Business Model

Select

Karolinska Development has developed a well-structured selection process to identify the most commercially attractive medical innovations screened by Karolinska Institutet Innovations AB (KIAB).

Pharmaceutical development is a high-risk enterprise. In most cases, development projects fail because of side effects or insufficient efficacy. Successful selection of innovations is fundamental to Karolinska Development's business model and therefore the inflow of new projects is crucial. One key to success lies in selecting those innovations that can be developed from scientific finding to products and have significant commercial potential. To date, over 1,200 projects have been screened by KIAB.

Karolinska Development estimates that 100 to 120 innovations per year will be screened in cooperation with KIAB and other Organizations over the next few years..

To be accepted for screening, an innovation must:

• be based on a unique technology originating from prominent research;
• have secured, or have the potential to secure solid intellectual property rights and;
• meet a significant medical need and exhibit major international commercial potential.

After initial selection, projects go through a validation period which typically takes 18–24 months and are financed by Karolinska Development. Once certain milestones have been achieved, Karolinska Development may invest according to a predetermined formula. Karolinska Development estimates that the company will annually invest in up to five of the best projects that:

• present a realistic development plan along with well defined milestones; and
• have a well-defined, realistic prospect of being exited or partnered out.

Develop

Portfolio companies are often founded together with the innovators and are initially operated as virtual companies, with only a few employees. During the first six to twelve months the companies normally have minimal fixed costs and the technical development is outsourced.

The innovator, who is often employed at an academic institution, normally participates as a board member and as a scientific advisor. The CEO of a portfolio company cooperates closely with a dedicated investment manager from Karolinska Development who, in most cases, is also a board member of the company. The companies are capitalized in order to reach their next milestone, usually within a period of six to eighteen months. In the first three to four years the operating expenses of a portfolio company are often limited to a few million Swedish kronor per year, which cover the cost of external studies and the salary of the company's CEO. During the subsequent years, Karolinska Development and other investors play an important role recruiting key expertise to the companies.  

Commercialize

Karolinska Development intends to realize value by exiting portfolio companies or through out-licensing of projects.

Such transactions (especially out-licensing) are often structured as single upfront payments followed by payments based on predetermined milestones and royalties on sales. Although Karolinska Development has a flexible exit strategy, pharmaceutical products are, for two reasons, preferably exited at Phase II. First a successful Phase II study indicates that the pharmaceutical has an effect on patients, which is an important value-enhancing factor when negotiating out-licensing or sales. Secondly, finalizing product development and undertaking Phase III clinical trials frequently requires very large patient populations. In many cases this requires much greater resources than those available at Karolinska Development but these can be found in established pharmaceutical companies.

Several licensing deals were closed in 2010 involving projects with a similar focus and development phase to Karolinska Development's projects. Including milestone payments, these deals were often worth USD 300–500m plus royalties on future sales.