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Karolinska Development – wait until track record is proven

Karolinska Development has some interesting companies in its portfolio but has yet to show that it is capable of out-licensing projects to major pharmaceutical companies.

Karolinska Development, noted on the Stockholm Stock Exchange, was founded in 2003. About a decade ago, the Karolinska Institute (KI) in Stockholm introduced several structures to commercialize biomedical research-projects conducted at the university. These efforts were based on successful examples set by American universities such as Stanford. Karolinska development (KD) was formed during that time and focused on projects and companies in middle to late stage development, not only at KI but at other Nordic biomedical universities as well.

Entered stock market in 2011
KD was financed by KI, as well as by external investors. The management of KD tried to note the company on the stock market several times. However, it was not until the spring of 2011 that they succeeded. The strong Karolinska Institute brand name clearly contributed. The IPO raised about SEK 400 million and valued the company (before the IPO) at SEK 1.4 billion. The valuation had to be lowered for the IPO to succeed. The company initially aimed at a valuation of SEK 2 billion but that was considered as too high by investors.

Projects developed through phase II
The basic business model of KD is the fact that the development of pharmaceuticals is extremely risky. With a portfolio of life science projects within pharmaceutical and medtech development (including both medical devices and technology platforms) the risk is lowered, since one success will cover for several losses. In total, KD has a portfolio of 26 companies with 35 projects. Out of these, 15 are in clinical phase. KD’s ownership of the companies is usually around 50 percent. The idea is that projects are developed through phase II and thereafter sold or out-licensed to pharma or medtech companies.

Axelar, Pregamum and Akinion in the portfolio
To analyze each of KD’s projects and companies is beyond the scope of an assessment such as this, but some of the companies are worth mentioning. One of the most interesting is Axelar, located at the Karolinska Institute. Axelar develops compounds against cancer based on the Insulin-like growth factor-1 receptor (IGF-1) which is overexpressed in many types of cancer cells. The company’s main drug-candidate AXL1717 is currently in Phase II and results are expected in 2013. Other interesting companies include Pergamum, which has a drug-candidate in phase II against venous leg ulcers with data expected in late 2012 and Akinion Pharmaceuticals, which has a candidate in phase I/II against acute myeloid leukemia. KD plans to out-license all of the above-mentioned substances if the results are positive.

Need to show proof of out-licensing
To speculate on the chances of success for Axelar, Pregamum, Akinion and the other portfolio companies is extremely difficult. Instead, to predict the outcome on a company-basis (i.e. for all of KD’s projects) we believe that the best way is to look at KD’s track record, and that brings us to the main problem. The major argument against KD is that it has not yet shown proof that it can capitalize on the projects. The company has yet to show that it is capable of out-licensing projects to major pharmaceutical companies.

Wait for track record
Since the introduction onto the stock market, KD has lost about 60 percent of its value. At SEK 16.20 per share KD’s market cap is about SEK 800 million. The stock market seems to have lost interest in the company since the turnover of shares is low. Usually shares of only SEK 10 to 20 000 are traded on a daily basis. Furthermore, the losses are high and revenues relatively non-existent. During the second quarter of 2012 Karolinska Development lost SEK 100 million, about one million SEK every day. If this continues it will have to ask the shareholders for more money sometime during 2013, and that may cause investors to sell shares. To summarize, although the valuation has come down substantially during the last year KD is no bargain and we recommend investors to wait until the company has a reliable track record.


Karolinska Development
CEO: Thorbjörn Bjerke
Market cap: MSEK 770
Share price: SEK 15.80 (15 Oct 2012)
Recommendation: Hold/wait
Result: loss of MSEK 189 during Jan-June 2012.