Navigating an Ever-Changing Landscape: the Role of a CFO in a Private Equity or Venture Capital Controlled Pharma Company

Navigating an Ever-Changing Landscape: the Role of a CFO in a Private Equity- or Venture Capital-Controlled Pharma Company

By Kurt R. Nielsen, Ph.D., President and CEO, Pharmaceutics International, Inc (Pii)

the Role of a CFO in a Private Equity

Executive Summary

It can be lonely at the top, and for a CFO of a pharma company that is controlled by a private equity firm, venture capital, or an angel investor, the role can be isolating and the ultimate test of their skills and leadership.

Success can be achieved when the CFO effectively gains and sustains economic clarity, engages the right people, owns key performance data, and takes an active role in leading the transformation. The CDMO can be a valuable asset to the small- to mid-size pharma CFO and their biggest advocate while they navigate an ever-changing landscape of drug development and commercialization.

Article:

You’ve likely heard the saying, “it’s lonely at the top.” Chief executives from presidents of the United States to owners of small start-ups often feel isolated in their roles despite being surrounded by others. And while it may not be trending on the TED Talk circuit, it is real and can have a negative impact on people and businesses.

Workplace isolation is not limited only to chief executives, anyone in a position that bears a significant amount of responsibility in an organization is subject to feeling lonely. Consider the role of chief financial officer: balancing the sometimes competing demands of the Board of Directors, other executives, their own staff, and investors or shareholders.

Now let’s add additional challenges. What if you are the CFO of a small-to-mid-size pharma company with little to no internal resources for development and manufacturing and you are controlled by PE or VC investors. Yes, challenging! That is why a recent McKinsey & Company study referred to this role as the crucible for CFOs.1

The McKinsey study identified four things that a CFO can do to successfully navigate the crucible: maintaining economic clarity, engaging the right people, owning the data, and leading the transformation. I’d like to explore ways in which the pharmaceutical company’s contract development and manufacturing organization (CDMO) partner can be the CFO’s best friend.

Economic Clarity & Transparency  

For pharma companies that are part of a PE or VC portfolio, the economics are complex and have three dimensions: its own pharma company, the PE or VC investment structure, and the CDMO. Having clarity and transparency across these dimensions can be a big plus for CFOs and helps everyone win. 

The CFO is primarily responsible for its own company’s profits and losses (P&L), cash flow, and balance sheet. For small pharma that likely means debt and expenses, and there is a good chance there are no drug therapies generating revenue. Instead, the company’s valuation is projected and based on the market-defined quality of its drug development pipeline.

Because the pharma company is controlled by PE, the valuation established and measured against investor objectives matters. Investor capital can come from a PE firm, VC, or an angel investor. Each has its own distinct goals and strategies, and they all provide working capital to the pharma company in exchange for hitting the PE’s or VC’s investment return goals. While a PE firm may have majority ownership and exercise significant authority in decision-making, the angel investor might not. It is incumbent on the CFO to have absolute clarity of the investors’ objectives and ensure that the pharma company’s cash flows and balance sheet are aligned to support them.  

The CDMO also has a P&L, cash flows, and balance sheet to manage. It is important for pharma CFOs to understand that not all CDMOs are alike, and each has its own business model and distinguishing value. For example, some CDMOs have invested heavily in proprietary technologies to advance drug development. These CDMOs may require the drug sponsor to have plans to commercialize the product and the CDMO may expect royalties or profit share when that happens in exchange for reduced development costs. Other CDMOs may customize the scope of work and align it with the objectives of the drug sponsor and their investors.

Each of these economic dimensions have different outcomes, but all three organizations must develop integrated operations and the pharma CFO must manage their P&L, cash flows, and balance sheet nested within each of the others.

People

While the economics described above can be daunting, the good news is that the CFO, despite feeling lonely at times, doesn’t have to do this in isolation.

As stated earlier, investment capital can come from PE firms, VC organizations and angel investors. Each can be organized differently, there is no standard template for any of them, and they can be challenging to navigate for a portfolio company CFO. For PE-owned companies, it can be common for the leadership structure to be in a state of transition. Nevertheless, investors will still be expecting results. This can be challenging for the pharma CFO as they assess roles of key stakeholders and determine their personal motivations and goals. Delivering customized financial information to these key stakeholders can sustain the organizational stability even when leadership roles and structure might be changing.

Pharmaceutical CDMOs also have its own nuanced organizational structures. Some CDMO strengths lie in its research and development services and others in its manufacturing, others are balanced or may specialize in specific drug delivery—oral dose, injectables, or topicals. They too have their own key stakeholders who can be valuable in helping the drug sponsor CFO understand development timelines, when projects will begin, manufacturing scale-up costs, or how risks materialize leading to foreseen and unforeseen issues that may cause delays. And these are things that have direct ties to investor expectations and outcomes. For example, perhaps a new investigational drug (IND) filing, or formulation development can be completed quickly, but manufacturing capacity will not be available for a year. Investor expectation may drive identifying another CDMO that has the production capacity sooner or to secure a supply chain, e.g. business continuity plan, to ensure uninterrupted supply of finished product to patients and caregivers.

Data

Investing in pharmaceutical development is considered risky because of the low chances of success in the early stages. However, drug development occurs over a set of universally standard phases, so it brings a structured data system with it, and the CFO needs to only translate it to financial terms.

Pharmaceutical therapies are developed over four distinct phases, all clearly defined with strict regulatory oversight and controls. Where it can get murky and confusing is in the detailed activities conducted in each phase, especially at the pre-clinical phase when the failure rate is high, and the research activities may be more challenging to understand for non-scientists or regulatory landscape changes are implemented by FDA or other government health authorities.   

Key subject matter experts in the CDMO can be a great resource for information that can help the drug sponsor CFO make decisions and keep PE or VC investors accurately informed. Before the project is accepted and begins, the CDMO will deliver a proposal and scope of work that contains a timeline, key milestones, and costs. This in a sense serves as a roadmap for the drug sponsor and can be a valuable resource for the CFO. CDMO scientists often have the experience and expertise to overcome development and manufacturing challenges and to know how long it takes. For example, key CDMO research and development supervisors can offer valuable insights based on their observations as to how the project is progressing, what challenges they may face and whether the timeline will be met.

And don’t forget that the CDMO also has a CFO who is responsible for managing their P&L, cash flows and balance sheet. This may be the rare occasion when the drug sponsor CFO has an empathetic partner facing the same issues of meeting the challenging demands coming from all directions. The two can find common ground as they translate scientific data to financial information. It can be a real bonus if the CDMO also has a relationship with its own PE or VC investors.

Leading Transformation

When PE establishes a controlling, or even influential, interest in a small to mid-size pharmaceutical company, change is underway. Perhaps the company was distressed and needed new leadership along with financial backing, or maybe it simply needed capital to achieve the next stage of growth and success. The PE or VC investment organization could be looking for commercial success or meet the next drug development milestone, increase the value of the pipeline, and seek a motivated buyer.

The relationship between investor -whether PE, VC or - angel and the pharma company is primarily about economics and the CFO is close to all the key performance indicators (KPIs).  The CFO can be an influential leader who communicates progress, successes, changes, and even setbacks when they occur. Communication from the executive level is important when companies undergo change. When PE takes control of a pharma company, the CFO, for the reasons covered in the earlier sections, is ideally suited, and has the information to lead the transformation.

References
1.   The PE Company CFO: essentials for success How CFOs in private equity companies can succeed | McKinsey  “Private equity portfolio companies are crucibles for CFOs. Here are four essential priorities to get started on the right foot.”

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ABOUT Pii

Pharmaceutics International, Inc. (Pii) is a US-based contract development and manufacturing organization (CDMO) located in Hunt Valley, Maryland. The experienced scientists, engineers, and staff at Pii pride themselves on adroitly employing a phase appropriate method of drug development for the prudent use of their client’s resources as they solve challenging problems. In addition to offering end-to-end development services, Pii manufactures a variety of dosage forms to include complex parenteral drugs and has a wealth of analytical testing capabilities. Its Hunt Valley campus has four aseptic suites with lyophilization capabilities. Our talented professionals stand ready to help!

ABOUT THE AUTHOR

Kurt Nielsen

Kurt Nielsen, Ph.D.
President and CEO

Kurt Nielsen joined Pii in 2019 as President and CEO.

Dr. Nielsen is a seasoned pharmaceutical executive with over 20 years of diverse experience, most recently as the President of Lupin Somerset, responsible for all its generic and branded products. Prior to Lupin, he held the post of Vice President, U.S. Development, Portfolio and Launch Management at Sandoz Inc., where he was accountable for the U.S. development of generic, OTC and specialty brand products. Dr. Nielsen has also held positions at Catalent, where he was Senior Vice President of R&D and Chief Technology Officer, and URL Pharma where he was the Executive Vice President, Pharmaceuticals.