Do you remember your first job? How about your first boss?
Peter Hecht, Ph.D., sure does. “I worked at a grocery store in high school,” recalls the cofounder of Ironwood Pharmaceuticals. From this early formative experience he learned something very valuable about himself. “I’m a pretty bad employee,” he laughingly attests. “I’m always challenging the status quo, asking questions, wanting to see if we can figure out how to do things better.”
Though this might be fine in his current role as Ironwood’s CEO, what the would-be entrepreneur learned back then was that most bosses (i.e., those who have been running a supermarket the same way for 30 years) really don’t want the guy bagging groceries to tell them how to run their businesses more efficiently. Some 15 or so jobs and similar experiences later, Hecht figured he needed a job where he could either work with a bunch of partners or for himself. In the mid-1990s, while working as a research fellow at the Whitehead Institute for Biomedical Research, an MIT affiliate, Hecht decided he was finally ready to scratch his entrepreneurial itch, and he began formulating the notion of building a sustainable pharmaceutical company from scratch.
BUILDING A BIOPHARMA IN GREATER BOSTON
There’s no doubt that being in Cambridge, MA, and at MIT were two factors that significantly helped Hecht launch Ironwood. For example, the first three people he approached for advice about his idea were Charlie Cooney, Ph.D., Chris Walsh, Ph.D., and David Baltimore, Ph.D. Cooney, who cofounded Genzyme, and Baltimore, a Nobel Prize winner who started half a dozen companies, were both at MIT, within walking distance of Hecht’s office. Walsh, who had been a scientific advisor to dozens of pharmaceutical companies, was just across the river at Harvard Medical School. “Even though I didn’t know anything, very quickly I was able to tap into the people who did, ask a lot of questions, and learn very fast,” recalls Hecht.
In contrast to his boss at the supermarket who didn’t want to hear his suggestions, Hecht says all three of these academic leaders and biopharma heavy hitters were very supportive, connecting him to investors and other scientists. But when Cooney and Walsh told him that they liked his idea and that they wanted to invest, he thought, “Now what do I do?”
As Hecht and his six cofounders (Brian Cali, Joseph Cook, Gerald Fink, Gina Miller, Todd Milne, and Eric Summers) continued to bounce ideas off their ever-expanding network, Ironwood continued to take shape. Twelve years after being legally founded, the company executed its IPO. Though selling 19.2 million shares at $11.25 each was well below its target of $14 to $16, considering the timing (on the heels of the Great Recession) and being the first biopharma IPO in about three years, the successful raising of $203 million via the IPO in 2010 was a significant milestone.
But even more significant was the discovery of their first molecule, LINZESS (linaclotide). “It’s an oral peptide that survives through the harsh environment of the stomach and gets into the gut and works on a receptor there to relieve abdominal pain,” Hecht shares. “It also brings fluid into the gut, so it helps with constipation.” But it is the drug’s pain relief that got the folks at Ironwood really excited. “As soon as we saw, even in early and preclinical studies, that the drug had a direct pain mechanism in the gut, we knew we had a big opportunity to help millions of people suffering from GI-related discomfort,” he says. In August 2012, Ironwood received FDA approval for LINZESS, indicated for irritable bowel syndrome with constipation (IBS-C) and chronic idiopathic constipation (CIC) in adults. LINZESS, like Ironwood, is enjoying consistent growth, approaching use in nearly 1 million patients thus far.
BECOME A TALENT MAGNET
When speaking with Hecht, he’s quick to note that, although he’s a cofounder of the company, “The story is really not about me.” Others — and history — may disagree, though. For instance, Hecht, who was called “a talent magnet” by one of Ironwood’s investors, is the guy who managed to woo his fellow cofounders to invest in the company. He did that despite the fact that three of them, Cali, Milne, and Summers, had all received offers to work at premier academic institutions — and in spite of himself having zero formal business, entrepreneurial, or leadership training.
Still, during our conversation Hecht continued to deflect any attribution of company success to himself (a true leadership quality, by the way), instead crediting Ironwood’s core mission as the true talent magnet. “We’re here to create new medicines that can really change people’s lives, as hard as that might be,” he says, adding that if you’re going to have grandiose goals, by default, you need incredible talent to reach those goals. He claims it’s those big goals — the desire to build a great pharmaceutical company from scratch and to have it last a couple hundred years — that have helped Ironwood attract top talent. “We wanted to collect likeminded, crazy people who were very mission-driven,” he explains. “They had to accept the company’s very long-term focus. They had to understand that drug development is all about managing your way to success through failure. After all, the products we’re talking about discovering, developing, and bringing to market have 10- or 15-year development cycles, and then they have 15- or 20-year franchise lives. That long business cycle is the reality of biotech.”
THE IMPORTANCE OF COLLABORATIVE SCIENCE
When talking about Ironwood’s allure to employees, Hecht frequently mentions the term “collaborative science.” It’s a concept that he stresses is part of the very fabric of the company. It’s basically team-based science, as compared to working solo in a lab. But it’s more than that. He explains that the latter has the goal of simply uncovering new knowledge for the sake of doing so, while collaborative science actually translates that knowledge and insight into something that can be incredibly meaningful to a patient. “It’s a faster, more exciting, and productive approach that offers the opportunity to make a difference in the world in an applied way,” he says. It’s also why his cofounders turned down their academic offers.
At Ironwood, collaborative science is a very iterative process, starting with a molecule that has some activity against a target of interest. What follows is a labor-intensive effort to keep improving the attributes of the molecule, a process that requires close collaboration among biologists, chemists, pharmacokinetic and pharmacodynamics people (i.e., the DMPK group), and pharmacologists.
“The process is not driven by one group but a collective,” Hecht elaborates. “We form project teams that can consist of three to six people.” The goal is to involve at least one person from each of the groups listed previously. The groups start improving on what they call a “pharmacophore,” which is the core molecule that has some of the desired attributes. “The group members tend to learn from each other, so that over time our chemists start to think more like pharmacologists, and our pharmacologists tend to think like chemists,” Hecht explains. “Once we get a molecule that looks like something being targeted, we bring in preclinical and early clinical folks. Whether it is safety toxicology studies or preparing the molecule for chemistry scale-up, we want to continue this close collaborative process throughout the organization, all the way through to development.”
Although Hecht believes there are many successful approaches to the drug development process, at Ironwood there is a concerted effort to avoid the development of silos. To explain why, he recounts a story he heard from the head of chemistry at a pretty big pharmaceutical company. The chemistry group had about 100 chemists in the EU and another 100 in the U.S., all working toward the same target for about a year and a half. They ended up making some very potent molecules against the target. But when the molecules were finally shipped off to the biology group, it was discovered that they didn’t get across the target membrane at all. Though they had devoted around 200 people to conduct 18 months of exquisite chemistry, it was far away from making a drug. “At Ironwood, we love the idea of cross-disciplinary learning and being able to draw on those resources,” Hecht says. “After all, humans are learning machines.”
Hecht and his colleagues have certainly been emulators of this principle. Since the early days of founding the company, the Ironwood team has applied the iterative process of scientific drug development to the business of building a biopharmaceutical company — learning, growing, evolving. Today, Ironwood (NASDAQ: IRWD) has a market cap of $1.37 billion, a commercial engine to capture and maximize value, and a pipeline Hecht believes is robust enough to keep things going for a long time to come. “Exclusivity with LINZESS should get us to at least 2031, and our second generation, if successful, takes us to 2036,” he shares. Combine this with Ironwood’s efforts in refractory GERD (Gastroesophageal Reflux Disease) and vascular and fibrotic diseases — both programs that are expected to be blockbusters with IP protection well into the 2030s — and it appears Hecht and team are well on their way to building a pharmaceutical company that can generate rapid, sustainable, high-margin growth, just as they set out to do back in 1998. It’s easy to imagine that the only thing this one-time grocery store employee will soon be bagging is accolades from patients, providers, and yes, even shareholders.
How Ironwood Embeds A Long-Term Focus
Since the pharmaceutical product life cycle is lengthy and unpredictable, Ironwood believes it is critical to have a long-term strategic horizon. To that end, the company strives to embed a long-term focus through certain policies and practices, which include:
A dual-class equity voting structure (which provides for super-voting rights of pre-IPO stockholders only in the event of a change of control vote). This is designed to concentrate change-of-control decisions in the hands of long-term focused owners who have a history of experience with Ironwood.
Weighting compensation to equity over salary for all of Ironwood employees. For example, many employees have a significant portion of their incentive compensation in milestone-based equity grants that reward achievement of major value-creating events.
A change-of-control severance plan for all employees. This is to encourage employees to share their best ideas, giving them the peace of mind that in the event of a change of control and employment termination, they still have an opportunity to share in the economic value they helped to create.
All board of director members are substantial Ironwood investors and are required to hold all shares of stock acquired as payment for their service throughout their term.
Partnerships with Allergan, Astellas, and AstraZeneca all include standstill agreements. These serve to protect Ironwood from an unwelcome acquisition attempt by a business partner. The company also had change-of-control provisions in its partnership agreements to protect the economic value of linaclotide.
Ever Heard Of The Warren Buffett School Of Business?
Warren Buffett is one of the most successful investors the world has ever seen, a fact not lost on Peter Hecht, even at the age of 12. “I’ve been a Warren Buffett groupie since I was a little kid,” Ironwood Pharmaceuticals’ CEO admits. “For various reasons, I started getting Buffett’s annual reports when I was young.” Hecht admits to always being very inquisitive about the business world, which may have been because he saw his father start his own business. Hecht’s older brother convinced him that he should read Buffett’s reports, if for nothing else, that they were funny. “The first couple years I read them just for the Mae West jokes,” he laughs. “But Buffett is a clear thinker and a good writer, and I started finding that I really liked business, and I actually understood what he was talking about. For example, he’d have sections in the annual report where he’d do accounting explanations.” Hecht even remembers reading a Buffett accounting treatment for acquisitions back in high school. “At that time, there were two ways you could legally account for an acquisition, and he [Buffett] discussed each and the consequences of each for your financials. And it made a lot of sense to me.” Though Hecht went on to earn a B.S. in mathematics, an M.S. in biology, and a Ph.D. in molecular biology, he believes he got his MBA long beforehand. “I have the Warren Buffett version,” he insists, “Because I read all of his Berkshire Hathaway annual reports and was able to get ahold of the old Buffett partnership documents, which I have read a bunch of times. I’m a pretty serious Buffett groupie,” he reiterates.
Is Death The Best Exit Strategy?
Listening to Peter Hecht tell the story of Ironwood Pharmaceuticals, you initially get the impression that everything went smoothly in those early years. The cofounder and current CEO of the company makes it sound easy when he tells the story of getting $10 million in series-A financing from Venrock, Polaris Partners, Aberdare Ventures, and several angel investors in 1998. But then he tells what happened leading up to that initial investment. As he puts it, “It’s a funny story.”
“Very early on, even before we raised our first round, we met with a bunch of different VC funds,” Hecht begins. “Remember, although this was at the height of the dot-com bubble, it was still a very hard time for biotechs to try to raise money. One of the firms asked us what our exit strategy was, and I simply said ‘Death.’ Well, he almost got up from the table and walked out of the door!”
Though Hecht realized that death as an exit strategy was probably not the best way to describe his and his cofounders’ commitment to seeing Ironwood succeed, not every investor would share this level of devotion. Nevertheless, he believes, especially in those early days, stating this death strategy worked well when selecting investors. “Those investors who were looking for success in a shorter amount of time than us were discouraged from investing when they heard our death as an exit strategy,” he explains. “In addition, it helped us connect with the best venture capitalists in the healthcare industry that were very long-term oriented and focused on building great businesses.” Over time, Hecht refined his response. “I learned to say something a little more politically correct, like, ‘That’s a very good question. We’re working to build a great company and to earn the right to create returns for our investors. We’ll create on- and off-ramps so that you can get an exit at the right time, but we intend to keep building the business.’”