Spin-Out Step-Ups Reflect Bulk, Not Risk

An analysis of a group of Big Pharma and big biotech spin-outs, which tend to raise more private money than their build-from-scratch bretheren, shows that while these firms are certainly heftier--and often considered better equiped to succeed in the public markets--their pre-money step-ups are in the end, nothing special.

Spin-outs tend to raise more money privately than their build-from-scratch brethren, and in Europe are seen as one of the few sustainable biotechnology business models. (See "Are Spin-Outs Really a Better Bet?" START-UP, October 2004 (Also see "Are Spin-Outs Really a Better Bet?" - Scrip, 1 Oct, 2004.).) But an analysis of our group of Big Pharma or big biotech spin-outs that have hit the public markets since 2002 suggests that while these firms are certainly heftier—and often considered better equipped to succeed in the public markets—their pre-money step-ups are in the end, nothing special. (See Exhibit 1.)

Which isn't surprising: intrinsic to the concept of a spin-out from a larger firm is less risk for VC investors; consequently those firms that took a punt on most companies here saw average pre-money step-ups at best. But even spin-outs have bad days at the office: Barrier Therapeutics Inc. 's market value was halved in late June when the firm's Phase III study of the an oral version of the anti-fungal itraconazole (Hyphanox) failed to meet its primary endpoint in vaginal candidiasis.

Missing from this graph is the main success story of the group, Actelion Pharmaceuticals Ltd. While not technically a spin-out (nor, incidentally, is Arpida Ltd. ), Actelion's Roche pedigree helped it zoom to a step-up of nearly 17 on its 2000 IPO; since then the firm's market value has nearly tripled. (See "Actelion: A Model for European Biotech," In Vivo Europe Rx, September 2003 (Also see "Actelion: A Model for European Biotech" - In Vivo, 1 Sep, 2003.).)

ZymoGenetics Inc. , which floated back in 2002 after being spun out of Novo Nordisk AS , is perhaps the only pure-play biotech in the group; its latest-stage project at IPO was in Phase II. [See Deal][See Deal] Basilea Pharmaceutica AG and Arpida each have past ties to Roche; [See Deal] Tercica Inc. and Barrier were spun out of Genentech Inc. and Johnson & Johnson respectively, and each went public in 2004. [See Deal][See Deal] Each of these four companies had Phase III assets at floatation. The most recent addition to the group, the Franco-Scottish ProStrakan Group PLC , already markets its own products and listed on the LSE in June after a protracted battle over valuation. [See Deal] One of its constituent companies, the Paris-based ProSkelia SAS , spun out of Aventis (now Sanofi-Aventis ) in 2002. [See Deal]