Spinout to AF 28 March 2012-no author details
The Spinout case study was financed by the Institute of Chartered Accountants of Scotland (ICAS)
as part of the Haslam et al (2011) study discussed in this paper. However, ICAS played no part in
the writing of this paper.
Spinout: re-financializing the business model
Abstract
We follow Haslam et al’s (2012) business model framework in developing a model of UK biotech. In
so doing, we build upon the Andersson et al (2010) and Haslam et al (2011) studies, in constructing a
‘narrative and numbers’ (Froud et al, 2006) case study of a biotech firm, Spinout. We conclude that
Haslam et al’s (2012) BM spectrum captures key aspects of Spinout although the case contributes
points of detail. Over time however, there is scope for firms to migrate along this spectrum, as has
happened with Spinout and is arguably also the case with certain Big pharma firms.
Key words: financialization, business model, biotech1, bio-pharma, narratives and numbers.
1. Introduction
The term business model has become ubiquitous within the management literature although we argue
that discussion of the concept is fragmented and inconclusive as to its format. Using Haslam et al’s
(2012b) business model (BM) framework, we seek to develop understanding of this concept under
conditions of financialization with particular reference to the case of UK biotech. Specifically,
Andersson et al (2010) construct a financialized business model of UK bio-pharma that reveals how
the product innovation and development process conjoins with speculative forces in capital markets.
We build upon Andersson et al (2010) and the later work by Haslam et al (2011) conducted at the
level of the AIM market as a whole, in order to test the robustness or otherwise of the Haslam et al
(2012b) BM framework. We do so through constructing a ‘narratives and numbers’ (Froud et al,
2006) case study of a biotech firm which we seek to locate in the Haslam et al (2012b) framework.
We conclude as to the robustness of the framework and suggest that through time, focal firms may
migrate along the financial model typology.
The paper adopts the following structure. Firstly, we review the extensive but fragmented literature on
BMs, choosing for the purposes of this paper to adopt Haslam et al’s (2012b) loose framework of
analysis. Next, we turn to BMs within a financialized context and note the key role of narratives under
financialization. After a brief discussion of narratives in this context, we focus on the nature of
biotech business models under financialization, discussing at the level of individual firms, the
Andersson et al (2010) framework which we locate within Haslam et al’s (2011) study conducted at
the level of the AIM market as a whole. Finally in this section of analysis, we situate the UK biotech
BM within Haslam et al’s (2012b) business models financial typology, arguing that the typical UK
1
In this paper we use the terms biotech and bio-pharma interchangeably to refer to small pharmaceutical
development companies in contrast to Big pharma firms such as GSK and Pfizer.
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biotech firm is located on the far left hand side of this spectrum, being pure Cash Burn in nature. After
a brief discussion of the methodology we adopt in constructing our narratives and numbers (Froud et
al, 2006) case study at the micro level of analysis, we turn to our focal firm, Spinout.
Spinout emerges as a relatively mature biotech firm which struggles to manage its various
stakeholders within a complex network. In our Discussion, we locate Spinout within the Haslam et al
(2012b) business models financial typology, arguing that it does not fall into the Cash Burn category
on the extreme left hand side of the spectrum. Based on the Spinout evidence, we address similarities
and differences in the firm versus the macro level findings in Haslam et al (2011) and in the Haslam et
al (2012b) business model financial typology. Following Haslam et al (2012b), we argue that with
time, biotech firms and indeed other organisations such as Big pharma firms may migrate along the
business model financial typology spectrum. We conclude as to the contribution of the current paper
in building upon the Andersson et al (2010) framework and in testing the Haslam et al 2011 and
2012b studies and suggest further areas for study.
2. Literature review
2.1. Business models
Searching on the database Business Source Complete for mentions of the term ‘business model’ on
28th February 2012 in all text of articles, yielded a count of 175,554 results (versus 138,188 results at
21st March 2011). Business model as a term is therefore widely used within the management literature
although Teece (2010) argues that the concept lacks a clear theoretical basis in economics or business
studies. This is the view also of Zott et al (2010) cited by Haslam et al (2012b) who argue that the
literature on BMs is fragmented. Adopting an historical perspective on the evolution of the use of the
term ‘business model’, Feng et al (2001) writing earlier comment that at some point in the late 1990s,
it became widely used within management speak and in the business literature generally and that the
term passed into general usage in the 1990s with the new economy when there was little interest in
firms’ plans for cost recovery from the product market.
In this paper, we follow Haslam et al (2012b) in using the term BM to connote a new unit of analysis
with the following three characteristics. Firstly, BMs are taken to mean a focus on organizations
within a wider boundary of analysis. Secondly, it is their activity and system level characteristics that
help define the nature of BMs. Finally, the advantage of using a BM framework is that it helps us
understand the nature of an organization’s value creation and value capture processes.
Haslam et al (2012b) construct a loose framework of analysis, arguing that a BM exists where
information attributes congeal to establish a broad descriptive boundary within which focal firms can
be located. In their view, a BM has as its central purpose the generation of a financial surplus out of
which on-going capitalisation can be augmented. Consequently, information generated within a BM is
absorbed into a focal firm’s financial numbers and it is from these numbers that we can construct
narratives about the extent to which strategic interventions by management generate viable financial
entities and BMs. Indeed writing earlier, Magretta (2002) observes that a (viable) BM must have
coherent narratives (or business logic) and sound financial numbers. We build on and extend these
two aspects regarding BMs into a loose conceptual framework to generate alternative perspectives of
how organizations function in a financialized context.
2.2. A financialized context
As is the case with the literature on BMs, the writing on financialization, is wide-ranging, Krippner
(2005, p. 181) commenting in this respect that it is at present a ‘bit of a free-for-all, lacking a cohesive
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view of what is to be explained.’ However, she identifies the following main strands. Firstly, there is
the approach tracing the rise of shareholder value as a mode of governance with Froud et al (2000)
and Lazonick & O’Sullivan (2000) contributing to this part of the literature. Secondly, Phillips (2002)
and others have written about the growing dominance of capital markets compared with systems of
bank-based finance. Yet another strand of the wide-ranging financialization literature concentrates on
the increasing political and economic power of a rentier class whilst a final stream concerns the
explosion of financial trading connected with the spread of new financial instruments (e.g. see
Phillips, 1996).
In this paper, we use the term financialization as a short-hand to explore the growing influence of
financial markets, where financial institutions no longer function as simple intermediaries but instead
act to change behaviour of firms and households (see Froud et al, 2002). Similarly, as argued earlier
by Froud et al (2000), the increasing power of financial markets prompts companies to pursue goals
set by the capital markets rather than operational goals related to their production function. Hence,
according to Haslam et al (2012b), financialized strategy is multi-dimensional, being best understood
within a BM framework of analysis in which focal firms are engaging in a range of strategic
interventions to simultaneously arbitrage stakeholder networks. Strategy is financialized in an era of
shareholder value because of added cultural and institutional pressure on managers to deliver higher
returns on capital. However, under financialization, the resultant outcomes are variable, with writers
commenting on the key role played by narratives.
2.3. Financialization and the role of narratives
Froud et al (2006) argue as to the importance of giving the proper weight to narrative elements,
observing in their case study of GlaxoSmithKline (page 150) how the company issued narratives of
achievement for media and stock market consumption so as to build the firm’s share price. In a
similar vein, Newberry & Robb (2008) comment on the importance of the presentation of success
narratives and Froud et al (2004) argue that new economy technology companies were able to achieve
rises in their measures of share price without making any profits by means of building and
maintaining a narrative about the transformations to come from digital technology. In the current
study we aim to build on Froud et al’s (2006) approach of narrative and numbers in constructing a
case study based on both financial numbers and interviews of a focal firm, Spinout, which we locate
in the context of a uniquely constructed historical data set based on biotech companies quoted on the
AIM market between 1998-2010 (Haslam et al, 2011). We follow Haslam et al (2012b) in arguing
that the purpose of corporate strategy in a financialized world is to modify its financial performance
within its BM for shareholder value. Our aim is to understand the robustness or otherwise, particularly
in the light of the recent financial crisis, of the business model of UK biotech.
2.4. Biotech business models under financialization
At the macro level of the AIM market as a whole, Haslam et al (2011) explore the BMs of UK
biotechs and the relationship of firms to capital markets. Our focus in this section of the paper is on
the growth of quoted bio-pharma discovery and development SMEs which have been listed on AIM
on the London Stock Exchange (LSE) since 1998. The general financial model underpinning a listing
on AIM is to raise finance from the initial public offering (IPO) and from the issue of additional share
capital in the form of follow-on funding. This is because most AIM listed biotechs ‘burn cash’ as
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they take product along a development pipeline into clinical testing (Andersson et al, 2010). Investor
funds are drawn down to cover the expenses of managing a portfolio of drug development and of
purchase of external clinical and support services, for example, clinical testing. SME bio-pharmas
regularly issue milestone reports to equity investors about progress along the clinical testing stage
towards final regulatory approval and these form the basis upon which investors judge follow-on
funding.
Andersson et al (2010, p. 631) construct a financialized business model of bio-pharma showing how
the product innovation and development process interacts with speculative forces in capital markets.
To conceptualize this descriptive business model, they employ three organising dimensions:
narratives about pipeline progress that may (or may not) lead to additional funding from equity
investors or other investing partners, capital market conditions that impact on the supply of funding
and market valuations and the variable motivations of equity investors who are not in a development
marathon, but in a relay race anxious to pass on ownership and extract higher returns on invested
capital through realised market value. Biotech firms are constituted, in effect, as investment portfolios
of innovations whereby products in pipeline and firms trade for shareholder value. In this particular
BM, complementary narratives and favourable capital market conditions are required to keep it all
going (Andersson et al, 2010). Their bio-pharma business model is summarised in Figure 1 below.
Figure 1: A schematic of the SME bio-pharma business model
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In Figure 1 Andersson et al conceptualize the biotech BM as one where product moves along the
pipeline from concept into phases of clinical testing and then hopefully, is approved for use in the
healthcare market. As product moves towards regulatory approval, milestone reports are important in
the absence of ‘sensible’ financial data because these inform investors about progress and capital at
risk. Strong milestone reports encourage analysts to mark up share prices and this makes easier the
entry and exit of different types of investor as we progress along the product development chain.
Investors are called upon to provide larger injections capital because clinical testing in phase II and III
becomes more expensive. Biotechs are dependent upon frequent re-financing episodes and a majority
of firms burn cash resources on R&D expenses. In this circumstance many managers constantly
struggle to ensure investor confidence to maintain a drip feed of funding.
Haslam et al (2011) shed further light on the Andersson et al (2010) model. According to Haslam et al
(2011), the UK bio-pharma business model is a ‘cash burn’ one in which equity finance is raised in
order to cover the costs of research, development and clinical testing.
Figure 2: AIM bio-pharma total costs as % of income
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AIM Bio-Pharma Costs as % of Income
160
140
Percent
120
100
80
60
40
20
0
2009
2008
2007
2006
2005
2004
2003
Source: Haslam et al (2011, page 16)
In Figure 2 above it can be seen that by 2007 AIM bio-pharma costs as a percentage of income were
close to 140%. Subsequently in 2009, this reduced to close to 100%, Haslam et al(2011) arguing on
the basis of their interviews with directors from a sample of firms, that management had cut back on
cash burn by slashing R&D costs and by reducing the number of products in their portfolios. These
trends are also obvious in Figure 3 with by 2009, 73% of firms experiencing negative cash flow.
Figure 3: AIM listed bio-pharmas with negative cash earnings (%)
AIM listed Bio-Pharma's with Negative Cash Earnings
80
70
Percent
60
50
40
30
20
10
0
2009
2008
2007
2006
2005
2004
2003
Source: Haslam et al (2011, page 17)
This translates into the length of how many months’ cover for operating expenses firms had with
Figure 4 showing this.
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Figure 4: Cash burn bio-pharmas’ balance sheet cash reserves (months)
+
Cash Burn Bio-Pharmas Balance Sheet Cash Reserves
(Months)
80
70
60
50
40
30
20
10
0
NEG EBITDA
0-6
MONTHS
6-12
MONTHS
12-18
MONTHS
MORE
THAN 18
MONTHS
Source: Haslam et al (2011, page 17)
Of this group of firms ‘burning cash’ and focusing on AIM-listed firms at the beginning of 2010, 54%
had less than 6 months’ operating expenses and 75%, only 6-12 months’ worth. Accordingly, biopharma firms appear to be engaged in a race against time, with just over one third of the companies
listed on AIM at the beginning of 2010 having less than 6 months’ cash on their balance sheets.
However, perhaps apparently paradoxically whilst firms experience such liquidity problems, returns
to investors suggest a different picture. Haslam et al (2011, page 21) argue from their work on
biotechs quoted on the AIM market from 1998 to mid-2010 that
‘An average investor holding a full portfolio of AIM listed bio-pharmas and participating in
all equity follow-on funding opportunities would have experienced both ‘strong’ and ‘weak’
returns on investment at final exit. Significantly, it is found that weak exiting firms accounted
for a relatively small fraction (11%) of total investment made into an AIM listed bio-pharma
portfolio…Roughly half (55% or 1.1 billion) of our ‘average’ investor’s funds would have
been placed in strong exiting firms and generated a market value return on £3.3 billion, a
market value to investment ratio of 3:1. The remainder of their investment (34%) would still
be in survivor firms listed on AIM where a final exit is still to be made. As at the end of June
2010, a total equity investment of £0.7 billion in this group of firms had a market value of
£1.7 billion, representing a return on investment of 2.5: 1.’
Accordingly, whilst a significant percentage of AIM-quoted biotechs struggle with liquidity problems,
returns to investors are positive.
Returning to Haslam et al’s (2012b) business model framework, we can locate the UK biotech BM
within the typology below.
Figure 5: Business models financial typology
Cash Burn
7
Cash burn
Cash
Strong cash
Very
Strong
Cash
Spinout to AF 28 March 2012-no author details
+ income
generation
+
generation
strong cash
surpluses
Cash
generation
generation +
Cash from
operations
negative
Some cash
from
operations
Slim cash
Margin
Cash margin
strong
High cash
margin
Cash
margin
strong
Slim cash
margin on
asset
trades
Debt and
Equity
draw down
Debt and
Equity
draw
down
Debt and
Equity +
funding
Positive Debt
and Equity
funding
Limited
external
financing
Slow
balance
sheet
tangible
asset
augmentation
Tangible and
some
intangible
asset
accumulation
Tangible
and
intangible
asset
accumulation
High levels
of debt to
equity
external
funding
Very high
debt to
equity
financing
ratio
Balance
sheet
depletion
Some
balance
sheet
depletion
High
gearing
and
financial/
intangible
assets
Very high
gearing.
High
financial
and
intangible asset
structure
Source: Haslam et al (2012b, p.9)
Haslam et al (2012b, p.9) argue that firms can be classified in terms of a business models financial
typology. In Figure 5 above, the typology runs on the extreme left hand side with a cash burn model
in which cash from operations is negative so that debt and equity are drawn down, resulting in balance
sheet depletion. Next along the spectrum is a cash burn plus income model in which some cash is
generated from operations although debt and equity is still drawn down, resulting this time in some
balance sheet depletion. The typology progresses from a situation of cash depletion on the extreme
left to cash augmentation in the middle and to a strong balance sheet where there are holding gains. At
the extreme right hand side of the spectrum we have a situation combining slim cash margins on asset
trades, very high debt to equity financing ratios and so very high gearing.
According to this typology, UK biotech firms are located in the extreme left hand side of the
typology. In this paper, we employ this general business model framework of analysis to explore, in a
case study, Spinout, the way in which a focal firm evolves, adapts and responds to the information
demands of stakeholders within the bio-pharma business model. Narratives are collected from
interviews with the CEO, the Chief Financial Officer and the Chief Scientific Officer of Spinout and
financial ‘numbers’ employed to inform our understanding about viability and sustainability. Our
interviews explore how senior management employs narratives about innovation and re-invention in
milestone reports to inform investors about how product is progressing along the pipeline and its
potential for selling on or licensing. Milestone reports are thus significant because they inform
analysts about progress and influence the valuation of the firm’s equity market value and instil
confidence about providing follow-on financing.
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In so doing, we build upon Froud et al’s (2006) case studies based upon publicly available
information and the Gleadle and Haslam (2010) case which was constructed from both publicly
available information and interviews. Like Froud et al (2004), we turn via case study to the micro
level of analysis. This approach answers to Lazonick’s (2007) call for case studies in order to generate
robust conclusions about the relation between the functions that the stock market performs in the
corporate enterprise and the generation of innovative capabilities.
3. Spinout: A focal firm in the bio-pharma business model
3.1. Background
The company was founded in the 1990s by a local university professor who was an internationally
recognised authority on gene expression and retrovirus research. After Spinout’s IPO in the late
1990s, he continued to act as CEO until 2008, after which a more commercially minded CEO was
appointed, so representing a shift in the management culture. In earlier years investors had generally
been happy with the firm’s focus on blue skies research but this behaviour has also changed.
‘As we’ve kind of grown up, we’ve needed to become much more of a development
company.’ (Chief Scientific Officer)
This viewpoint is echoed by the CEO when he comments:
‘In the current environment, it’s self-evident, you go for the stuff that’s further down the pipe
(line). It’s a commercial decision.’
Spinout specializes in gene therapy and immunotherapy addressing diseases that are untreatable or
poorly treated today, in the fields of core oncology and neurotherapy. The science involved is highly
innovative, for example with its Parkinson’s treatment which changes how part of the brain works
whilst other specialisms of the firm involve the development of cancer vaccines and ocular treatments.
Regarded as one of the leading companies in these fields, the firm’s strategy is to realize the potential
of its innovation through both in-house and collaborative development with Big pharma. Indeed, in
the last five years, Spinout has been involved in two major deals with major pharmaceutical firms,
thereby obviating temporarily the need to raise more capital from the financial markets. Other
important collaborations include Spinout’s continued work with various academic groups and diseasespecific charities as a cost-effective and non-dilutive means of early-stage development. By so doing
and by extending its use of external clinical and regulatory experts, and by engaging more scientific
advisors, Spinout’s project teams aim to ensure more access to medical opinion leaders and industry
experts.
3.2. Spinout’s financial situation
As can be seen from the summary Table 1 below, Spinout is not simply a pure cash burn development
firm. Like a number of firms, it receives some revenue in the form of license fees paid when
milestones are met from Big pharma partnership agreements.
Table 1: Spinout summary financial data 2006-2011
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£ million
2006
2007
2008
(rounded)
Actual
Actual
Actual
Revenues
1.0
7.0
18.0
R&D spend
20.0
22.0
27.0
Accumulated (82.0)
(96.0)
(105.0)
deficit
Cash & cash 8.0
11.0
8.0
equivalents
Source: Spinout annual reports and 2011 estimates
2009
Actual
19.0
18.0
(108.0)
2010
Actual
11.0
20.0
(118.0)
2011
Estimates
7.7
17.8
(130.0)
7.0
7.0
14.3
The pattern of revenues received is however quite volatile, peaking at £19 million before falling back
to £11 million in 2010 and an estimated £7.7 million in 2011. Whilst there has been some cutback in
R&D expense, the overall accumulated deficit is still increasing and is estimated at £130 million at
end 2011 representing the accumulated loss on equity investments made into the firm. 2011 estimated
net cash burn for the firm stands at £16.5 million so that end 2010 cash balances of £7.0 million
represented around 5 months only of cash burn, an arguably vulnerable financial position,
necessitating fund raising in some form. (This potentially vulnerable position explains the title of this
paper as Spinout’s BM has become arguably ‘re-financialized’ by late 2011). The company, like the
majority of its bio-pharma peers, continues to be loss-making and so analysts tend to focus on cash
balances and how many months of cash burn are available.
A significant challenge faced by Spinout concerns the long development cycle of drug development
and the short-term drip feed financing model of the capital market. The nature of pharmaceutical
development from concept to product launch involves at least a ten year cycle, which may extend to
15 or 20 years for some drugs. Whilst Spinout has been relatively successful in getting funding from
public markets, this has only been sufficient to run the company for two years at a time. This leads to
serious dilemmas for the firm. In order to conserve cash, the CFO comments that if necessary, the
firm would cut back on R&D expenditure:
‘You know, if we were to get to that position (i.e. where cash flow was a problem), you
know, sometime before we got to the end of 2011 we would seriously reduce our expenditure
in order to keep things going, but it’s sort of a living death.’
Inevitably, the firm has to compromise because of the necessity of strict cash management. To quote
the CEO:
‘I mean actually cash is king as always-you finance it as best you can and you’ve got a
window of money. When that window starts to look short, you get back in and get some more
and take a very commercial stance. I think the real big thing is for example, we’re looking at
partnering something at the moment, it might not be the deal we’d always hoped for but
actually, does that get us where we want to be to do the next thing we want to? Everybody in
the building would say to me, ‘We’ve had this baby for 13 years, Oh my God, you can’t give
that away for that.’ I don’t give a damn, if it gets me from here to there and lets me do the
next thing I’ve got to do, I’ve actually got a deal that’s 75% what it could have been.’
The main measure on which the firm is judged, according to the CFO is cash balance:
‘So, that (i.e. cash in the balance sheet) really is the most important metric and people who
are making an intelligent assessment of the company also look at what is our investment in
R&D, you know, are we investing…building the assets? But sadly, most people are more
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focused on, is the cash going to run out, and is there going to be an inflection point before that
happens?’
The vital inflection point here refers to positive milestone announcements or news of a substantial
collaboration with a Big pharma company. Accordingly, the firm has to be short-termist in its
decision-making. In this regard, the CFO comments how in an ideal world, the firm would have
invested about ten years ago in production capability for both its Parkinson’s products and those for
eye diseases. However, such investment is not regarded as newsworthy by the financial markets. To
quote the Chief Financial Officer:
‘If you do a small clinical trial, then a year later you’ve got a result. If you invest in a
manufacturing facility, then it will take you a year to build it and two years to validate it, and
then you can use it, and it’s really useful and it’s what the business needs in the long-term, but
it’s not sexy or sassy and it doesn’t help you raise money.’
The need to manage news flow is something that also preoccupies the Chief Scientific Officer who
comments that this substantially affects the type of R&D activity undertaken by the firm:
‘(This need) to avoid long-term endpoints for clinical studies…has skewed the make-up of the
pipeline and the stage development into a more clinical candidate and clinical development
situation….You need to pay attention to timelines and turnaround and deliverables and news
flow and all those juicy things.’
Because of such on-going uncertainty about funding, the firm has had to focus its R&D efforts more
than would have been the case otherwise. For example, cash constraints have meant that the firm has
had to focus on one or two areas in connection with its gene delivery system rather than developing
across a broad front although the technology has the potential to treat a range of different diseases.
Whilst needing to focus its R&D efforts on a narrower range of products than is ideal, the firm faces
other pressures emanating from the need to balance its major collaborator’s interests with those of
investors. Whilst the Big-pharma collaborator acts as Spinout’s most important source of day-to-day
funds, the CFO comments how ideally the firm would want to fund also its Parkinson’s clinical trial
which is generating data that the market would see as progress. Although the collaborator’s funding
has proved a life line to Spinout, such funding is becoming more difficult to obtain. The Chief
Scientific Officer comments:
‘They (Big pharma) really want absolute proof before they’ll make the investment and so
have been kind of holding on before plunging (in) to licence product candidates, whereas
maybe a few years ago, they’d be kind of hoovering them up….(Consequently) we’re having
to invest much more in later stage clinical development before (Big)pharma (comes in) which
is expensive. It burns up our resource and delays the investment for Big pharma, which they
like as they’ve got more proof of concept.’
The result, to quote the Chief Scientific Officer is that
‘We’re sort of dancing around the handbags in a disco, really, and meanwhile we’re all
running out of cash.’
In terms of dealing with the financial markets, the firm faces a variety of conflicting pressures. To
quote the CFO, “the firm has a pipeline of early stage products but they receive relatively little
attention, the market ascribing 95% of the company’s value to one product”.
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With regard to the pattern of shareholding, 40% of Spinout’s shares are based long-term in
institutional hands. The firm is able to enter into dialogue with its institutional investors and so
manage this relationship whereas this is far from the case with the balance of largely retail investors.
To quote the CEO:
‘The retail arm…it’s very hard to keep up with everything going on – they might sell on a
whim, buy on a whim, they’re watching chat boards, one sells, ten sell or fifty sell and then
the next day they’re piling back in. The share price is volatile because of the pattern of our
shareholding.’
The firm’s shareholders therefore have distinct characteristics according to their size, the largest ones
adopting a more sanguine view of the firm and of its long-term value, ignoring what can appear to be
the almost capricious manner in which financial markets value bio-pharma companies. This contrasts
with smaller retail investors, who particularly a few years ago when leveraged products like spread
bets were more easily available, would play the market given Spinout’s share price volatility which is
illustrated in Figure 6 below. These investors tended to be particularly vocal in demanding that the
firm publish news which would affect share price.
Figure 6: Spinout share price (Source: Spinout accounts plus FTSE data)
In terms of 6 year performance versus relevant indices, Figure 6 shows the value at the end of each
year of £100 invested on 31 December 2005 in Spinout 1p ordinary shares compared to the change in
the FTSE100 and the AIM indices over the same period. From this, we can see that the Spinout share
price tends to follow the direction given by the benchmark indices, but with greater volatility, and
occasionally as affected by major company developments. In the 2010 Spinout annual report, the
directors comment that the high volatility in share price is not unique to the firm, but is a feature
shared by many high-tech companies whose valuations are significantly influenced by news flow,
investor sentiment and attitude to risk.
As well as differences in time horizon of retail versus institutional investors, there are further
distinctions as regards preferences for different stages in the life cycle of Spinout’s products in the
pipeline. According to the CFO, there is a class of investor who shuns the high-volatility early-stage
development phase with prospects for a substantial capital gain. These relatively risk-averse investors
only become interested in the firm as an investment opportunity when they become more confident
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that a product has progressed along the clinical testing stages of the development pipeline. Because of
the need to accommodate such differences in investor perspectives, Spinout directors run the firm as if
they were managing a portfolio of investments.
The CEO sums this up as follows:
‘What we do is very, very risky and so yes, it’s been all organic to date but it has to be done a
different way. Two or three things-- One, we have to grow…Two, we have to have a portfolio
which is a little less risky. Currently, if one thing goes down, we get mortally wounded. If we
had a bigger portfolio than this one drug….we can come back to fight another day. So that’s
the strategy there….so going out and finding money on the markets all the time at each new
stage of a trial, isn’t going to work and to build something that’s self-sufficient, that has some
cash and profitability and sales and you can pay part of your costs of development every year
without going to the market every time. So what we’re looking for is some form of sustained
profitability.’
3.3. Summary
The narratives and numbers for Spinout reveal that the business model within which it is located is
both complex and fragile because contradictory forces are at play. The development cycle is long but
cash resources provided by investors are provided on a drip feed basis and often investors select
different products and product stages to back. In contrast, the pressures from the way in which the
business model is structured are at odds with the way in which managers have to organize the firm as
a financial unit of account with a portfolio of products under development and testing. Spinout’s
unpredictable pattern of revenues and volatile share price combine to make its BM vulnerable as
commented by the CEO with respect to the necessity for the firm to seek finance from the markets at
each new stage of a trial.
Consequently, managers in Spinout are making all sorts of trade-offs: does the firm prioritize
developing the ocular programme or does it engage in other work leading to results which are
regarded as more newsworthy by financial markets? Does the firm sell off intangible assets to boost
cash resources which are focussed on late stage rather than early stage product in pipeline? Will tradeoffs damage the firm’s valuable stakeholder relations with universities, disease-specific charities and
other medical researchers? These issues contribute to the vulnerability of its BM which we discuss
next.
4. Discussion
Despite the vulnerability of Spinout’s BM caused by the volatility in both its income and share price,
we argue that its BM is not located at the extreme left hand side of Haslam et al’s (2012b) typology
where cash burn from operations is negative and debt and equity are drawn down, resulting in balance
sheet depletion. Instead, the firm does generate some cash although we would argue that Spinout still
fits within overall BM financial typology shown in Figure 5. We would characterize the firm as being
of the cash burn and income type, second from the extreme left of the typology. Spinout generates
some cash in the form of licensing income although equity continues to be drawn down, resulting in
balance sheet depletion. However, Spinout’s cash depletion is less than that of other biotech firms,
making its BM more viable than that of many of its peers.
We need to consider next whether the Haslam et al (2012b) BM framework and the Haslam et al
(2011) study capture important details regarding the Spinout case study. We can do so to the extent
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that Spinout emerges as being characterized as being of the cash burn BM, whilst not belonging to the
extreme cash burn type located at the extreme left hand side of the typology in Figure 5. However,
corresponding with the Andersson et al (2010) framework and the findings of the Haslam et al (2011)
study, the firm is engaged in a race against time, seeking to develop product before funding runs out.
Following Gunningham and Rees (1997) we can characterize this as being a situation where capital is
‘impatient.’ Within the Spinout case, as in Andersson et al (2010), milestone reports assume a huge
significance, certain classes of investor clamouring for good news so that they can choose to exit on a
share price hike. Consequently as in Andersson et al (2010), investors are in effect engaged in a relay
race, seeking to hand on ownership at opportune times, rather than being engaged in the marathon
effort needed for development of drugs which can amount to 15-20 years. As in Andersson et al
(2010) and in Haslam et al (2011), narratives about future potential performance figure large in the
absence of ‘sensible’ financial numbers. This finding supports that of Froud et al (2006) as to the role
played by narratives in their study of the Big pharma firm GlaxoSmithKline.
Whilst the Andersson et al (2010) framework and Haslam et al(2011) capture many of our findings in
Spinout, we need to consider what aspects are not covered. Here, we can cite points of detail such as
the complexity of motivations of different types of investor and the advantage to Spinout of its Big
pharma partnership. However, what is not covered includes Spinout’s struggle to balance the interests
of Big pharma in pursuing joint projects versus advancing other work, progress of which would lead
to milestone reports, so satisfying the interests of other classes of investor. Throughout this process,
Spinout finds itself needing to rationalize its product portfolio in the light of liquidity problems. It is
at this point that the Haslam et al (2012b) loose organising framework of BMs comes to the fore and
proves its usefulness. Notably, Haslam et al (2012b) argue that within a given BM, focal firms exploit
a range of strategic interventions as they manipulate relations and respond to a range of stakeholders.
Hence, we argue that in Spinout we see an example of the complexity of the UK biotech BM,
characterized as it is by its lack of straightforward connectivity. What makes the UK biotech BM
particularly vulnerable is this very complexity of its stakeholder network which is lost with all its
associated knowledge should a firm fail.
We need to assess whether there is there scope for differences within Haslam et al’s(2012b) BM
framework. Testing this against the Haslam et al (2011) study, we argue that many of the biotechs
included in the ‘numbers’ and ‘narratives’ may be located at the extreme left hand side of the
typology as evidenced by the findings on cash balances. However, we would argue that there is scope
for migration rightwards along the spectrum. Viewed in this light, Spinout emerges as a relatively
mature biotech, having been established in the late 1990s when it originally conducted basic research
as opposed to development. By now however, it has a sufficiently developed pipeline to attract a Big
pharma partner. So not only do product portfolios have their own life cycles but biotech firms
themselves do also. Hence, the Haslam et al (2012b) framework is flexible enough to accommodate
difference. Indeed, Haslam et al (2012b, p.15) argue that Big pharma is moving rightwards along the
spectrum with its ROCE falling as it becomes more capital intensive. In other words, its BM is
maturing and degrading as Big pharma faces the patent cliff occasioned by the expiry of patents on
formerly blockbuster drugs. We argue that with time, the BM of UK biotech might migrate also along
the BM Financial Typology spectrum in Figure 5 although for this to be possible, certain policy
interventions might be necessary.
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5. Conclusion
The BM Financial Typology of Haslam et al (2012b) as supplemented by the Andersson et al (2010)
biotech BM framework capture key aspects of what is important with respect to Spinout. However,
narratives and indeed numbers from Spinout flesh out the detail. In this paper we have followed Froud
et al (2004, p.887) in interrogating the underlying BM of UK biotech for cost recovery. We have
contributed detail with regard to this BM from two perspectives: firstly, from that of the AIM-level
market as a whole, looking both at the returns to the average investor but also examining the liquidity
position of quoted firms, and secondly, from reviewing the contribution made by the Haslam et al
(2011) study. Additionally, we have contributed detail on this financialized BM from the perspective
of different functionally-based directors in our focal firm, Spinout. Like Froud et al (2004, p.888)
writing about the 1990s’ new economy firms, we find that biotech firms’ share prices are bid up on
the basis of social narrative about possible transformation, in this case, of advances in R&D and
progress against milestones. Moreover, like the 1990s’ US new economy firms, UK biotech firms
recover costs from the capital rather than product markets.
The current research has examined these relationships in the case of UK quoted biotechs. Whilst to
date Lazonick & Tulum (2011) have explored the BM of US biotech, further work should extend to
cover both private UK firms and also other biotechs internationally which necessarily find themselves
facing conditions of different varieties of capitalism (Hall & Soskice, 2001). Once such work is
completed, it should be possible to construct a more complete view as to the relationship of biotech
firms to both Big pharma and the capital markets under varying conditions of financialization and
under different varieties of capitalism. This is important not only from a scholarly point of view but
also because of the importance of the sector, both nationally and internationally. Such further work
would also enable us to test both the Andersson et al (2010) and the Haslam et al (2012b) frameworks
for their robustness.
References
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[2] H. Feng, J. Froud, S. Johal, C. Haslam, K. Williams, A new business model? The capital market
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financialization, Accounting Forum 34 (2010) 54-65.
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[8] N. Gunningham, J. Rees, Industry self-regulation: an institutional perspective, Law and Policy 19
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[9] P. Hall, D. Soskice, (Eds.), Varieties of Capitalism: The Institutional Foundations of Comparative
Advantage: Oxford University Press, New York, 2001.
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Financialized World, Routledge, 2012a-upcoming.
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financialized world, paper submitted to the British Academy of Management conference (2012b).
This paper is based on Haslam et al (2012a) which is currently with the publisher.
[12] C. Haslam, N. Tsitsianis, P. Gleadle, UK Bio-pharma: Innovation, Reinvention and Capital at
Risk, Institute of Chartered Accountants Scotland (ICAS), 2011.
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business model, Research Policy 40 (2011) 1170-1187.
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Dr Pauline Gleadle is lecturer in management at the Open University. Her research is centred on the
inter-related themes of financialization and enterprise (e.g. work by Paul Du Gay) and as well as on
the management of innovation. She has published a variety of journal articles and book chapters on
these themes and also has received research funding from various sources. After leading a stream on
financialization at the 2011 Critical Management Studies conference, she is editing with Professor
Colin Haslam, University of Hertfordshire, a special issue on the subject in Critical Perspectives on
Accounting to appear in early 2013.
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Dr Edward Lee is a Principal Lecturer in Finance and Accounting and researcher in the Finance and
Accounting Research Unit at the Business School University of Hertfordshire. In recent years he has
published in the area of financialization and how the pressure to deliver shareholder value is
impacting on corporate governance and stakeholder relations. His recent work is concerned to locate
financialization within the context of national and corporate business models.
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