Management Accounting

The High-Stakes World of a Biotech CFO

In an industry built on big successes and much more numerous failures, the average project destroys shareholder value, the finance chief of Biogen ...
David KatzAugust 4, 2011

Comparing his situation with that of his peers, Paul Clancy grants that he’s sitting pretty. “You know, the biotech business is comprised of thousands of companies that don’t make money, and then a handful of companies that make a tremendous amount,” says Clancy, the finance chief of Biogen Idec. With 2010 revenues of $4.7 billion, Clancy’s employer is indeed one of the fortunate handful.

The biotech giant’s balance sheet is comfort-inducing: as of June 30, the Weston, Massachusetts-based company had about $2.5 billion in cash, cash equivalents, and marketable securities. In nearby Cambridge, by contrast, “there are biotech CFOs who have to worry about how much cash they have in order to fund their development programs,” notes Clancy. “My concerns are far more about prudent capital allocation.”

Still, in an industry where betting on a single line of therapeutic drugs can make or break a company, capital allocation is a serious business. In biotech, that boils down to decisions about how much to spend on research and development and what to spend it on. In an interview with CFO last week, Clancy discussed changes in Biogen Idec’s R&D program and what it’s like to be a CFO in an all-or-nothing business. An edited version of the interview follows.

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In Biogen Idec’s recent earnings call, CEO George Scangos, said: “R&D is now structured around programs that we truly believe in and that leverage our strengths.” Can you describe the changes you made in structuring your R&D efforts?
If you go back 12 to 18 months, our company had been focused on many therapeutic areas, including oncology, cardiovascular diseases, neurology, autoimmune diseases, hemophilia, and some other programs as well. When George came in 12 months ago, we underwent an assessment to understand if we could effectively play in all of these markets. We concluded that we were going to be much better off if we focused on those areas where we had differentiated expertise.

We decided to deprioritize or get out of a number of research and development programs in oncology and cardiovascular disease and focus our efforts on neurology, autoimmune diseases, and hemophilia. This was a very classic case of assessing what we’re best at and focusing our resources.

Has your R&D spending changed?
It’s relatively flat in terms of dollars. But we went from spending in the high 20s as a percentage of revenues to the low-to-mid-20s. Our industry will always be one where there’s a tremendous amount of investment in R&D, so we’re not talking about a fundamental change.

What kinds of metrics do you and your team look at to provide insight into what’s essentially a long-term scientific call?
We try to break down the elements of R&D into classic costs and attrition rates per stage of development. We attempt to compare that to benchmarks in the industry. But more importantly, we try to take a look at each of our projects and determine if they’re providing an economic return above our cost of capital.

What’s unique about the biotech industry?
On average, projects destroy shareholder value. The cost to develop a drug, including failure rates, ranges from $1 billion to $1.7 billion. Most companies don’t earn the economic returns, when their products are commercialized, to cover the cost of development. A big part of that cost is the cost of failure.

We work in a business that has very binary-type outcomes. A drug either gets approved and makes it to market or it doesn’t. We can get all the way through the [final] phase of drug development, and it may or may not be approved.

Doesn’t getting at least that far create some value for the company?
No. It would be like developing a movie that was turned down at the box office.

With the stakes so high on a product’s success or failure, finance has to get very involved in each one, right?
That’s very accurate. We have to understand the economics of each of the projects. We have probably 30 or 40 projects going on in development at any one time.

The other element that’s unique in this business from a CFO perspective is that there are long economic tails on the decisions that you make. That’s just the nature of drug development being 10 or 15 years. The decision to advance a program into the next phase of development can cost $100 million to $200 million. And you don’t know if you’ve had a successful outcome for 3 to 5 years. It’s actually a remarkably fun business to be in from a financial perspective.

How so, in your case?
Like many finance people, I like doing hard analytics. But I think it’s also fun to be able to work with the economics of the business.

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