KDEV halves its portfolio value as new accounting practices take effect

Karolinska Development (STO:KDEV) has slashed the value of its portfolio after adopting a new way of tallying up what its early-stage biotech investments are worth. The new accounting model and the sale of Pharmanest almost halved the value of its portfolio, but the fall is not over yet. If another deal is revalued as KDEV expects, the value could sink to less than 25% of the tally as of the end of March.

KDEV CEO Jim Van heusden

As it stands, KDEV is valuing its portfolio at SEK 679 million ($80 million). A few months ago, KDEV calculated the figure at SEK 1,277 million. Two years ago, it stood at SEK 1,846 million. The rapid fall over the past few months was driven predominantly by two factors: a reassessment of the value of the portfolio using a different accounting method and the exit of Pharmanest. The deal to offload pain relief biotech Pharmanest to a consortium of Östersjöstiftelsen, Recipharm Venture Fund and Praktikerinvest contributed to a cut of SEK 352 million from the fair value of KDEV's portfolio.

KDEV is staying tightlipped about what it got in return, although the fact that it ended the quarter with 13% less cash than it started with suggests that no hefty upfront fee has landed in its account. While declining to reveal financial details of the deal, KDEV did outline a structure in which it retains a chance to profit from Pharmanest's success through an earn-out agreement but is freed from the need to support Pharmanest financially. The consortium is putting SEK 28 million into its new asset to move a topical pain relief candidate to the cusp of a regulatory filing in Europe. 

The remaining SEK 368 million drop in the fair value of KDEV's portfolio was accounted for by its new way of assessing the worth of its assets. KDEV has always valued its portfolio using discounted cash flow (DCF), an analysis method based on forecasts of free cash flow. Creating such forecasts for a biotech with a pipeline of preclinical or early-phase clinical assets is hard and necessitates making many assumptions. As such, KDEV will now only apply DCF to companies in the later stages of clinical trials. Earlier-stage companies will be valued based on their worth at their last round of investment.

KDEV is still assessing the full impact of the change. The new model has definitely knocked around 25% off the fair value of its portfolio. What is unclear is whether its application to a deal KDEV has with Rosetta Capital will drive a similarly large drop. In 2012, KDEV put 13 of its 25 portfolio firms in a new private company in which Rosetta took a 7% stake. Applying the new assessment model to the deal is forecast to knock SEK 359 million off the fair value of KDEV's portfolio. If this happens, the fair value of KDEV's portfolio will sink to SEK 320 million.

While the changes make for some ugly figures, CEO Jim Van heusden thinks they are needed if KDEV is to prosper in the future. "We are making good progress in executing our strategy to create a more focused portfolio of companies which we believe have the greatest potential," Van heusden said in a statement. "We are confident that the decisions we have announced today put Karolinska Development in a much stronger position to generate value for its shareholders."

- read the revaluation release
- and the Pharmanest news