Asset-Centric Special Purpose Vehicles (SPVs)

July 2014

What is an Asset-Centric SPV?

An Asset-Centric SPV is often a newly formed company which has been incorporated solely with the purpose to develop and manage a single asset. In the life sciences and pharma sectors this asset would usually comprise of the intellectual property rights ("IPR") in a particular asset. Usually the IPR would be transferred, assigned or licensed exclusively from the company in question to the Asset-Centric SPV and the sole development of that asset would thereafter be undertaken in that Asset-Centric SPV.

Funding of Asset-Centric SPVs is often made according to specific, defined milestones. Once the current milestone is achieved, the cash is released to the company by investors and the focus then moves to the next stage of asset development and the achievement of the next milestone. This allows management and other key individuals to work towards specific goals to develop the asset and also allows the entities funding the Asset-Centric SPV to measure the progress of development and, very importantly, control their capital outlay. Investments are usually made either in the form of equity or loan notes, depending on the requirements of the investors.

Life cycles of Asset-Centric SPVs are usually short – they are set up, run and monitored with a defined purpose in mind – and are becoming an increasingly common way of funding life science and other pharma projects.

school of fish It is important to note that Asset-Centric SPVs are not solely a tool of life science and other pharma companies – they are also incorporated by a variety of other persons and institutions ranging from universities, to individual biotech and life science entrepreneurs, to specialist life science funds – for a number of different purposes and goals. The purpose of this article is to focus and give an overview of Asset-Centric SPVs generally in the life sciences sector.

What are the benefits associated with an Asset-Centric SPV?

There are several benefits to using this structure:

Cost control and risk – from an investor's perspective, the financing of an Asset-Centric SPA can be controlled tightly with monies usually only being released to the company on achievement of the next development milestone. This allows investors to not only control their capital expenditure, but also allows investors to manage their risk profiles better. With each milestone of development achieved, the risk profile associated with the investment is decreased
Life cycle – most Asset-Centric SPVs tend to have a life of between 3 – 6 years. This gives investors the ability to deliver quick returns to their stakeholders and also diversify their investments. It also allows founders and entrepreneurs to work in a number of different Asset-Centric SPVs over the course of their life, not only giving them variety and different challenges at each stage, but also giving them several opportunities to build a company that might just be "the jackpot".
Management and monitoring – IPR can be developed in an Asset-Centric SPV without having to deal with some of the bureaucracy that can exist in larger organisations. It can also help to focus the minds of the management team on one project, making it easier to monitor them (if it goes wrong, there is little to hide behind) and, from an investor's perspective, the return on investment.
Tax benefits – if the IPR in an asset is transferred, licensed or assigned to an Asset-Centric SPV at an early stage in its development where the value that has accrued in such IPR is low, this can have huge tax-saving implications vis a vis transferring the IPR at a later stage. Generally, the more value in the IPR at the point of transfer/licence/assignment, the higher the tax charge.
Variety of investors – an Asset-Centric SPV can attract financing from investors who otherwise would not have been interested in investing in or alongside large life science or pharma companies.
Liquidity - from an investor's perspective it allows them to potentially see liquidity at different times throughout the lifetime of their investment rather than just in one event, which may take many years to realise. So there are advantages in both risk profile and return horizons.

What are the disadvantages associated with an Asset-Centric SPV?

Long term research projects – Asset Centric SPVs do not really facilitate the development of medicines and treatments that require very large amounts of capital and time commitments. This could arguably restrict the development of medicines and treatment in new and unexplored sectors of medicine. The IPR that is transferred to an Asset-Centric SPV therefore needs to be not just the right asset, but also the right kind of asset.
Focus – whilst an Asset Centric SPV can attract funding from a variety of investors, it is not suitable for all types of investors. Seasoned life science and pharma investors tend to have a large amount of industry experience and drug development expertise.
History - although there have been a number of well publicised successes with Asset-Centric SPVs over the past few years, in the grand scheme of investment models, they are relatively new and not fully proven.
Complexity on multiple vehicles - Asset Centric SPV models can get quite complex where you have several spin-out vehicles from one asset and asymmetry of investors is introduced, as you need a governance regime for each vehicle rather than one over-arching governance regime.

Setting up an Asset-Centric SPV – the legals

To set up an Asset-Centric SPV a number of legal formalities need to be considered and, where appropriate, dealt with:

Incorporation - most Asset-Centric SPVs will be set up as a company limited by shares with the investors, management and other key employees owning shares. The company will need to be registered at Companies House by filing the necessary documents (Form IN01, articles of association etc) and paying the required fee. It will then be issued a certificate of incorporation.
Articles of Association - the Asset-Centric SPV must have articles of association. The Articles of Association are a contract between each shareholder and the Asset-Centric SPV and set out a range of procedures to deal with various matters relating to the Asset-Centric SPV's governance. Typical provisions that are found in the Articles of Association of a life sciences company can be found in Key terms of the Articles of Association.
Subscription and shareholders' agreement – often management, investors and other parties owning shares in the Asset-Centric SPV will be a party to a subscription and shareholders' agreement, which sets out the private, contractual agreements between them relating to the subscription of shares by the investors, the milestones and how they are achieved and any specific consent rights to which the parties have agreed to be bound. A summary of the typical provisions that can be found in a subscription and shareholders' agreement / investment agreement for a life sciences company are set out in Key terms of the Investment Agreement.
Intellectual property – decisions regarding how the IPR is to be transferred, assigned or licensed need to be made at an early stage. Related to this are decisions about what, if any, royalty arrangements need to be put in place as part of that transfer, assignment or licence together with whether any profit-sharing or similar agreements are appropriate.
Incentive arrangements - as Asset Centric SPVs are established with a specific purpose in mind and with a view to relatively quick returns, consideration needs to be given early on regarding how management and other key employees are to be incentivised. This will often take the form of a tax efficient Enterprise Management Incentive (EMI) scheme, although other forms of incentive arrangements may also be appropriate depending on the circumstances.