December 1, 2015 (Vol. 35, No. 21)

Founding CEOs Continue to Meet Resistance from Investors and Directors

Aladar A. Szalay, Ph.D., envisioned bringing a cancer treatment to market after leading a Loma Linda University research team in discovering that tumors in mice split up and emitted more light when injected with light-emitting viruses. Dr. Szalay, his boss the dean of the university’s School of Medicine, and a friend agreed to commercialize the potential treatment by establishing Genelux in 2001.

In the years that followed, disputes among the founders over the issuing of stock and Dr. Szalay’s management culminated last year in a board of directors vote to remove Dr. Szalay as Genelux’ chairman, CEO, president, and CSO, and invalidate half of his founder’s shares—depriving him of his ability to elect two people to the board.

But on October 22, the Delaware Court of Chancery sided against the company and with Dr. Szalay, finding that his shares were validly issued—the company had argued otherwise—and that two board members he handpicked were validly elected. Lawyers for Genelux have said publicly the company is considering an appeal.

Robert Brownlie, managing partner of the San Diego office of the law firm DLA Piper, which represented Dr. Szalay and the two allied board members, told GEN what happened at Genelux was atypical of cases where founding CEOs face removal from their companies.

“There were a number of investors who probably weren’t best-suited for a startup life science company who came in very early to the company, and didn’t fully appreciate how long it takes to get from the lab with an idea through clinical trials to commercialization. And those folks lost patience,” Brownlie said.

More commonly, he said, a startup hungry for cash brings in new investors, diluting the shares held by founders.

“At some point, a founder realizes that he or she is about to lose control of their company to the investors. At that point, behaviors that are not conducive to the good corporate management of a business start to occur,” Brownlie added.

It’s good to be the king—unless you’re the founding CEO of a recently launched biopharma. If you are perceived as being slow in guiding your company beyond startup status, impatient investors may agitate for returns, and directors may insist on replacing you with a leader who has more business experience. [iStock/nullplus]

Seven Founding CEOs Challenged

Genelux is one of at least seven biopharmas over the past 14 months where founding CEOs have faced efforts to remove them from office, breathing new life into Shakespeare’s observation from King Henry IV, Part II: “Uneasy lies the head that wears a crown.”

It is hard to pinpoint a most common trigger for ouster efforts directed against founding CEOs. Ryan Abbott, associate professor of law at Southwestern Law School in Los Angeles, told GEN several factors explain why companies part ways with their founders.

“Boards want change at the top when they want someone who is not from a startup culture, or when there’s a merger and acquisition, or just when they want a CEO because they don’t like the performance of an existing one,” Abbott said.

J. Leslie Glick, Ph.D., an independent corporate management advisor, told GEN founders can face pressure as new investors come into a company that goes public, and then see the value of their shares decline for whatever reason. Years ago, he noted, companies went public with fewer rounds of investment capital, at significantly lower valuations than what those companies raised when they later went public.

“Today you have more rounds of private capital coming in, and the last couple of rounds aren’t going to be that much different than what the price of the public offering is. So they want to get some fast return, and it’s not as easy,” Dr. Glick said.

Yet, as he added, founding CEOs have faced pressure from investors and directors throughout the development of biotech and its evolution into biopharma, especially when companies are perceived as underperforming.

Back in 1984, Biogen co-founder Walter Gilbert, Ph.D., resigned as chairman and CEO, succeeded by the fledgling company’s COO Mark Skaletsky, whose business background won over a board scrambling to stem losses related to drug development. Skaletsky took on the additional job of serving as acting chief executive until James Vincent, a former executive vp and COO at Abbott Labs, was named CEO. Dr. Gilbert, by contrast, was a researcher, his stellar career capped by co-winning the 1980 Nobel Prize in Chemistry for discoveries toward determining base sequences in nucleic acids.

Can Go Home Again

And as Dr. Glick also noted, conflicts between founding CEOs and their investors and directors extend well beyond biopharma. Founders pushed out of the corner office can return given the right circumstances, as illustrated by Steve Jobs.

One founder CEO lost his job in December 2014, only to get it back in May. At Acucela, a Seattle biotech that develops therapies for eye diseases, Ryu Kubota, M.D., Ph.D., was reinstated as chairman, president, and CEO after a court overturned company objections and ordered the special shareholders’ meeting he sought. There, a shareholder majority consisting of Dr. Kubota and SBI Holdings—whose shares he controls—voted out four of Acucela’s five board members, including the CEO named in December, Brian O’Callaghan, and voted in four new board members.

Not clear is how much the effort to replace Dr. Kubota reflected factors other than those stated publicly, and how the company will address the issues it cited earlier this year. Acucela did not respond to GEN seeking answers to these questions from Dr. Kubota.

At Phosphagenics, founder and company Director Harry Rosen stepped in as interim CEO after predecessor Esra Ogru was sentenced to six years in prison after pleading guilty to seven charges of obtaining financial advantage by deception from the company and a subsidiary following an investigation by the Australian Securities & Investments Commission. Rosen stepped down as interim CEO in January 2015 following the appointment of Ross Murdoch as CEO and subsequently stepped down from the Board of Directors in July.

Founding CEOs were successfully removed at four other companies—Arena Pharmaceuticals, ARIAD Pharmaceuticals, Nabsys, and Retrophin.

Arena is the most recent biopharma to part ways with a founder CEO. On October 5, the company disclosed that Jack Lief, a co-founder who had been president and CEO since 1997, retired from the company and its board “at the request of the Board of Directors.” The company named an interim CEO, Harry F. Hixson, Jr., Ph.D., who is also interim principal financial officer following the departure in June of CFO Robert E. Hoffman.

Arena isn’t saying why its board made the request; the company didn’t reply to a GEN query posing the question. More than likely, the board was unhappy with Lief’s performance given disappointing sales for its sole marketed product, obesity drug BELVIQ. On October 27 the company said it will cut about 80 jobs, one-third of its U.S. workforce, by year’s end.

“Pretty Lucrative”

In a regulatory filing, Arena revealed just what it took to usher Lief into retirement: A cash severance payment of approximately $1.8 million, continuation of health insurance coverage for 18 months, acceleration of his stock options and restricted stock units (except performance-based restricted stock units) that would otherwise have vested 18 months after his resignation; and continued stock option exercisability for 18 months or the end of his original post-termination exercise period, whichever is later.

“Companies usually offer founders pretty lucrative financial deals to stay on as at least consultants, something they do to avoid the challenges associated with leadership changes,” Abbott said. “Founders often find it lucrative enough to kind-of play ball and step out, and sometimes potentially even see the value of bringing in a more experienced or different CEO themselves.”

ARIAD CEO Harvey J. Berger, M.D., who founded the cancer drug developer in 1991, will retire by year’s end, or sooner if a new CEO is named before then. The retirement, announced April 29, came some two months after activist investor Alex Denner’s Sarissa Capital launched a proxy battle by nominating two candidates to ARIAD’s board.

Sarissa also requested that the board “undertake measures to effect and facilitate the imminent retirement” of Dr. Berger, citing his retention as CEO in 2013, the year the company was forced to withdraw its leukemia treatment Iclusig® (ponatinib) from the U.S. market, leading to the layoff of 160 employees; Iclusig returned in 2014 with a boxed warning and a narrower patient indication.

Retrophin’s board ousted Martin Shkreli a year ago this month, then sued him in August for $65 million-plus. The board accused Shkreli of breaching his duty of loyalty to the company, breaching his fiduciary duty, and unjust enrichment. Shkreli responded by telling Forbes the suit was “preposterous,” adding: “the company draws a lot of speculative conclusions and half-truths.” A month later, Shkreli became a household name when his Turing Pharmaceuticals, sparked a furor with a 5,000% price hike for toxoplasmosis drug Daraprim.

Sometimes, removing a founder with new management does not produce the turnaround envisioned by a board. Nabsys, developer of a sequencing platform broadly applicable to DNA analysis, shut the doors of its Providence, RI, offices in September, according to numerous local news reports.

While Nabsys never said publicly it had ended operations, its president and CEO Stephen J. (Steve) Lombardi, listed his tenure in the position as ending in September 2015 on his LinkedIn page—a year after he replaced CEO and co-founder Barrett W. Bready, M.D.

[This article was corrected from an earlier version that omitted Harry Rosen as interim CEO of Phosphagenics and misidentified Ross Murdoch, who is the company’s current CEO and managing director].

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