Actelion On The Defensive: Corporate Governance White Paper

First, there were just words. Then there was a maiden dividend, the first of regular payouts to shareholders. Now there's a white paper on good corporate governance. Whether or not Elliott Advisors, a new-ish, almost-6% shareholder in Actelion, succeed in their (apparent) mission to force the sale of the company, they've certainly done a good job, it seems, reminding the company of its duties to its shareholders.

We're not taking sides here. Far from it. We dislike short-term, profit-seeking hedge funds just as much as the next (average) man (or woman) who isn't getting part of the spoils. (And Elliott, for the record, claims it's a long-term investor).

But Actelion's responses thus far to Elliott's Feb. 3 public missive, calling for CEO Jean-Paul Clozel and for Chairman Robert Cawthorn to step down from the board, and accusing the Swiss biotech of poor corporate governance, hint that perhaps management wasn't quite doing enough previously to explicitly reassure investors that they do, indeed, consider all the strategic options and judge each in terms of shareholder value, rather than against Clozel's personal, and well-documented, drive for long-term independence.

To the latest defense weapon, then: two dozen slides highlighting the company's super-high corporate governance standards, by Cawthorn.

"Eight out of nine of our board members are independent," shouts the slick slide-deck (Clozel is the odd-man out, which is why Elliott wants him off). We meet regularly and consider input and feedback from shareholders, it says. (We're paraphrasing a little.)

But not content with emphasizing its own (high) standards, Actelion's board is arguing that it's corporate governance is BETTER than your average U.S. standards. Under Swiss law, the full board is called to make more major strategy decisions than is the case for U.S. companies; Swiss companies need shareholder approval for many more actions than their U.S. counterparts, the deck claims, including dividends and issuing new equity.

If that isn't enough, the white paper goes on to essentially remind Elliott and their ilk of the power that they do have, as significant shareholders, over the composition of the board. Firstly, investors owning at least 1.5% can submit proposals for adoption at the AGM. Second, Swiss law allows a majority of voting shareholders to force directors out without cause, giving them "a powerful tool to assure their ongoing satisfaction with the Board." (In the U.S. removing directors requires a supermajority vote in most cases, says the paper).

It seems the corporate governance system is working rather well, then; no doubt Elliott will continue to leverage all the rights granted to it as a large shareholder. The company's May 5 AGM should be an interesting event.

Meantime, Actelion's board will be hoping that enough other investors join Rudolf Maag's camp: the 4.2% shareholder on March 7 became the first to speak out in support of the company's standalone strategy.

image by flickrer Ran Yaniv Hartstein under creative commons

FDA To Increase Criminal Prosecutions Of Execs

The pharmaceutical industry spends plenty on lawyers for all sorts of things - patent challenges, product-liability litigation, employment matters. The list is long, but it may be time to add another reason - criminal defense of executives.

Sure, there have been some big fines paid of late for such things as off-label promotions, but the FDA is now saying it will increase prosecutions of executives as part of an effort to bolster its Office of Criminal Investigations. It's not the first time FDA has made noises intended to get drug execs thinking about doing hard time.

So why the renewed vigor now? The agency is responding to a report issued today by the Government Accountability Office, which found there is little oversight of the OCI. This is the office that's responsible for probing counterfeit drugs and other criminal activities, as well as misconduct by FDA employees. But oversight is so lax that the GAO concluded the FDA "has relied largely on the OCI director to determine which aspects of OCI's operations and investigations are made known to FDA's top management." So who's in charge? Apparently not the FDA commissioner.

For instance, the OCI has six field offices across the U.S., and each office is supposed to undergo evaluation at least every three years. But the GAO found that only seven evaluations, or roughly 30 percent of those required, took place between 1996 and last August. One office has not been reviewed in more than a decade, according to the GAO report, which was undertaken at the request of Charles Grassley, the Iowa Republican on the US Senate Finance Committee who has regularly investigated drug safety issues.

The FDA is sent a more detailed response today to Grassley (see this), although the agency already agreed with the GAO findings (there is a letter at the end of the GAO report that you can read). For those looking to connect dots, the recent Senate Finance report on Avandia made a point of noting that several big drugmakers have paid huge fines for criminal violations, such as off-label promotion, and that more diligent oversight is needed to ensure consumer safety. In other words, Grassley was leaning on the FDA to get tough. But will anyone get convicted?

The FDA response (read here) says the agency will "increase the appropriate use of misdemeanor prosecutions, which allows responsible corporate officials to be held accountable and is a valuable enforcement tool." So maybe it is time to find a full-service law firm.

photo from flickr creative commons sbaker

Limiting Stock For Docs On Boards Could Crimp Pharma

Earlier this month, the owner of two prominent teaching hospitals in Boston decided to impose new rules concerning outside compensation and other activities for its most senior officials, who may also sit on the boards of drug makers and biotechs. The initiative comes amid controversy over the extent to which the pharmaceutical industry may influence medical treatment and prescribing habits, an issue that has prompted congressional inquiries into conflicts of interest and has ensnared several drug makers.

And so Partners HealthCare, which owns Massachusetts General Hospital and Brigham and Women’s Hospital, decided not to allow its top people to accept gifts, participate in speaker bureaus or engage in ghostwriting. There are some other restrictions involving institutional purchasing and institutional royalties. But one stipulation is very interesting – senior officials can serve on a board, but are not permitted to receive more than $5,000 a day for board-related work, or accept any stock. And this last prohibition may make life difficult for drug makers.

Why? Corporate governance experts have been arguing for years that board members should hold stock. The reason is simple – in this way, a board member is more likely to feel the pain or gain as much as other shareholders. You know, their interests will be aligned with investors. Under Partners’ rules, a doctor would have to purchase shares on the open market, rather than take stock as compensation, in order to become aligned with shareholders. As a result, drug makers who solicit doctors from these two widely respected teaching hospitals may find themselves running afoul of shareholder activists.

“A director who doesn’t own stock has no business being on a board,” says Charles Elson, who chairs the John Weinberg Center for Corporate Governance at the University of Delaware. “They’re supposed to take cash compensation to buy the stock. And they’re supposed to represent shareholders, so no longer being able to accept stock would be problematic. I think it’s ridiculous. If they feel there’s a conflict, they shouldn’t be on a board. I think they have to choose – either be a director or work for the hospital.”

One doctor – Dennis Ausiello, chief of medicine at MassGen and Partners’ chief scientific officer - apparently made his choice. He told The New York Times that he’ll continue to serve on Pfizer’s board, even if it means forsaking compensation that amounted to $220,000 last year. “I’m very proud of my board work,” he told the paper. “I’m not there to make money. I certainly think I should be compensated fairly and symmetrically with my fellow board members, but if my institution rules otherwise, as they have, I will continue to serve on the board.”

Of course, he can continue to hold previously purchased Pfizer stock, since the new Partners rules don’t require him to sell existing holdings. And Ausiello may have the means to purchase shares on the open market. Presumably, other doctors could afford to do so as well. But it’s not hard to imagine that some doctors may not relish the prospect of being appointed to a board, but receiving limited compensation and being forced to use their own money to purchase stock.

This may sound like a trifling matter. After all, just two hospitals are affected by this policy. But it could become a trend. That’s because the Association of American Medical Colleges has recommended tighter restrictions on potential conflicts of interest. Ann Bonham, the AAMC’s chief scientific officer, tells us that limits on stock holdings will likely be decided on a case-by-case basis by each institution. “Some institutions could decide to limit the salary cap or stock options or something in between,” she tells us. “Some are considering this.”

And if more academic medical centers do institute such rules, this could become a dilemma for drug makers and biotechs, who actively court physicians to join their boards. After all, the pharmaceutical industry wants and needs physicians who have certain expertise and a unique perspective on research and patient treatment. But if it becomes harder to attract physicians, the industry will lose potentially valuable input.

image from flickr user charles fred used under a creative commons license.

Genzyme: Contents Under Pressure

Friday's announcement that bits of rubber and other detritus were found in vials of five different drugs manufactured at Genzyme's beleaguered Allston Landing plant was worthy of the satirical publication "The Onion"--except that it was true.

The picture grew murkier over the weekend, with the arrival of another Form 483 missive from FDA about ongoing manufacturing issues and a complete response for Lumizyme, Genzyme's enzyme replacement therapy for Pompe disease has been subject of more regulatory twists and turns than the plot of a Dan Brown novel. (Note this is the second time the Big Biotech has been dinged by regulators in the span of months. In September, FDA also shot down plans to expand the indicated use of pediatric leukemia drug Clolar to adults.)

The sad thing is the situation is entirely of Genzyme's own making. Don't think so? Let's review.

The origin of the problem goes back three years, to the original approval of Myozyme, basically the same drug as Lumizyme only manufactured on a much smaller scale, at a 160-liter scale facility in Framingham. Genzyme underestimated the demand for the drug, and plans to shore up capacity with a 4000-liter facility in Belgium were put in place. Only as a stop gap, the company also decided to devote 1/6th of its manufacturing capacity at Allston to the making of the drug.

And that decision has proved problematic. The stress of running an aging plant full tilt meant there was no time for necessary facility upgrades that might threaten the inventory of drugs manufactured at Allston, among them Cerezyme for Gaucher disease and Fabrazyme for Fabry disease. Genzyme CEO Henri Termeer admitted as much in the Nov. 16 investor call, noting "the introduction of the production of Myozyme in Allston was a very significant factor in the complications we have experienced there."

Too bad that realization didn't happen one year ago. That's when regulators started sending warning letters outlining concerns related to what sound like bread-and-butter manufacturing issues: microbial monitoring, equipment maintenance, and process controls.

What's most amazing is that problems are ongoing. Recall that six-week interlude this summer when the firm took the entire plant offline to sterilize it after discovering yet another unrelated problem--several bioreactors contaminated with a non-lethal to humans but problematic Vesivirus.

On the company's Nov. 16 call to investors, management confirmed that the latest 483 letter relates not to a new problem created by Genzyme's decontamination efforts but arising because of "an older piece of equipment". As Genzyme's EVP of Therapeutics, Biosurgery, and Corporate Operations said during a Q&A session with analysts, "There was a number of issues there that they [regulators] highlighted and many of which we were very aware of and working to address."

Management's solution? Take the plant off line again for a few weeks to, as Meeker puts it, "allow us to move more quickly to address those issues." Does everyone feel better now?

In some strange way, the very minor nature of these gaffes is the most damning element of the story. It throws management's judgment into question and again casts doubt on the ability of the current team to resolve a situation that should never have escalated to this level. True, the most recent news has changed little for the company near-term. The complete response on Lumizyme was widely expected by analysts and, amazingly, the particulate contamination didn't provoke a demand from regulators that Genzyme recall the product.

But regulators' hands were likely tied, in part because of the life-saving nature of Genzyme's medicines and the current lack of approved therapies that could substitute for Cerezyme and Fabrazyme. By the middle of next year that won't be the case. Shire is clearly gunning to steal market share from Fabrazyme with its Replagel product, which has been approved in Europe since 2001. In October, Shire announced plans to submit a BLA for its medicine in the US before year's end.

And the potential competitive threat to Cerezyme is even greater. The FDA has already authorized the use of competing products from both Shire and Protalix despite lack of formal regulatory approval. To date, the headaches required to negotiate the administrative hurdles of the emergency access programs have limited the erosion to Cerezyme's market. But note that Shire filed its NDA for its Vela product in September; if the agency grants the drug a priority review, it could be on the market by March 2010.

That's only four months from now. Can Genzyme get its act together in the meantime? The firm is increasingly vulnerable; it can't afford another announcement like Friday's. The summer shut down already created an opening for competing products to cannibalize on one of Genzyme's main money makers. Another "Dear Health Care Practitioner" or Form 483 letter and the current rumblings of dissent will move from the fringe as patients and investors rightly demand to know: who's minding the store, and why didn't Genzyme execs ensure supply of its most important drug by building up reserves when they had a chance?

Moreover, the company's share price is under pressure, hovering perilously close to its 52-week low and Genzyme has cut its earnings forecast four times this year alone. According to Adam Feuerstein over at The Street.com, adjusted earnings are now expected to fall 43%, from $4.01 a share in 2008 to $2.27 a share this year.

Much as we were ridiculed for discussing a potential sale of the company three months ago, its impossible to deny that Big Pharma's love affair with hyper-specialist products continues unabated. Any doubts, look at the recent deal between GlaxoSmithKline and Prosensa in Duchenne muscular dystrophy.

Oh, and did we mention that Carl Icahn, who has a reputation for homing in on troubled biotechs and turning them around in time to sell them, disclosed a stake in the Big Biotech on Monday night? Coincidence, you say? (We have 1.45 million reasons to say that's not likely.)

Would GSK or that other convert to ultra-niche, Novartis, pony up the money to buy Genzyme before the biotech cleans its own house? It's unclear. But one thing seems obvious: if Termeer can't clean up the mess that's been brewing in Allston, someone else--either Icahn or another shareholder activist--will.

Image courtesy of flickrer massdistraction via creative commons license.

Hard Time For Biopharma CEOs (Part 2)

The indictment of former Stryker Biotech President Mark Philip should hammer home a message that the Food & Drug Administration and other federal health care enforcement authorities have been delivering for at least two years: senior management at FDA regulated companies can and will be held criminally liable for marketing practices that run afoul of regulators.

Before today, that message has been (mostly) words. Prosecutions of executives have been rare, and when they do occur they tend to focus on individual sales reps and their direct managers, rather than reaching into the C-suite.

There have been exceptions. Former Intermune CEO Scott Harkonen is facing jail time after being convicted of wire fraud in a case involving claims that the company inappropriately promoted Actimmune via a press release. For Big Pharma CEOs, though, it is easy enough to dismiss that precedent, since Harkonen was personally involved in the activities at issue in the case—a small biotech CEO necessarily leaves more fingerprints, as it were.

Then there is the case of several top Purdue executives, who paid criminal fines as part of a settlement of an investigation into the promotion Oxycontin. That prosecution involved the application of the so-called Park Doctrine, named for a Supreme Court ruling which allows the government to hold top executives accountable for violations of the Food Drug & Cosmetic Act even if they were personally unaware of the violation. That is, the law makes it a crime to introduce misbranded or tainted products into commerce—and a CEO can be guilty of that crime even if he or she had no knowledge that someone somewhere in the company was doing that. (We discussed the implications of that prosecution in The RPM Report; click here.)

Still, the Purdue case was a bit of an outlier, a prosecution motivated by concerns about abuse of Oxycontin in some rural communities, rather than by the more common themes of recent industry marketing cases. It was a classic war-on-drugs case—not part of the war on the drug industry and its marketing practices.

Much more common has been what happened in the recent Pfizer settlement. The case included a record-setting fine ($2.3 billion) and lots of tough talk about holding individuals responsible. But the prosecution in that case focused on only one sales manager, who was convicted for her actions in promoting Bextra. For Pfizer’s senior management, the settlement means another corporate integrity agreement—but not direct accountability in the form of criminal charges.

At least so far.

But one wonders how long that pattern will continue. It is worth noting that the Pfizer settlement was negotiated before Inauguration Day—that is, before the new Administration had a chance to decide what if any changes it wants to make in approaching health care fraud prosecutions.

The Stryker case does not by itself answer that question. This investigation also began in the prior administration, and the charges (against the company and several sales executives in addition to Philip) focus on explicit acts, not the broader notion of executive liability inherent in Park. Specific counts include wire fraud and conspiracy, as well as overt acts of introducing misbranded or tainted products to the market—all based on what the government claims was a deliberate campaign to market bone morphogenic protein beyond the limits allowed by its humanitarian device exemption approval by FDA.

We have no idea whether those allegations are true, of course. But we also know this: Philip is no longer the President of Stryker Biotech, and he is no longer free to travel.

Philip “self-surrendered yesterday and appeared in court,” the US Attorney’s Office told us. “He was released on standard conditions and surrendered his British passport. His arraignment is set for tomorrow (Friday) at 2:00 p.m. in front of Chief Magistrate Judge Judith Dein.”

We’re betting Philip won’t be the only top executive to find himself standing before a judge as the Justice Department works though its backlog of marketing cases.

Carl Icahn: Biotech Raider, Savior of North Dakota

In case you missed it, Carl Icahn’s campaign to make boards of directors more accountable to shareholders—including, one assumes, the boards of Amylin, Biogen Idec and other biopharma businesses he would like to see move in different directions—now includes a plea for action from Congress.

In an editorial published in the Washington Post February 16, Icahn recaps his frustration with what he sees as a culture of insiderism in corporate boards and the challenges dissident shareholder groups face in making changes to the lineup.

The problem, Icahn argues, can be fixed simply, by allowing shareholders to vote on where their company should be incorporated—thereby allowing them to shop for the most shareholder friendly state laws.

"Corporate law is largely the province of states, which to varying degrees protect flawed governance models," Icahn wrote. "What is needed is a superceding federal law that gives shareholders the right to vote by simple majority to move their company's legal incorporation to states that uphold greater shareholder rights."

And Icahn has found his favorite jurisdiction, apparently: "North Dakota...is recognized as having the most shareholder-friendly corporate laws in the nation, thanks to recent legislative action. By incorporating in the state and adopting its provisions, a public company would in one easy step improve rights for its shareholders and eliminate the often too-cozy relations between managements and boards."

Ah for the gentle kiss of the Great Plains zephyrs in February!

We don’t know what the prospects are for action on Icahn's proposal, though presumably North Dakota’s congressional delegation is on board with the plan.

In the meantime, maybe some of Icahn’s targets can take the opportunity to steal a march on him? Amylin is deep in cost-cutting mode already, but has the company considered swapping its San Diego corporate offices for some new property out near Bismarck? Commercial real estate is much cheaper...

Hard Time for Biopharma CEOs

Yes, times are hard for many biopharma executives. But we're referring to hard time in the other sense, as in time behind bars in a federal penitentiary.

If history is any guide, top executives across the industry should prepare for a wave of high profile enforcement activity from the Food & Drug Administration and the Department of Justice--cases where a civil settlement and fines may no longer be enough to satisfy prosecutors. It sure looks like the government wants to start putting people in jail.

The RPM Report has just published an article highlighting recent, not-so-friendly reminders from top FDA officials that they have immense power to pursue criminal cases against corporate executives--starting with the CEO--even if those executives did not participate in, or even know about, criminal conduct that occured on their watch.

Two officials quoted in press releases this week underscore that point. Here is the first:

“It is unacceptable that Americans have died and been seriously injured by what appears to be deliberate tampering. Whether this contaminant was introduced intentionally or by accident, the full force of the law must be brought to bear to bring those responsible to justice.”

That is Senator Edward Kennedy responding to FDA's announcement that it has identified the contaminant that apparently caused severe adverse reactions to Baxter's heparin products in the US. FDA still does not know if the contamination was accidental or deliberate, but note Kennedy's response: Accidental or not, someone must be held accountable. He underscored that point in a separate letter to FDA Commissioner Andrew von Eschenbach, asking for a criminal investigation.

Here is the second quote:

"Pharmaceutical companies do not run themselves, and those who engage in criminal conduct will be held personally accountable."

That is FDA Special Agent Kim Rice, quoted in a Department of Justice press release announce the indictment of Scott Harkonen, the former CEO of Intermune Inc., on charges of wire fraud and violations of the FD&C Act. The indictment follows from an off-label promotion and False Claims Act investigation settled by Intermune in 2006.

Intermune settled the investigation by agreeing to strict new codes of conduct and paying a fine of $37 million. That is a relatively large sum for a small company, but also is the type of fine that upsets some members of Congress who believe pharmaceutical companies are not been punished aggressively enough. Harkonen, on the other hand, faces a theoretical maximum penalty of 20 years in prison.

The company points out that the indictment of Harkonen, who left Intermune in 2003, does not in any way affect the settlement or Intermune's current business prospects. And of course we have no idea whether any of the allegations against Harkonen are merited.

What we do know is this: if the tough talk from FDA and Congress is to be believed, Harkonen will not be the only pharmaceutical executive brought up on charges.

CFOs: Agents for Change?

I'm not convinced. Last year saw an unprecedented five new CFOs among the top drug firms-- at Pfizer (Frank D'Amelio), AstraZeneca (Simon Lowth), Wyeth (Greg Norden), Amgen (Robert Bradway) and Merck (Peter Kellogg). This re-shuffle led to the question, posed during a panel at Windhover's Pharmaceutical Strategic Outlook meeting in New York City today, as to whether these money-men were going to be the drivers of (let's face it, necessary) change at Big Pharma.

Peter Kellogg joined Merck in June 2007 following stints in Big Biotech -- at Biogen Idec--and in the consumer industry, at Pepsi, before that. What has he brought across from those sectors? Well, the biotech experience allowed him, he said, to slip easily into the mega-dealmaking/collaborative culture that Merck has been touting for some years now, and the Pepsi learnings were useful in re-engineering cost structures (common in all Big Pharma these days).

But Kellogg's most radical predictions were more collaborations (especially risk- and cost-sharing ones) and more shrinking SG&A costs. Will Merck shrink so much as to become virtual? "No, that would be too extreme," he said. But the share of overall R&D spend on internal infrastructure will decline in favor of external collaborations, and even then total spend will grow only in the mid-single digits. "We will bring in more from the outside, and we'll be smarter about where we run our trials, and where to find patients."

The other CFO-panelist, Genzyme's Mike Wyzga, claims this Big Biotech's already applying lessons from his previous life in the software industry, where winning companies like Microsoft looked beyond the ten year horizon to figure out how to grow. "From mid-07 we stopped giving quarterly guidance, and instead we predicted 20% in average compound earnings growth out to 2011," Wyzga explained. That, he argues, shifted the company's outlook – and to some extent, the outlook of its investors -- beyond the next decade, as Microsoft did. "That's how you build continued sustainable growth."

Genzyme can already reasonably lay claim to some fairly radical moves, not least those creative financial engineering experiments that stretch back to the company’s earliest years. When Wyzga arrived a decade ago, Genzyme had four separately-listed tracking stocks, seven joint ventures, and 50% of a joint venture with spin-off Genzyme Transgenics (now GTC Biotherapeutics.) So for Genzyme, adapting to the future means maintaining that creativity and flexibility, while at the same time growing larger—closer in size to a mid-sized or even large pharma. There'll be no return to tracking stocks, Wyzga predicted. "Instead, we're creative in how we put deals together."

Evolutionary change, then, not revolutionary; and this driven as much by the dealmaking teams, it seems, as the bean-counters. Indeed, the boldest signs of Big Pharma change in today's PSO sessions were probably from Jim Cornelius, Bristol's CEO. In describing this once-big-but-now-midsized pharma's planned metamorphosis into a next-generation biopharma firm, he talked openly about shrinkage--the 50% cut in sales force that's already happened since 2000, and the further 15% planned reductions over the next three years. "Our total sales force for our recently-launched breast cancer drug Ixempra is 125," he stated. Compare that with the 1500-strong Plavix sales force--which, incidentally, may be out of a job by the end of 2011 when generics hit.

Perhaps this in itself--pharma talking about down-sizing rather than merger-mediated upsizing--is transformation enough.

Carl Icahn vs. Evil Corporate Governance

Don’t get us wrong. We think corporate governance, as a general, rule, stinks. We never understood how Pfizer could have gotten itself into the position of paying Hank McKinnell $180 million in retirement benefits – the man who presided over the deletion of tens of billions in the company’s market value.

Or, in an act of proportionately greater idiocy, how the board of Cell Therapeutics, that reliably subpar performer, could in 2006 pay its CEO James Bianco some $1.1 million in cash (and a ton of underperforming stock) along with, among other perks, $220,000 in the use of chartered aircraft.

Chancellor, Sith School of Corporate Governance

The charters must have been some compensation for the loss of Air Cell Therapeutics (the corporate jet) – which the board, in a short-lived fit of financial responsibility – sold at the end of 2005.

So philosophically we’re on board with Carl Icahn’s idea of taking lax corporate governance to task in his new blog (http://icahnreport.com/), still post-less as of this morning. "I may do something to finally focus on more than making money," Icahn told Dow Jones.

We’re sure Carl gives generously to all sorts of charitable organizations (there are, after all, the Carl C. Icahn Foundation and The Icahn Charitable Foundation). But forgive us for a certain skepticism re. icahnreport. Oh, we’re sure those widows and orphans will benefit as board members get religion and really start corporately governing. And we’re also sure that when they do, our economy will just pull itself up by its bootstraps instead of whining for more bailouts.

But we also figure that the more Carl can whip up support for board-bashing, the more likely he’ll be to get additional board seats at Biogen Idec. Then, with that malign group finally paying attention to the shareholders, they'll finally force the deal to allow Carl to off-load his Biogen shares.

He bought them, remember, figuring that Big Pharmas had such poor corporate governance that they'd be begging like dogs at the Thanksgiving table to overpay for an acquisition. (For our take on that ongoing affair, see here and here).

They didn’t? Hmm. Maybe there is some real corporate governance out there after all.