Driven To The Dark Side


By Cynthia Robbins-Roth

BioWorld Today Columnist

Last summer, I was surprised to read that Kleanthis Xanthopoulos, founding CEO of Anadys Pharmaceuticals, was planning to leave the company to become a venture capitalist at year-end. He was so closely intertwined with the company that I was taken off-guard to think of the two as separate entities. Shareholders apparently were surprised as well, and drove the stock down 20 percent immediately.

But what really surprised me was the comment that news provoked from another "scientist gone bad" serial entrepreneur and public company CEO, who wished to remain anonymous: "This is a wakeup call for compensation committees."

Times have been tough for biotech teams (when have they not been?), but is it really driving people out of companies?

Is There A Compensation Crisis?

Only Xanthopoulos could tell me what was on his mind. I also polled a group of long-time biotech participants, all of whom had operations experience before plunging into investing.

The general consensus was that there is not a compensation crisis. Ernest & Young and various executive search firm data show that the average public biotech CEO (small to mid-sized companies) makes around $350,000 with a bonus potential around 50 percent and a 4 percent stake in the company. Private biotech CEOs are not far from that ballpark, with smaller bonus packages. And salaries all around have risen significantly in the past five years.

BioWorld's Executive Compensation Report 2007, to be published in November, examines compensation at 244 public biotech firms; the data show the median CEO base salary in 2005 was $400,000, with the median bonus being $138,000.

Sam Colella, partner at Versant Ventures and part of the biotech venture community from the beginning, is on several compensation committees. He said they "do a very good job" of looking at the market for salaries and use outside advice to help justify executive payments. As a result, they "don't get complaints from CEOs."

OK, but do the CEOs see it differently? Xanthopoulos said he is amazed at how many CEOs have talked with him about his decision, though it's not clear to him that money is driving the questions, since stock ownership lets "the average biotech CEO do very well if the company does."

Dan Kisner, former CEO of Caliper Life Sciences, co-founder of Isis Pharmaceuticals and current venture partner with Aberdare Ventures, said that today it is "harder to get people into management jobs," and therefore "we have to pay more to get them there."

Bottom line: The financial payoff is significant, especially if your company does well, but there had better be other motivators to keep you in place for the long haul.

Has Turnover Rate Increased?

Nobody I spoke with is seeing a mass migration of CEOs from biotech firms.

Colella was surprised at how little CEO turnover there is in biotech vs. the comparatively massive turnover in the IT world. Some of the CEOs from his early days at Institutional Venture Partners are still at the helm, including Hollings Renton at Onyx and Lou Lange at CV Therapeutics.

"There's no question that the biotech CEO job is very hard," said Colella. "We are in a tough environment. Markets are very challenging; valuations are crimped; pharma is a mess. It's a tough, tough biz." As a result, his phone "certainly is not ringing off the hook with guys who want to run companies."

Keep in mind that a certain amount of CEO turnover is good for biotech. Different talents, personalities, leadership skills and experience are necessary at different stages of company development. In fact, lack of turnover in the form of "founderitis" has killed several companies, even when the science was successful.

Maybe It's Not The Money

Maybe it's just that the job keeps getting tougher.

Jonathan MacQuitty, Genentech/Genencor veteran, founding CEO of GenPharm (acquired by Medarex in 1997), and now president of Abingworth Management Inc., said that's poppycock - it's been tough forever.

"Biotech CEOs have always felt under pressure!" he said. "For those of us who remember what life was like in the 1980s and 1990s, there were not fun' times where IPOs ground to a halt."

He makes a good point. Remember December 1989, when everyone agreed that nobody would raise money for a biotech company ever again? Or late 1982, when Amgen almost ran out of cash and disappeared?

And yet, new challenges, such as regulations that add time, cost and liability to the job, or investors who want reduced risk and shorter time frames (not to mention the current negative perception of CEOs in general) have made the job a lot less fun. Why, Business Week just wrote about the rise in CEO golf handicaps, perhaps related to longer hours in the office.

Joel Martin, general partner at Forward Ventures and founding CEO of two biotech companies, said companies are "no longer rewarded for basic scientific innovation." Today's investor darling is "a clinical-stage company that doesn't require big bucks to grow in value."

That change in investor interest means that the folks who used to love the CEO jobs might not be the right people to run today's companies. And with some boards focused on M&A exits rather than IPOs, a very different management team is required.

Things might not be harder than in the 1980s and 1990s - they are just not a good fit for the same people.

Is The Grass Really Greener For VCs?

Walter Flamenbaum, partner at Paul Capital Partners and former biotech exec, said some peripatetic CEOs have the wrong idea of what awaits them on the investing side. He finds that CEOs assume it'll be fun spending their time giving out cash rather than trying to extract it.

They are sadly mistaken in their expectations. The biggest job for venture funds is raising that next fund. Flamenbaum noted that "limited partners are not charitable institutions giving you this money because they like you. They want more back!"

That might be why some partnerships are having a tough time raising their new funds.

Flamenbaum thinks the recent breathless coverage of astronomical take-home pay for private equity partners has gotten company folks all worked up. But VCs do not typically fall into that pay range, he said, and anyone jumping to VC work in hopes of being "paid what you are really worth" is going to be "sadly disappointed."

Our anonymous VC agreed that CEO jobs are tough, but said the venture route is no panacea: "VCs are highly beholden to investors. You must raise funds every three years to provide 100 percent of your livelihood. When our return drops, we can't raise the next fund and we all lose our jobs. But let's be realistic. Most jobs are hard, and most of the world thinks both CEOs and VCs are vastly overpaid!"

Why Do People Make The Move?

It has a lot to do with desire for a lifestyle change. Specifically, a desire to work fewer hours, spread the responsibility and switch from the MVP position to coach to have a wider impact.

MacQuitty is emphatic that he would not go back to company management. "I would much rather have my risk spread over a portfolio," he said. "Also, I like mentoring CEOs. I don't mind not being in charge, though other ex-CEOs get frustrated when they see execs not doing it right.'"

Kisner said he left Caliper "in part for family reasons. Running a biotech company is a 365-day-a-year job. After you do it for 15 to 20 years, it's time to get one step removed from the front line."

What about Xanthopoulos? He had grown Anadys until it was ready for the next generation of management to take it into the marketplace. That left him susceptible to wooing.

"In 2005, Anadys had a market cap of $400 million, over $100 million cash, and it was on trajectory to become a successful anti-infective company," he said. "Enterprise Partners, the oldest and largest venture fund in Southern California, had been trying to recruit me since 2003. They had evolved from a small health care fund to primarily IT. The partnership wanted to expand and rebalance the health care side of fund."

Xanthopoulos, who said his "true passion" is creating companies, saw a fit for himself, a place where he "could have a larger impact by affecting more than just one company at a time."

The tricky issue was how to make the transition without upsetting shareholders or the stock price, which had a 52-week high of $16.60. "The board decided to make the announcement, including my staying on board for another six months, in advance of a critical clinical data announcement," he said.

The fate fairies were cruel: Two weeks later, Anadys suspended dosing in its hepatitis C trial at the request of its partner, Novartis, to check out preclinical toxicology issues. It didn't make shareholders happy - the stock hit a low of $2.64. (Friday, shares closed at $3.05.) But with $94 million in the bank, a hepatitis B treatment in Phase II trials, a full preclinical pipeline and additions to the senior management team, Xanthopoulos feels he is leaving the company in a strong position (and he will stay on the board).

Industry In Transition: The Next Generation

It is not lost on these industry veterans that biotech is in transition, and that new demands must be made on the people who create the new companies and industry structures going forward.

This columnist certainly has argued long and hard that the big structural changes in health care, the financial world and the larger global economic system require creation of new models to build and sustain biotech companies. Today you can't finance and build a company like Genentech. We need to redefine what a biotech company is.

Steven Holtzman, founding CEO of Infinity Pharmaceuticals and former chief business officer of Millennium Pharmaceuticals, worries that the transition might drive away the next generation of entrepreneurs. "It is getting tougher to build a classic biotech company - starting with novel new tech and getting products from it into the market," he said. "The key question: Can a new model support raising the dollars to get to the next point of value recognition?"

Our anonymous VC is optimistic about biotech's evolution. "It isn't all just about money, otherwise none of us would be in biotech. Many of us are passionate about the business. In good markets, everyone ignores the bad stuff. In a long, bad market, it's easy to get focused on those things.

"I had a crisis of faith last spring, when people kept saying the venture model is broken. But it's not, nor is biotech broken. But it is different. We have to be able to roll with the punches and make the needed changes.

"This may be our mid-life crisis."

Robbins-Roth, Ph.D., founding partner of BioVenture Consultants, can be reached at info@bioventureconsultants.com. Her opinions do not necessarily reflect those of BioWorld Today.

BioWorld Today  October 10, 2006