? Some products need to be reformulated, or positioned for a different indication, Lack explains.

Avera also looks at manufacturing processes to improve the prospects of bringing an abandoned project to market. Avera out-sources all of its clinical development work, but has experienced managers with backgrounds in manufacturing and toxicology to find new ways to pump life into discarded research. "The idea is not to be very deep in all those areas," says Lack, "but to have very senior people in all of them so internally we can evaluate new compounds and set the right strategies for them."