Upscaling for growth in life sciences. Part 2

24 Dec 2019

Upscaling for growth in life sciences. Part 2

What are the roles of the CEO, the board and the CFO as life science companies scale up for growth? In this interview, we hear from two voices of experience.

Michaël Mellink, Senior Partner Life Sciences at Odgers Berndtson’s Amsterdam office, continues his conversation with Erik van den Berg, CEO AM-Pharma and co-founder of Lava Therapeutics and Hans Schikan, co-founder of Pharvaris in our Executive Search series ‘From Science to Entrepreneurship’. (You can read Part 1 here).

What role does risk play in the financing process?

Hans Schikan: On average, a financing process can easily take 6-9 months. You spend a period of time preparing the story well, presenting it to various potential investors, and then eventually involving a smaller group with extensive due diligence involved. At that stage of a company, certainly in a private company, many emails arrive every week with dozens of questions that investors ask about the company and product looking to get certainty that the investment will be the right one. That can take a few months and of course things can happen with your drug during that period.

So, in that respect, you will keep your potential new investors informed of any new developments in such a period of due diligence. This starts automatically at the end of a financing process. If you are going to close, you will also have to give a number of guarantees that you have not withheld anything. It's all properly checked. So there is certainly a risk if you are involved in a financing process for nine months. A lot can happen to the market, your product, your company. All these things will come up in a due diligence process.

Erik van den Berg: Developing a drug is high risk. That is included in the valuation of the company.

What is the CEO’s role?

HS: A CEO of a smaller company is mainly concerned with raising money. I remember that when I was CEO myself, I spent 40-50% of my time presenting at venture capital firms, at conferences, and even when we were already public, it certainly took up 40% of the time to keep the company constantly in sight of shareholders and potential new shareholders. If the company starts to get bigger, you naturally also involve investor relations and the CFO. It is not unusual for your chief medical officer to regularly stand in front of the camera or speak to investors.

EvdB: Fund raising is chefsache for private biotech companies. It is the primary responsibility of the CEO. At the same time the management team plays an important role as well. Investors want to make sure that the team is in place to execute on the plan. A CFO is a more important role for public biotech companies.

"In the end, it is a team effort, with the most important player being the CEO in combination with the CFO, to ensure that shareholders become and remain interested in the company"

A good CEO surrounds himself with the best people he/she can find. These are both the best employees who can carry out the work, and who can advise him/her so that the CEO can make a final decision. A good board is just as important. Ensure that you have people who have done it before, who come in with experience, knowledge and the network. That is why financing rounds often involve the acquisition of ‘smart money’. This means not only bringing in the dollars to go on for another year, but also that you bring in a network and contacts. That is basically the job of the CEO, to build the company with good people, both on the inside of the company and around a company. And that requires good executive search consultants, such as those from Odgers Berndtson.

Just how important is it to have the right people on board?

Michaël Mellink: In an IPO or trade sale process, this is very important. With a trade sale, you will be more involved in the business development process to see if there are organizations with which you can collaborate. For that, you need to attract the right people with the right network who can handle that and any negotiations well.

"For an IPO, it is important that you have good financial knowledge in-house, a strong CFO and a good mergers and acquisitions team"

Furthermore, you need a financial team that ensures that the interaction with investment bankers and the financial community as a whole goes well. There is often already a CEO and CSO present at that point. For the financial process to go smoothly, you really need a business finance person who can also look ahead strategically and get the most out of it. If you don’t have that, we are, of course, able to help.

What is the CFO’s role in this process?

MM: To achieve a successful IPO, you need a specific skill set. Those revolve around how to ensure the most optimal financing for the organization, now and in the medium term. The moment that this is secured, you have to take the stock market into account, you have to have the reporting in good order. The function has become more about business finance and control.

Everything must be in order and you have to ensure that all is compliant with international rules, through the necessary reporting.  This is a slightly different skill set than for a CFO in an operational sense. These must look at how an organization is organized, for example, how the IT function should develop. One skill-set does not necessarily exclude the other. Furthermore, these skills do not have to be in just one person.

"The person managing the IPO could be replaced after 2-3 years by a more operational CFO"

When an organization grows fast, there are so many other things involved, such as legal aspects and taxes in different countries if you’re operating internationally. What the duties and responsibilities of the CFO are or will be, depends on the size of the organization. We can assess if the CFO has these already, or has the potential to develop it.

To find out more, get in touch with our CFO Practice here.