June 30, 2010 / 11:14 PM / 9 years ago

Analysis: Biogen bets scientist has right formula for growth

BOSTON (Reuters) - In picking George Scangos of Exelixis Inc (EXEL.O) as its new chief executive, Biogen Idec Inc (BIIB.O) is betting that scientific knowledge will trump commercial experience in helping to strengthen its portfolio of experimental drugs and revive flagging growth.

Scangos, who since 1996 has been president and chief executive officer of Exelixis, a small drug discovery company, will be the first scientist chief executive at Biogen in 25 years.

He replaces Jim Mullen, who recently retired under pressure from billionaire investor Carl Icahn.

Scangos is a scientist who holds a degree in biology from Cornell University and a doctorate in microbiology from the University of Massachusetts, making him a rare bird in an industry where CEOs are increasingly being picked from the ranks of lawyers and businessmen.

“I like the idea of having a person at the top who at their roots has a deep appreciation and feel for the science,” said Gary Pisano, a Harvard Business School professor and biotechnology industry expert who has consulted for Biogen in the past. “You don’t necessarily want the CEO making research policy, but I think having someone at the top who understands the tension that exists between business and science is a good thing.”

By any standard, though, the choice of Scangos is a huge leap. He goes from managing a company with no commercial products and a market value of some $417 million, to managing one of the biggest biotechs in the world, with a market value of more than $13 billion.

Some analysts are concerned Scangos may not have the commercial experience needed to take on the challenges facing Biogen, which sells the multiple sclerosis drugs Avonex and Tysabri.

“We believe George Scangos has ample experience effectively managing a research organization and in the area of business development,” said Geoffrey Meacham, an analyst at J.P. Morgan, in a research note. “That said, Biogen is a commercial stage company and George’s limited experience in this area does pose some challenges.”

Sales of Tysabri, which Biogen makes with Elan Corp Plc ELN.I ELN.N, have been hurt by safety concerns, and a new oral product made by Swiss drugmaker Novartis AG NOVN.VX, which is expected to be approved in the United States at the end of September, could erode the drug’s market share even further.

Over the past five years the company’s shares have risen about 41 percent, compared with a gain of about 87 percent in the NYSE Arca Biotech Index .BTK. And after three years of pressure, Icahn now has three representatives on Biogen’s board, who could potentially push the company to sell itself.

Tackling Biogen’s problems will require a good deal of skill, energy and passion, said Harvard’s Pisano.

“When you’ve got an organization that is languishing and you’re trying to turn it around, you really have to use shock treatment,” he said. “Nibbling at the edge here, incremental change there, isn’t going to work.”

In Pisano’s view, that means Biogen must refocus its energies on research and development.

“Reinvigorating a pipeline is something that takes years,” he said. “In Biogen’s situation, the new CEO probably should think of the company as a pretty well-funded start-up.”

SCIENTIFIC HISTORY

Biogen was formed in 1978 by some of the best scientific minds of the day, including Phillip Sharp, a molecular biologist, and Walter Gilbert. Both Sharp and Gilbert were Nobel Prize winners — Gilbert in chemistry, Sharp in medicine.

But neither Gilbert nor any of the other scientists that helped establish Biogen were able to run the business efficiently. It took Jim Vincent, a graduate from Wharton’s School of Business, to rescue Biogen from potential financial ruin.

Vincent, who took over as CEO in 1985, chopped the number of staffers and scientific programs and replaced senior management. And he trained the company’s resources on developing Avonex, the multiple sclerosis drug that catapulted Biogen into the big leagues. Avonex was approved in 1996 and last year generated revenue of $2.3 billion.

“Vincent brought focus to Biogen, which is what it needed at the time,” said Frederick Frank, vice chairman of Peter J. Solomon Co and one of the industry’s leading investment bankers. “But this is an industry where the future is dependent on first-in-class science, and when Vincent left Biogen they should have brought in a scientist.”

Instead, in 2000, the company handed the reins to Mullen, who joined the company in 1989 as director of facilities and engineering.

Mullen, from the get-go, was more buttoned-down and conservative than many of his biotech peers. Three years into his tenure he orchestrated the company’s merger with San Diego-based Idec Pharmaceuticals, maker of the blockbuster cancer drug Rituxan.

It was a move more in keeping with big pharmaceutical companies, which were merging to cut costs and broaden their pipelines. From biotechs, investors wanted to see innovation and exciting new products.

Yet Biogen has failed to introduce any significant new products over the past decade, except Tysabri, which was discovered by Elan and approved by U.S. regulators in 2004. Part of that failure can be attributed, according to Frank and others, to the lack of a scientific sensibility at the top of the company.

Not that Biogen is alone. Very few publicly traded pharmaceutical and biotechnology companies are led by scientists these days. Even those whose products have not yet reached the market, such as Vertex Pharmaceuticals Inc (VRTX.O) are bringing in CEOs with commercial backgrounds to lead them.

Yet, coincidentally or not, those companies that have been led by scientist CEOs — Genentech, which was acquired last year by Roche Holding AG ROG.VX; Gilead Sciences Inc (GILD.O); and, until recently, Celgene Corp (CELG.O) and Vertex Pharmaceuticals — have, over the past decade, outperformed those run by non-scientists, such as Biogen, Genzyme Corp GENZ.O and Amgen Inc (AMGN.O).

<Graphic: link.reuters.com/kec64m>

“Boards of directors are going to come to find the need to have scientists run companies again,” said Frank.

In Biogen’s case, that realization appears to have occurred.

Stelios Papadopoulos, who co-founded Exelixis and is chairman of the board, also sits on the Biogen board and no doubt helped bring Scangos into the fold. Whether Scangos has the gravitas or authority to make the dramatic changes needed at Biogen remains to be seen.

Some are skeptical.

“One wonders about the logic of bringing in an executive lacking all commercial experience,” said Geoffrey Porges, an analyst at Sanford Bernstein. “It’s hard to understand.”

Additional reporting by Bill Berkrot in New York

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