Kellogg Conference Notebook: The Ovation Pharma Story

The following was written by Doug Potters, a first-year student at the Kellogg School of Management. Prior to Kellogg, Doug worked at AEA Investors, a middle market private equity firm, in their Small Business Fund. At AEA, Doug contributed to the execution and management of AEA’s investments in PLZ Holdings, Implus Footcare and Sextant Education.

Panel: Changing Strategies in Capital Appreciation: A Look at the Ovation Pharmaceuticals Success Story

For those unfamiliar with Ovation, the firm is a biopharmaceuticals business built by management and GTCR, predominately through the acquisition of niche, orphan products from major pharmaceutical companies. GTCR committed $100 million to Ovation and later sold it to Lundbeck for $600 million in cash with potential additional milestone payments of $300 million.

Ovation’s Founder and CEO Jeffery Aronin and Michael Burke, a fellow member of the founding leadership team, joined angel investor Gidon Cohen and GTCR principal Constantine Mihas for the panel discussion.

The primary driver’s of the deal’s success were the strength of the company’s capital base and of its management team. As Aronin noted, “I started with my own money, then went to CEOs in the industry and then looked for an institutional partner because we needed the credibility to do the deals.”

Beyond the initial financing of Ovation, Aronin persuaded top management talent, including Burke who was a “rising star at Abbott, heading for the comfortable corporate suites,” to join him. The ability of this team to identify and capitalize on products Big Pharma companies had underutilized drove the ultimate returns.

The panel’s perspectives on the Ovation deal provides further evidence that backing the right team in the right space can generate massive value for private equity investors. Interestingly, private equity’s ability to provide credibility to a business plan seems to be an often overlooked source of value provided by these investors.

For the large contingent of MBA students in the audience, the panel offered significant advice about the risk tolerance required to be an entrepreneur. Upon being asked how he and Burke thought about the risk of leaving secure high-profile positions at large pharmaceutical corporations to become employees #1 and #2 at a start up, Aronin noted, “There is risk in anything. Your firm could merge with another and you could lose your position. So when people say entrepreneurship is risky, I say compared to what? In some cases, the risk of doing nothing is higher because you don’t control the outcome.”

Cohen added: “If you’re really good and know your stuff like Jeff and Mike, I’d argue their risk was pretty low.” Mr. Mihas brought a slightly different perspective saying, “The opportunity set for top MBAs today is so attractive that it’s tough to be an entrepreneur. I think that’s why you rarely see these very bright people starting companies. The risk-reward dynamic is too negatively skewed.”

Perhaps most compellingly, the panel universally advised students to spend several years post-graduation building the commercial judgment as a means to limit the risks of entrepreneurship. Burke noted “I trained for 8 years after Kellogg at Abbott prior to Ovation.”

These insights of how to think about balancing risk-reward in your career and how to prepare yourself to capitalize on opportunities like Ovation either as an entrepreneur or investor were surely valuable to the audience members.