Whoops– sorry, Mr and Mrs Price

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Did you ever stick your foot so deep in your mouth that it took major surgery to extract it?

After the Red Sox opening day game, at which our new Ace, David Price, and our new prime reliever, each gave up three run homers (Sox lost to the Orioles), my wife and I stopped into one of our favorite restaurants for a bite to eat and to let the crowds subside.  Seated next to another couple who clearly had attended the game, I mouthed off about how we spent a zillion dollars and nonetheless this guy Price had stunk up Fenway Park.

Later in the conversation, Laura noted the Southern accents and asked where the other couple were from.  Tennessee, we were told.  Just up for the game, we asked.  Oh yes, they replied; we always travel to see our son David pitch.

David Price’s mom Debbie was most cordial about it.  The dad?  Well he shook my hand but I do think he would have preferred to not have.

Ouch.

Where’s the Money for Drug Development?

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Emerging life science companies always need money. Some seek non-dilutive money through research grants, government programs and the like. Others deal with angels and seed round and Round A investors.

Another source of possible funding, often over-looked, can be afforded through major drug and pharmaceutical companies. For example:

Johnson & Johnson has opened a facility in Cambridge (the geography is of course no surprise), which has a large investment fund, as well as access to incubator space (the space is at market rate).

Roche, similarly in Cambridge, has several programs; one is an investment arm but there are a couple of programs for fundamentally innovative technologies which are still primarily rooted in academia; they are willing, without equity claim, to support promising science on behalf of scientists still embedded in an academic setting.

The large and privately-held pharmaceutical company Boehringer Ingelheim has programs in Cambridge not only for investment but also for counselling companies and investors seeking to navigate working with larger pharmas.

Of course each company has its preferred technological targets, so approaches must be tailored. However, given the huge shift in emphasis away from drug development and internal innovation, to reliance on outside innovation, it is logical for these larger companies to nurture the external ecosystem. For example, at J&J in 2002 external drug development accounted for 20% of new products while in 2012 (last reporting year) it accounted for 50%; the statistics for the top ten pharmas are 16% and 33% respectively; at Roche 35% of all sales are based upon externally developed products.

About Ovaries

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The science of in vitro fertilization (IVF) has not advanced much in the last 20 years, but a small public company is trying to change all that. A presentation by the CFO of OvaScience, to a Thursday morning meeting of the Boston Chapter of the Association for Corporate Growth, described innovative programs in place or in development to improve the surprisingly low success rate of such procedures.

First, some statistical orientation. World-wide, 40,000,000 women per year seek medical advice and treatment for fertility issues. Of those, something under 2,000,000 per year undergo IVF (2012 statistic). Surprisingly, only about 11% or 12% of that number is in North America; the largest gross market is in Europe, and the largest single market is in Japan.

Fertility falls off rapidly in the 30s, and is really low by the time a woman turns 40. The success of IVF in this population is generally in the upper 20% range, although Japan for a variety of reasons is in the 17% to 18% range (perhaps because women tend to work longer there and start families later).

OvaScience is operating in 6 countries (not the United States) utilizing technologies which work only by utilization of a woman’s own body. The currently operant procedure is to augment the health of an older woman’s egg cells by extracting mitochondria from cells in the ovarian wall (cortex) and injecting it into active eggs within the ovary itself; mitochondria is sometimes described as the “engine” which provides energy to a given cell.

Future therapies being explored include replanting young cells in their entity from the cortex into the center of the ovary, and growing eggs from the cortex entirely in vitro (outside the human body).

Why no operations in the United States? While there are some regulatory issues involving, inevitably, the FDA (which unlike other countries does not have a dedicated function to fertility), the largest reason is “religious objection.”

CEOs and Presidential Elections

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Election years cause many CEOs to constrict their corporate plans.  It happens every Presidential election year.  It is most manifest among Republican CEOs.  It is not necessarily the most benign development for the health of the business.

This insight comes courtesy of Tom Sherwin, who ought to know; he is principal of CEO Resources, a firm devoted to coaching CEOs and with clients both in Massachusetts and nationally.  Is this generalization supportable, I had the temerity to ask over a pleasant lunch today?  Seems Tom’s office went back to check his own firm’s business level in election years.  Dips in his consulting business for his regular clients, reflecting corporate inaction, occurred during each Presidential election year; a spurt of activity followed, starting right after the election without regard to the prevailing party, including unleashing of long-discussed plans which were put on hold during the course of the election season.

Tom pointed out that he does not discuss politics with clients, it is not his business.  But the business dynamic is something he may counsel about, as it is predictable and seemingly not wholly dependent on the candidates or issues of the day.

Not often you learn something new and interesting and systemic at lunch.

Governance Tip: Do not steal from your Non-profit

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No big surprises about what gets non-profits into trouble with the Massachusetts Attorney General: it is not a good idea to steal, or for the board to govern so laxly that others can steal.

At Tuesday’s Boston breakfast panel presented by the National Association of Corporate Directors-New England, board experts and a representative of the Massachusetts AG’s office (which supervises public non-profits) discussed good governance for non-profit entities.

One theme was how to structure the board of directors most effectively. The larger the organization, the more likely that a board of directors will assume a strategic role; in smaller non-profits (there are 23,000 non-profits in Massachusetts), it is not uncommon to find board members actually doing the day-to-day work. But as organizations get larger, board members must understand that they are there to guide, and not “to do.”

One audience member asked (likely in light of the Harvard Endowment) what the role of the board might be in balancing between the size of an endowment and operational needs. While boards generally establish a spend rate of between 4.5% and 5.5% as prudent, one panelist urged recognition that an endowment was also a rainy day fund for dire circumstances. The panel avoided directly engaging the issue of systematic reduction of allegedly excessive endowments in order to support ongoing operations and reduce charges, tuitions, etc.

How much to pay your CEO? There are resources available to understand the marketplace, from consultants to the Federal 990 reports which provide compensation information in detail (posted on the Massachusetts AG’s website). No need to overpay. However, how can you compensate skilled executives, now moving from the for-profit arena into larger non-profits, who may be willing to work for less money but who have retirement needs which cannot be met (in a non-profit) by such things as stock options? The compensation to senior non-profit executives becomes very sensitive in social service non-profits, the clients of which are poorer people for whom “retirement benefits” are an unobtainable concept.

There was general consensus that large boards are unwieldy, that boards should have a robust committee system to do much of the work, and that financial heavy hitters on non-profit boards need to be invested in the mission but should not expect to have undue influence in how monies are spent just by reason of the size of their checks. If real control of expenditures is sought by a large donor, a restricted gift should be considered; imposing the will of heavy hitters on the operation of an organization through board pressure is not prudent management.

Revenge of the Bloody Sock….

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About a half hour ago the SEC announced it has sued an agency of the State of Rhode Island and the firm of Wells Fargo, as well as several individuals, for fraud in the offering of $50M of bonds by the State to in turn fund 38 Studios in its development of Curt Schillings’ promised video game.  Seems that no one remembered to mention that Schilling had made clear that they needed $75M to finish the project; perhaps the $25M shortfall was not deemed material?

The action reflects growing SEC focus on governmental offerings; first, an attack on the financial links between underwriters and political contributions and, lately, substantive focus on the offerings themselves.

 

In ancillary cases, two individuals have settled related claims for (unadmitted) aiding and abetting the fraud, a financial advisor to the State settled a claim of failure to document services, and action continues against the State, Wells Fargo and another individual.

As if the State of Rhode Island hasn’t been through enough on this….

How to Not Understand the SEC about Finders

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This morning, Mary Jo White (Chair of the SEC) addressed a meeting of the SEC Advisory Committee on Small and Emerging Companies and checklisted certain areas of SEC activity.  In reference to the issue of whether “finders and other intermediaries” in small business capital raises should be regulated, which the Staff “continues to review,”  there was NO mention of the deregulation of finders and intermediaries in the M&A area.

This notwithstanding over a decade of heated debate, proposed legislation, and Bar Association recommendations to deregulate M&A finders and brokers, or subject them to a so-called “Broker Dealer Lite” regimen.

Maybe White assumed the M&A issue was subsumed in her list.  Maybe she did not think the M&A issue is particular to small and emerging companies (which btw is incorrect).  Maybe….

In the immortal words of somebody: “go figure.”

Patent, Trademark Protection in China? Maybe so…..

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Mainland China’s historic reputation of riding rough-shod over intellectual property rights seems, at least as to matters of form, something of the past. In a presentation to the Boston Bar Association on February 18th, a team of intellectual property attorneys from Beijing presented highlights of new Chinese intellectual property legislation designed to protect trademarks and patents.

Interesting particularly is the level of civil litigation relative to the enforcement of trademarks. While the definition of “infringement” differs somewhat from American practice, numerous cases (particularly clashes between American companies and indigenous trademark holders) seem vigorous and far-reaching.

On the patent front, particularly focusing on patent protection for biologics and pharmaceuticals, it seems (as here in the United States) that the skill of the draftsman of the patent application is essential, particularly since certain items of intellectual property are not generally thought to be patentable under Chinese law: methods for diagnosis, therapeutic methods, new dosage regimes. There also are differences with American practice, including a certain inflexibility for the introduction of critical data arising after the patent application has been filed. Also interesting is the timeline for the patent process; upon filing, you have 36 months to request an examination (of course most filers opt for shorter periods), and the average processing time thereafter to reach a decision is 21.8 months. There is a procedure for reexamination of denials, with the average reexamination period 12.5 months. There is also a method for challenging an existing patent, and the average processing time for invalidation requests is 6.6 months.

Finally, there is an accelerated patent process available for applications containing at least one allowable U.S. claim, the so-called PPH (Patent Prosecution Highway).

It may be too early to tell the net practical effect of current Mainland China patent practices, but in terms of both governmental structure and the organization and activity of the private patent bar, there is reason to hope for a robust system of protection in the future.

Directors in Private Companies: Best Practices

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How do boards of directors function in larger, privately-held companies? The answer is: pretty much like boards of directors in publicly-held companies, according to a panel of directors convened February 9th in Boston by the National Association of Corporate Directors-New England Chapter.

Panelist came from a broad variety of companies: Mike Jeans sits on the board of the large Rhode Island insurer AMICA; Ralph Crowley is on the board (and is CEO) of Polar Beverages in Worcester; Ken Dreyer sits on the board of 225 year old King Arthur Flour in Vermont, a company owned by all its employees through an employee stock ownership plan (ESOP) and also organized as a “benefits corporation” with charter obligations to assist the community; Debra Jackson, President of Cambridge College, chairs the governance committee of 198 year old Eastern Bank.

Some commonalities: each company has a robust board of directors a majority of which are “from the outside;” each has a disciplined methodology for adding new directors, and each in a different way attempts to fill particular needs (rather than just hiring “cronies”); each emphasizes formal board procedures including robust “board books” in advance of meetings and reasonably formalized structure for the conduct of meetings; each has a relatively sophisticated system of committees in support of the board.

Notwithstanding somewhat differing fiduciary obligations (King Arthur Flour has strong fiduciary duties to its ESOP as well as to the community, Eastern Bank dedicates 10% of earnings to its foundation, AMICA is responsible as a mutual company to its policyholders, Polar Beverages is still a family owned enterprise), everyone identified their primary obligation in the first instance as flowing to “the company.” If a company is strong, then the rest of the mission can follow.

Other interesting takeaways:

Private boards, as public boards, see a primary function in fixing strategy (management presents strategy and “management comes to the board to have their answers questioned”); for full board meetings, no one goes on the telephone, some companies simply do not allow it (occasionally practice at the committee level may vary); boards are built not only to provide independent input and not only to provide diversity of race, geography, age and the like, but also with a strategic view toward retirements and ongoing need for continuity.

One over-riding theme: public company best practices have substantially infiltrated the operations of all these companies, including with respect to director independence, committee structure, often a designation of a lead director to provide guidance to the board and liaison to management, and in one instance the guidance of counsel to conform governance to listing standards of the New York Stock Exchange.

Clearly, larger private companies are being managed to a high level of professionalism, and directors in these companies attribute robust economic results to that practice.

Growth by Failed Acquisition

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Citrix has grown to a $3 billion company driven by approximately fifty acquisitions over the past decade since it went public, enjoying a comfortable 14% CAGR. Why did their senior vice president tell the January 14th Boston breakfast meeting of the Association for Capital Growth that “a significant number of acquisitions have failed from a financial, strategic and talent prospective”?

The answer, according to Tony Gomes (who is also chief legal compliance officer and secretary of Citrix) is that only a few succeeded, but these few were critical. He also noted that, with some assistance from activist investors (with whom Citrix rapidly reached accommodation in order to improve company operations), Citrix is taking a “pause” to focus on its strategic core businesses and providing best service to its customers, while undertaking a couple of spin-offs of ancillary businesses.

What do you do if an acquisition does not live up to expectations? One approach is to use the acquired management and technology team to change direction. Another is to divest quickly, not deterred by loss of sunk costs; the strategic considerations for divestiture trump the pricing.

How does Citrix approach the integration of its numerous acquired companies, which by definition are smaller and perhaps more entrepreneurial? There are two possible approaches: first, you make sure the team stays together by insisting upon three year retention agreements bolstered by financial incentives. Second, for a while Citrix sometimes simply does not integrate the acquisition, leaving it as a free standing operation (particularly for a period necessary to refine a particular product).

Additional take-aways included: it takes five years of further investment in order to successfully build out an acquisition until it scales; as part of due diligence, an acquiror should determine if its own sales force believes that it can sell the “new thing,” the acid test for which is asking whether your sales team is willing to be subject to a “quota”; activist shareholding is the new normal, and SEC prohibitions limiting communications with shareholders get in the way of company’s being able effectively to deal with shareholders.

I asked Gomes whether “taking a pause” without acquisitions was a tolerable strategy for Citrix, which operates in a fast-moving tech market segment. The answer, with a smile, was: this is just a pause, we need a strategic approach to continued growth and that is likely going to lead ultimately to more acquisitions.

Meanwhile, going from less than $10 million of revenue at IPO to over $3 billion of annual revenue based upon a less-than-perfect acquisition strategy doesn’t seem like bad historical performance.