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By Trista Morrison
Staff Writer
As of the end of August, biotech companies had raised $8.1 billion this year, less than half of the $19.3 billion raised in the same period last year, according to data from BioWorld Financial Watch.
Yet biotechs continue to find creative ways to keep afloat, such as spinning off products, programs, revenue streams, or even whole divisions.
The traditional model of spinning out a biotech company from a big pharma still holds plenty of appeal. Stephen Ferruolo, partner with law firm Goodwin Procter LLP and chair of a BIO 2008 panel on spin-outs, predicted that such spin-outs will continue despite mounting pressure to fill thinning big pharma pipelines, since some compounds will always fall outside of big pharma's focus.
In fact, an increasing number of spin-outs are occurring in the wake of big pharma's efforts to fill its pipeline through mergers and acquisitions. Examples include Coserics LLC (from Pfizer Inc.'s acquisition of Serenex Inc.), Relypsa Inc. (from Amgen Inc.'s acquisition of Ilypsa Inc.), and Sequel Pharmaceuticals Inc. (from Merck & Co. Inc.'s acquisition of NovaCardia Inc).
Biotechs Not Just on the Receiving End
But biotechs are also spinning out their own assets to secure financing.
Public biotechs have long used this tactic to get funding for programs that are undervalued or don't fit with the rest of the pipeline. Affymax Inc., itself an acquisition and subsequent spin-off of GlaxoSmithKline plc, has spun out multiple biotechs during its history, including Maxygen Inc., which later did a spin-out of its own to form Codexis Inc. Cell Genesys Inc. also has spun out a few, including Abgenix Inc. and Ceregene Inc.
More recently, CytRx Corp. spun off its RNAi programs to create RXi Pharmaceuticals Corp., Cell Therapeutics Inc. separated out its follow-on biologics technology to create Aequus BioPharma Inc., Meyer Pharmaceuticals LLC spun out Transcription Factor Therapeutics Inc. to focus on NF-kappa B programs, and Cerus Corp. spun out its immunotherapy programs.
Spin-outs can benefit privately-held biotechs, too, giving them a chance to develop early-stage research that would otherwise take a backseat to the lead clinical program. Ferruolo explained that a private biotech with a post-money valuation north of $100 million whose venture capitalists are reluctant to raise another round might have to ignore early stage programs and focus all of its resources on its lead compounds. Yet if the company spins off an early program, the venture capitalists can value it separately and raise $5 million to push it forward, he said.
As more biotech products gain approval and begin to generate revenue streams, companies like Enzon Pharmaceuticals Inc. and PDL BioPharma Inc. have proposed spin-outs to separate their money-making revenue streams from their money-losing biotech businesses. Still reeling from its Phase III failure with Alzheimer's drug Flurizan, analysts predict that Myriad Genetics Inc. may follow a similar plan to separate its revenue-generating diagnostics business from its biotech work.
Pratik Shah, partner at venture firm Thomas, McNerney & Partners, who also chaired a spin-out panel at BIO 2008, said that when a company's different businesses have different risk/reward profiles, spinning off one gives investors the opportunity to choose which risk/reward profile is the best fit for them.
Spinning off a royalty stream also can make it easier for a biotech to monetize the royalties through a financing deal.
Shah predicted that spin-outs of divisions and royalty streams will increase, partially because they offer a financing alternative in a difficult market, but also partially because the industry is maturing and has more profitability to take advantage of.
Turning Spin-Out Talk into Action
Despite the fact that spin-outs can serve an increasingly broad array of biotech needs, they are not easy to accomplish.
Troy Wilson, president and CEO of Intellikine Inc., has been involved in several spin-outs. During a BIO 2008 panel, he mused that only a fraction of spin-outs that are discussed ever actually happen.
"There is a very narrow window of valuation that will work for a spin-out," Wilson said. "How do you find an asset that is big enough for a spin-out but small enough that the parent will let it go?"
Other challenges include overcoming the fears of the parent company related to giving up control of the asset, losing out on the asset's future value, or creating a potential competitor by forming the spin-out.
"The parent company is naturally suspicious of the spin-out: They think you are taking the crown jewels even if they don't know why they are crown jewels yet," Wilson said.
To overcome these fears, he recommended using disinterested third parties to value the asset. He also advised that the assets can't be pulled out of the parent - there has to be "push and pull" with a champion inside the parent company helping to push the assets out.
Randall Woods, president and CEO of spin-out Sequel, said spinning assets out of big pharma can be particularly challenging because the big pharma culture is risk averse. It is "not good for your career" if the spin-out either fails or is enormously successful, he noted.
While big pharma once tried to assuage their fears of losing out on future value by using claw-back programs, Wilson advised against "anything that will cap upside from an investor perspective." Instead, he recommended arranging for some sort of first right of negotiation or exclusive negotiation.
"You can work out an agreement where the parent company is incentivized if the spin-out is successful," he said.
Woods added that lining up incentives for investors is also "critically important," as are incentives for employees at both the spin-out and parent.
Wilson recommended giving employees who stay behind at the parent company some of the equity in the spin-out as an incentive not to jump ship. Additionally, sharing resources that the start-up doesn't need full-time, such as business development or legal, can allow the employees at the parent company to be involved with the spin-out, he said. | 
