Karolinska Development

Advancing across all fronts

Update | 1 March 2017

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Karolinska Development has reported continuing progress in all its portfolio companies but the near-term remains focussed on the proposal to restructure the convertible bonds, with the EGM scheduled for the 8thMarch. We view the offer as marking the closing stages of the major transformation that has been underway at Karolinska Development over the last 24 months. Our valuation of Karolinska Development was placed under review pending the outcome of the offer, but previously was SEK 473m(SEK9.10 per share).

Year-end: December201520162017E2018E
Sales (SEKm)
Adj. PBT (SEKm)(78.2)(70.3)(63.6)(63.1)
Net Income (SEKm)(1,054.7)(216.8)(63.6)(63.1)
Adj. EPS (SEK)(1.5)(1.3)(1.2)(1.2)
Cash (SEKm)297.2238.1209.0180.0
EBITDA (SEKm)(43.6)(27.0)(30.0)(31.2)
Source: Trinity Delta Note: Adjusted numbers exclude changes in the fair value of portfolio companies and exceptionals.
  • The transformation is approaching completion Over the past two years new management has overseen the restructuring of the business, with significant strategic changes to the investment philosophy, the introduction of a greater commercial focus, and the rationalisation of the company portfolio. The latest step has been the offer to issue new B shares to its convertible bond holders. The EGM to approve this is on 8th March.
  • Progress across all portfolio companies Karolinska Development has streamlined its investment portfolio down to nine companies, most of which are funded through to material value inflection points. The news flow suggests that progress is being maintained across the board, with several companies expected to announce pivotal results during 2018. Although difficult to predict, the first major realisation could happen within the next 18 months.
  • Proposal to set-off bonds into B shares The outcome of the proposed set-off of the convertible bonds into B shares announced in February remains the largest uncertainty. Were this to happen, Karolinska Development’s equity position would be materially strengthened. This would allow management to further implement its strategy, making additional investments in new opportunities that have been identified.
  • Share price has been hampered by this overhang Our DCF valuation of Karolinska Development was SEK 473m (SEK9.10 per share). This is a conservative valuation based on the investments in Aprea, OssDsign, Modus Therapeutics, and Promimic, with upside from the other five investments and earn-out agreements. We have placed this under review pending the outcome of the proposed conversion and made no changes to our estimates.


1 March 2017

Price (SEK)5.85
Market Cap (SEKm)311.3
Enterprise Value (SEKm)457.6
Shares in issue51.9m
12 month range5.25-9.75
Free float100%
Primary exchangeOMX
Other exchangesN/A
Company CodeKDEV
Corporate clientYes

Company description

Karolinska Development has been successfully transformed into a leading life sciences investment company that is notably active in the Scandinavian region.


Mick Cooper PhD
+44 (0) 20 3637 5042

Franc Gregori
+44 20 3637 5041

Karolinska Development has made considerable progress across multiple fronts over the past two years. Following a strategic review, the new philosophy has seen the investment portfolio rationalised and management strengthened. All the portfolio companies have progressed as the active support, both financial and strategic, resulted in a number of milestones being achieved. The recently announced offer to convert existing bonds into B shares is, in our view, a major step forward. Resolution of this issue would strengthen the equity position, improve future investment decision making, remove a major management distraction, and address a concern that has been overhanging on the shares.

Karolinska Development has reported its results for FY16. Over the past two years new management has revitalised the company, with material changes to the investment philosophy, the adoption of a greater commercial outlook, and the creation of a more focussed portfolio. The consequences of these efforts have started to show through into the performances of the individual portfolio companies and, importantly, within Karolinska Development itself, while reducing operating costs by 38% in FY16 compared to FY15.

The change in emphasis saw a thorough portfolio review and resulted in several divestments being made, with the number of active investments reduced from 21 (December 2014) to the current nine (Inhalation Sciences Sweden was divested in February 2017). A key aim has been to ensure that all portfolio companies are financed to the next value inflection point, which is achieved through a combination of direct funding and proactively syndicating investment with other international life sciences funds. A total of SEK 610m was raised during the year, of which 91% was from external investors.

The focus is now clearly on effective execution of the strategy, with delivery on critical milestones ahead of potential exits (either through trade sales, IPOs, or licensing deals). Although timings are difficult to predict, the improving visibility suggests that, assuming current progress is maintained, the first major value realisation could happen within the next 18 months.

Portfolio company progress during Q416

Aprea Therapeutics is a private Swedish company that is developing novel small molecules targeting the tumour suppressor protein p53 pathways. In March 2016 it raised SEK 437m from specialist life sciences investors in the largest round completed by a private life science company in Sweden in over a decade. The first patient in its Phase II trial of the lead compound, APR-246, in high-grade serous ovarian cancer was enrolled in October 2016, with the results of this pivotal study expected in 2018. This follows the successful completion of the Phase Ib element of the study, in which the overall response rate was 50% (four complete responses and 10 partial response in 28 patients, data presented at ESMO in October 2016).

Modus Therapeutics was previously known as Dilaforette until it changed its name in October 2016. Its lead compound, sevuparin, is in Phase II trials in sickle-cell disease. In November 2016 the study design was expanded to include patients aged 12 to 18 and the sample size was increased from 45 to around 150 patients. This important study is now also expected to produce results in 2018.

OssDsign makes bespoke craniofacial implants, where complicated or difficult cases require individualised implants. In January 2017 this commercial stage company expanded its distribution infrastructure with new partnerships in Italy, Spain, Austria, Switzerland, and The Netherlands (adding to those in the UK and Nordic region). It also received 510(k) clearance to market OSSDSIGN Cranial PSI in the US; with a distribution agreement signed with Matador Medical Inc.

Promimic has developed a unique coating, known as HAnano Surface, that is used to improve the integration of implants into bones. In October 2016 Promimic and Danco completed the set up and validation phase of the US production facility. Management was also strengthened with Tord Lendau elected Chairman and Håkan Krook and Patrik Sjöstrand joining as Non-Executive Directors. In January 2017 Magnus Larsson was appointed CEO, replacing Ulf Brogren, who relocated to the US to lead the new sales operation in North America.

Dilafor is a drug development company focused on obstetric indications. Its lead compound, tafoxiparin, is currently undergoing Phase II studies with first results expected in Q1 2018. In December 2016 it was granted a key US patent for tafoxiparin and in January 2017 it started a Phase IIb clinical trial with tafoxiparin in women with protracted labour.

Umecrine Cognition is developing compounds that act on endogenous CNS-active steroids (GABA-steroids). GR-3027 is a first-in-class agent that acts to reverse the increased GABAA signalling that is believed to cause the clinical symptoms of cognitive and motor function impairment. In November 2016 it announced positive Phase I data with GR3027 in hepatic encephalopathy and raised SEK 45m in a private financing round.

Additionally, in February Oncopeptides was successfully floated on Nasdaq Stockholm. Karolinska Development has a 5% earn-out agreement with Industrifonden that has a current market value of SEK 26.7m based on Oncopeptide’s market capitalisation at listing on 22nd February.

Offer to off-set convertible bonds into B shares

In February 2017 Karolinska Development announced its intention to offer to issue new B shares to its convertible bond holders though a set-off arrangement. The voluntary agreement would see the new shares issued at the higher of the VWAP (volume weighted average share price) of the 90 trading day period ending either two trading days prior to the announcement, which is SEK 6.17 per share, or for the two trading days before the EGM on 8 March. The background to the bonds, the details of the scheme and the possible outcomes are discussed in our note “Unshackling itself from its bonds?” (8th February 2017).



We placed our valuation under review in February 2017 pending the result of the EGM (8th March 2017) and the outcome of the proposed bond conversion. We previously valued Karolinska Development at SEK 473m (equivalent to SEK9.10 a share). We employ a sum-of-the-parts valuation of its four leading investments (Aprea, OssDsign, Modus Therapeutics, and Promimic), which are valued using DCF-based methods, including rNPV models for the biotech investments and three-phase DCF valuations for those with marketed products. Our valuation takes into account the complicated ownership structure of Aprea, Dilafor, Modus Therapeutics and Promimic, which are owned by KDev Investments, in which Rosetta Capital is a minority shareholder with preferential dividend distribution rights.

We have examined the possible impact on the proposed debt to equity conversion and have detailed four potential scenarios in Exhibit 1. The likely outcome is particularly difficult to assess, with the number of variables greater than is typical in such cases (notably whether CP Group will seek exception from the mandatory 30% threshold and whether the Swedish Securities Council will grant it), nonetheless the scenarios used do provide a useful point of reference.

Exhibit 1: Indicative DCF valuations of Karolinska Development in different scenarios
Source: Trinity Delta; Note: Number of new shares issued based on outstanding convertible debt of SEK451m at FY16 with the loan component being SEK389m, and a conversion price of SEK 6.17/share

Scenario 1 provides the existing situation and Scenario 4 examines the outcome if all of the convertible bonds where to be exercised in the set off process. Whilst these set the boundaries, the most likely outcome will probably lie somewhere between Scenarios 2 and 3 and so are representative of the potential impact. It is worth noting that whilst existing shareholder dilution is inevitable, in all conversion scenarios our numbers suggest that there remains upside against the current share price.

Exhibit 2: Indicative timetable for the convertible bond offer
Source: Karolinska Development The timetable is preliminary and may be subject to change
Exhibit 3: Summary of financials
Source: Karolinska Development, Trinity Delta  Note: Adjusted numbers exclude changes in the fair value of portfolio companies and exceptionals. Forecasts exclude potential investments or divestments.



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