Recognizing Leadership In Biotech: A Critical Facet Of The Diligence Process

by: Nouvelle Asset Management

Much excitement in the life sciences sector surrounds the potential of drug and treatment candidates, and it's easy to see why: market potential is generally definable and sales prospects at least approximate. But the experience of the players backing that technology, while not as immediately quantifiable, are just as crucial to execution. Getting a business off the ground is no easy task, and refocusing a lagging one even more difficult.

An excellent example of the strength that comes with quality executives can be found in the developer of Vascepa, Amarin Plc (NASDAQ:AMRN). Love it or hate it, Amarin's successful refocusing under the guidance of CEO Joe Zakrzewski should be applauded.

Zakrzewski joined Amarin's Board of Directors in January 2010 and took the helm as CEO in November of the same year. At the time of his appointment to the Board, Amarin's market cap was just $137M; it had doubled to $300M by the time he was appointed CEO.

Under Zakrzewski's leadership, the company executed flawlessly on completing clinical trials for AMR-101 (now known as Vascepa), obtaining FDA approval for the compound, presenting and publishing peer-reviewed clinical data on the drug, and obtaining intellectual property to protect this version of concentrated fish oil through 2030 (the company continues to aggressively pursue patent protection).

Amarin's market capitalization has grown to $1.3B - even higher last year at the peak of interest in Vascepa - and investors still have an opportunity to exit at a higher valuation if the company secures New Chemical Entity status and/or Amarin gets acquired, a heated discussion among investors. While Vascepa has already received approval for the treatment of high triglycerides (the MARINE indication), investors eagerly await the possible addition of the ANCHOR indication for the treatment of patients with high triglyceride levels who are also on statin therapy; it's a market considerably larger than the MARINE indication, and Amarin guides for the filing of a supplemental NDA by the end of February. Some might disagree with Zakrzewski's focus on the NCE designation, but his efforts since arriving at Amarin have been highly remunerative for its investors.

Bruce Booth of Atlas Venture, a $2B+ VC firm, recently wrote about the learning curve in biotech investing, including a discussion of management and its importance (the article is worth a read). He writes of Atlas Venture's successes and missteps, "We've certainly hired our fair share of great paper-resume CEOs that didn't translate into excellent leaders and operators in our startups. Diligencing the specifics of their actual contributions in the past is an important part of reference checking and recruiting [emphasis is my own]." As Booth points out, what we're looking for, as investors, is an ability to execute - and a demonstrative history of just that.

We've long followed Antares Pharma (NASDAQ:ATRS) and CEO Paul Wotton, who joined Antares' Board of Directors in 2004. As the company's business stagnated over the following few years, the Board tapped Wotton to fill the role of President and CEO in October 2008. ATRS hit a low of $0.32 in December of that year, a valuation of just $21.8M, but within months, Wotton brought an environment of operational excellence to Antares. He stemmed errant cash burn, streamlined the company's focus on crucial programs, and executed on advancing key strategies and partnerships, including a collaboration with Watson Pharmaceuticals (now Actavis) (NASDAQ:ACT) in 2011 for a topical gel to treat overactive bladder. Today, Antares is on the map with a focused offering of injectable products, an active, partnered pipeline, and most importantly, a $435M market capitalization; shares trade at $3.51. Watton's execution since Antares' lows are palpable.

But investor excitement still exists for Antares. There's considerable discussion of a mystery drug being developed alongside Pfizer (NYSE:PFE), and investors are following closely Antares' recent NDA submission for Otrexup, a subcutaneously injected methotrexate formulation for rheumatoid arthritis. Otrexup circumvents the ugly gastrointestinal side effects associated with oral methotrexate, the current standard of care.

Wotton pulled a sharp U-turn five years ago with Antares and redirected the company on a path that created value for its shareholders. It's this kind of execution that investors should be screening for in the diligence process. "Go no-where" management teams, regardless of the pipeline's allure and promise, are a major red flag, and building a business around quality management is a key step in development, not a side note.

Booth makes an interesting observation about the interaction between the Board and an executive team, and for those of us on the outside of venture capital, it's certainly of note:

"A good Board is able to provide direction, governance, and input, and a good management is able to distill that feedback and integrate it into the strategic direction of the company. It's a healthy balance and tension. But keeping the Board away from whiplashing the "day to day" program choices of what to "chase" is key. An important nuance is worth mentioning here though: an active Board Chairman or single Lead investor playing the role of an Acting CEO is very typical in an early stage startup, and is a good thing."

In that line of thought, Alliqua Inc. (ALQA), which got some visibility at the Biotech Showcase Conference this January, recently brought in some interesting new talent for its executive team and Board: Dr. Jerome Zeldis, Celgene's (NASDAQ:CELG) long-time Chief Medical Officer, was appointed Chairman of the Board in November; and David Johnson, former CEO of ConvaTec took over as President and CEO this month. Johnson grew ConvaTec to a leading wound-care company with over $1.6 billion in annual revenue, while Zeldis, as a senior executive at Celgene, was instrumental in building the company into a multibillion dollar enterprise. Meanwhile, James Sapirstein, CEO of Alliqua's Biomedical division, is known for his work at Gilead (NASDAQ:GILD) and Bristol-Myers Squibb (NYSE:BMY).

This kind of experience should go a long way towards creating value for ALQA shareholders, and it's hard to imagine that any of these executives joined this micro-cap and are spending time and resources if they don't see an opportunity to build it into a meaningful business. The company develops and markets hydrogels for use in wound-care but expects the technology to become useful as a drug delivery platform further down the road. Certainly, ALQA at its current valuation isn't attractive to management financially, and investors betting on this strong management team could be rewarded alongside executives and the Zeldis-led Board as the business becomes more valuable. Admittedly, it's early in the process, but this leadership team speaks volumes about what's happening at Alliqua, and investors might keep an eye on the business, with a current opportunity to get in at the ground floor. The Johnson-Zeldis-Sapirestein team is a great amalgamation (judging by their prior track record) for creating shareholder value from existing assets and anticipated business development.

Interestingly enough, our present and future optimism regarding the above biotech names rests in large part on the past experience of management. It's their historical ability to execute that investors should be paying attention to. We've identified a number of names - both companies and executives - to which we pay close attention, and just a few are listed above. Making the distinction between a quality asset and the leadership that can turn that asset into shareholder value is critical. As Booth rightly points out, "Just because the 'former head of R&D John Doe thinks this is the hottest program ever' is simply not sufficient."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.