1999 | Case No. A177
In May of 1999, Antonio Regalado, an investment analyst, was charged with determining whether to invest in Dura Pharmaceuticals or Spiros II. Dura Pharmaceuticals (Dura) had built itself into one of the premier drug delivery companies in the world. Dura had successfully changed its organization from one that specialized in marketing established niche products to one with extensive research and development (R&D) capabilities needed to generate new products. Like several other pharmacology companies changing their business models, Dura relied on R&D spin-offs to develop its proprietary technologies. In each of these spin-offs, Dura raised money from its own coffers and those of individual investors to fund the new entities. But, in many ways, the spin-offs were not the independent concerns commonly seen in other industries. The spin-offs contracted exclusively with Dura to do the research, had few employees, and had always been repurchased by Dura at the end of the development cycle. However Dura still believed spin-offs allowed it to segregate the risk of R&D from that of its core business because Dura had an option, not an obligation, to repurchase the spin-offs’ shares. Therefore, R&D spin-offs allowed Dura to fund its long-term objectives without hurting its current investor base. Some members of the financial community questioned the validity of these spin-offs. It was unclear that there was adequate justification for Dura’s spin-offs to be accounted for as separate entities given their close relation with Dura. In addition, many Wall Street pundits cautioned investors that Dura might be using Spiros II, formed to develop Spiros® inhaler technology for use by diabetic patients, to hide poor underlying business economics. Finally, it was unclear the spin-offs made economic sense for Dura in the first place. Shares in Spiros II had lost a tremendous amount of market value, falling from $16 per share at the initial public offering (IPO) to only $10 per share as of May 1999. As an investor in Spiros II, Dura had lost a lot of money. Independent of his analysis of Dura Pharmaceuticals’ capabilities, Antonio Regalado believed it would be necessary first to understand the underlying economics of the spin-off transaction. Then he would make a determination of which investment offered the greatest rewards, the spin-off or the sponsoring firm.
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