AZ Spin (off)

I just came back from Boston and the annual meeting of BAARN – the Boston Area Antibiotic Resistance Network symposium held at the Broad Institute.  The meeting was interesting but the atmosphere was funereal.  Many of those losing their jobs with the closure of Cubist’s research center in Lexington, Mass were there as were many whose jobs are threatened at AZ’s facility in Waltham, Mass. One major topic of discussion during the breaks was – where will all the antibiotic research go? If, as I have been saying for years, we need to train academic antibiotic researchers in industry – what is left in Boston to address this need?  Cubist is gone.  AZ  - well – see below. Novartis has moved its team out to California where they rest in some sort of extra-dimensional limbo between their desire to find new products and their company’s desire to have nothing to do with antibiotics. This is definitely NOT the way to assure a robust pipeline of antibiotics for our future.  This is the road to oblivion.

From what I can gather from various sources, the AZ spinoff, as announced last week, was a last minute backup plan to their failed effort to partner their products, their late stage pipeline and their preclinical assets with either external investors or with another pharma company. This failure seems to be related to AZ's own stringent view of the value of their own assets and their insistence on keeping a large share of the assets. Having been rebuffed by external investors and by most of big pharma, the spin off was born mainly to provide some firm stance to employees who have been fleeing the uncertainties of AZ in large numbers.

Since I have worked with two spin-offs, Nabriva from Sandoz/Novartis and Novexel from Sanofi-Aventis, I think I can speak with some perspective here.  First, it is terribly important that the new company be completely independent from the “mother ship.” That means – no rights to current or future assets or potential products that go to or come from the new company.  It means no exclusive manufacturing agreements or obligations with the new company.  It means no board position at all or only a minority position. The board for the new company should be a balanced one with an independent chairman, a couple of independent board members and the investors who vote decisions based on their shares.

Today, I spoke with a highly placed and knowledgeable source at AstraZeneca about their plans for their spin-off. So far, AZ is providing all of the $40 million in funding to establish the new company. No formal agreements are yet in place. No officers for the new company have yet been designated. There are no outside investors. The new company will be comprised, initially, of about 20 employees derived from those remaining at AZ in Waltham. They will grow to about 30 over the first year or so. Clearly, the current structure is completely incompatible with the principles I have listed above. In spite of this, my source assures me that AZ’s goal for the spin off is as I have described above.  Are you confused yet?

AZ now maintains and apparently wants to continue to maintain an important share of the company. Their goal is to share the risk but also to share the upside.  In other words, they want their cake and they want to eat it too. In my view, AZ will be unable to attract any outside investors under these circumstances.  Their only choice at this point is either to try and sell their shares to bring themselves down to a very minority position (15-20%) or to quickly raise a second round of funding sufficient to accomplish that.  I think the latter is very unlikely as well until more assets enter clinical development. The other choice is to continue to fund the newco and retain all risks and rights.  If that will be the case – what’s the point?

While I am grateful that AZ’s antibiotics research will continue, albeit in a much more limited way, I continue to marvel at the wrongheadedness of AZ’s CEO when it comes to antibiotics and value. I understand the pressure AZ feels from investors and shareholders.  But antibiotics have value today and will produce even more value tomorrow.  They are less risky to develop and now have the same sorts of inexpensive and quick pathways to market as the more risky oncology drugs. Have I missed something here?