By Allan L. Shaw, a four-time public company CFO (e.g., Serono & Syndax) who has served on five public boards, which included the chairing of two audit and two compensation committees. He currently serves on the board of directors of Vivus Inc.
The biopharma capital markets, driven by many fundamental factors, have been on an unprecedented tear for the last three years, exemplified by the twofold increase in the NASDAQ Biotechnology (^NBI) even after the sell-off that dropped its recent peak by 25 percent. While it is unclear where we go from here, it would be unreasonable to expect that the industry as a group will continue its gravity-defying returns, particularly when considering the implicit risks and execution challenges coupled with the increasing need to successfully adapt to a fluid and fast-changing environment. When considering the plethora of factors that go well beyond an organization’s direct control (e.g., capital markets, science, regulatory, development, commercial, competition, reimbursement), management team quality is the fundamental differentiator in determining the winners from the losers, particularly when the waters get rough.
Given the choice, I would choose the combination of a mediocre asset and a great management team over a great asset and a mediocre management team. Simply put, management teams can create or destroy value. Let’s face it, things rarely go according to plan, and time is always the enemy, which makes it even more important to have an objective, principled, and agile management team of fact-based decision makers who have the capacity for ingenuity, determination, and perseverance. The importance of these qualities cannot be understated, particularly in a very competitive landscape that requires differentiated strategies for success (e.g., innovative medicines in noncompetitive categories), given the increasing prevalence and clustering of activities concentrated on common targets further compounded by long developmental time lines.
To better illustrate the impact of management on value creation, let’s take a quick look at NPS Pharmaceuticals — a company that was on the precipice of extinction until a leadership change turned it around and recently sold it to Shire for $5.2 billion. In a nutshell, new leadership:
In my opinion, leadership’s capacity to identify opportunities and recognize failure was the most important factor that contributed to NPS’s success, as well as a critical trait embedded in the DNA of great management teams. Management’s ability to recognize and capitalize on opportunities is often underappreciated and highlights another leadership trait to be considered and valued when separating the “wheat from the chaff.” This is clearly much easier said than done, as evidenced by the increasing prevalence of repurposed drugs, reflecting overlooked opportunities generated from someone else’s failure. Conversely, intellectual honesty and objectivity (completely detached from emotions) are fundamental management qualities that enable timely recognition of failure, or put another way, knowing when and how to pivot (or cut your losses) are equally important.
Throwing good money after bad will only accomplish one thing: destroying shareholder value. It is not unusual for individuals to become emotionally attached to developmental projects or business combinations that no longer make sense, such as those devoid of scientific and market reality (e.g., competitive landscape, patients’ needs). In some cases, people are simply trying to keep the plates spinning (which could also be characterized as job preservation). This reminds me of sage-like wisdom bestowed by a mentor: “If you make a wrong turn and continue going down the road, it is still a wrong turn!”
Great teams and companies require diversity of thought, skills, passions, and backgrounds. With that said, the biopharma industry tends to hire from within and generally prefers leadership/ management from other life sciences companies, akin to the recycling of coaches and managers in professional sports. It is interesting to observe the divergence in hiring practices between scientists and business people, whereby the entire world is scoured and every rock turned over in pursuit of the best scientific talent available while the resource pool for business people is artificially limited to those playing in the industry’s sandbox. Objectively speaking, this makes as much sense as a commercial fisherman choosing to fish in a pond instead of the ocean. The industry’s insular and inward ways have fostered this inbreeding, which inevitably perpetuates the same ideas not only within a company but also throughout the industry. Companies in this scenario often ignore outside influences with alternative perspectives, which in turn, makes it difficult to accept/embrace new business practices. Ironically, this is the last thing the industry needs (e.g., a prescription for disaster) as the healthcare (HC) ecosystem embarks on unprecedented change to fundamentally reform itself. The old ways of doing business are going the way of the dinosaur and will simply not work in the future. It is time to embrace new talent and leadership with cross-functional skills and expansive experience with the strategic vision and understanding of macro issues, new ideas, and business models necessary to successfully navigate the rapidly evolving HC landscape.
As a result of the incredible capital market run and industry growth, human resources have supplanted financial resources as the most significant gating factor for successful execution and value creation. Human capital is becoming an increasingly scarce resource, reflecting the pressing need for experienced business leadership capable of operating in a changing HC environment and creating differentiated strategies necessary for success. This situation has become more acute with the parade of IPOs and the consequential proliferation of “green” management teams. The latter are inexperienced at operating a business in the public fish bowl, lack the dexterity to optimally handle Wall Street’s cast of characters, and in many cases, are illequipped to manage the growth that is implied by their companies’ valuations. Let’s remember that the biopharma sector is not for the faint of heart; the industrial jeopardies are pervasive and represent significant operational and strategic challenges that make the likelihood of success dependent on the readiness of the firm’s leadership to meet business challenges. Put another way, a company’s greatest strategic asset (or liability) is its management.
The ultimate competitive advantage, in my view, is a seasoned management team with a macro understanding and diverse industry background in companies of various sizes who have “been there and done that” and can provide a veteran’s perspective on how to build and scale organizations in a dynamic environment. Given recent capital market turbulence, let’s see where all this ends up. But if the supply of cheap capital starts to dry up, it would be the beginning of the end of the joy ride that we have been on, putting a further premium on the quality of leadership. In a stock market that is up over 200 percent, everybody looks smart. It is when things get tough that the fortitude of management teams is tested. As such, pick your jockeys wisely.