In March, Ligand Pharmaceuticals, a San Diego-based biotech company, suffered a series of setbacks that prompted company executives to scramble to control the fallout and preserve its reputation. First, accounting issues prompted a delay in filing financial reports with the Securities and Exchange Commission. Then, two pivotal studies of a late-stage cancer drug under development failed to meet endpoints. To top it off, NASDAQ delisted Ligand's stock after the company repeatedly failed to file financial reports.
There was "a barrage of bad news," wrote Derek Jellinek, a biotech and pharmaceuticals analyst at Roth Capital Partners, in a July report in which he bemoaned "guidance missteps, inadequate internal controls, and clinical disappointments." To cope, Ligand quickly issued press releases, reached out to clinical investigators, and scheduled conference calls for Wall Street analysts. The multi-pronged effort was made in hopes of soothing the frayed nerves of its various constituents, especially investors.
For all its efforts, however, Ligand is still struggling. The stock, though delisted, continues to trade slightly above $8 a share, roughly the same price as when the bad news began to flow. This suggests investors think a recovery remains possible. (A company spokesperson, Abe Wischnia, declines to comment on the events, citing a quiet period caused by the regulatory issues.)
The episode underscores the difficult terrain a biotech can face when a crash-and-burn scenario unfolds. Life is never easy for a small company with modest funding and few, if any, real products. But conducting damage control requires a special kind of effort that few such companies are prepared to undertake, especially on a moment's notice. "Unfortunately, there are no hard and fast guidelines," says Buck Phillips, managing director of Vector Fund Management, which has invested in numerous biotechs and is based in Deerfield, Ill. "Too often, though, a management will focus on its stock price as a measure of a successful execution of their reaction. But it's the wrong measure."
STOP AND ANALYZE
A company has to be internally focused, explains Phillips. "They need to sort through the rubble and communicate that to the outside world in a timely manner," he says. "They need to step back, analyze the data, evaluate the options, and say how you'll deal with it. Wall Street is always hungry for information, but also respects responsible, professional communication."
Generally, financial analysts say they give most biotechs good marks for timely and responsible disclosure. They also find biotechs easier to navigate, simply because these companies are smaller than a big pharmaceutical company with its many organizational layers and far-reaching tentacles that simultaneously run various activities. "When you're dealing with a small cap stock," says Roth's Jellinek, "they're usually pretty open and not holding much back."
To avoid trouble, though, experts say several fundamental steps need to be taken when bad news emerges (see box). Formulating the proper reaction can depend upon a few factors. For instance, a biotech should step back and determine how important the product is to the company, and how important the trial is to the product. And then determine just how bad the data really was, says Mark Ravera, a partner at Strategic Pharma Consulting in Chatham, NJ. "These situations can be hard to handle, because these are often stocks that tend to be overleveraged on just one drug," says Jim Reddoch, a biotech analyst at Friedman Billings Ramsey in Alexandria, Va. "But a key choice to make is whether to create no expectations about the product, or some future expectations. You have to manage expectations."
Of course, the magnitude of the response to bad news really shouldn't differ whether the company is a one-trick pony or an enterprise with a growing product portfolio. That's because the implications of a failed response to bad news can be equally grave – angering patients or alienating investors with incomplete information – and the result can be destroyed credibility, says Peter Steinerman, an independent public relations consultant.
BEING TOO CAUTIOUS
Ironically, there can be an equally harsh response to a company that errs on the side of caution. A recent example is Biogen Idec, which earlier this year suspended sales of Tysabri, its new and widely praised treatment for multiple sclerosis, after it was linked to patient deaths. The event made national headlines for several days.
The Cambridge, Mass.-based biotech, however, followed a tried-and-true playbook for managing a crisis: company executives moved quickly to develop a strategy after learning of the bad news, and then communicated their decision far and wide. Biogen mailed letters to doctors, sent E-mails to investors, answered questions from Wall Street, and gave interviews to the media. There was also a Web site that was tailored to patients and their families, and it was linked to sites for the US Food and Drug Administration (FDA) and the National Multiple Sclerosis Society, says Jose Juves, a Biogen spokesperson.
In a climate where big drugmakers are criticized for allegedly minimizing safety risks, Biogen scored some points. "They got a lot of credit for being very upfront and forthright," says Vector Fund's Phillips. "As long as management and the board put patients first, you have to give them a lot of credit."
But there was a bit of a backlash, too. For patients helped by Tysabri, the move came as a shock, especially after questions were later raised about the extent to which unrelated, underlying diseases may have contributed to the deaths. In effect, Biogen was criticized for moving too quickly and not fully understanding the extent of the problem. This was quickly overshadowed, however, by reports that revealed the company's general counsel had sold stock on the same day company executives notified the FDA, making a $1.94 million profit.
The company ultimately pleased investors by announcing a restructuring this fall in which 17% of the workforce is being reduced and up to $300 million in costs will be cut. Although the stock remains well below its 52-week high of $70 a share, it climbed back above $41 recently, above the low point of $33.18 at the beginning of the summer. Investors, in other words, are gradually betting Biogen can sort out its difficulties. Spokesperson Juves declines to comment.
Whether a company is relatively new or somewhat established, it's easy to make the same mistakes when it comes to fully and quickly disclosing bad news. One thing that seems to irk investors, though, is a biotech's inability to acknowledge failure, drop a program, and move on after the news has circulated. "Many times, the managements of these young companies are reluctant," says Phillips. "They continue to try to find ways to repackage the same technology in different products or clinical trials. It's a big shortcoming, and it's hard to create investor confidence when you do that."
This appears to be the aftermath confronting Ligand. The biotech is now exploring ways to salvage its cancer drug, Targretin, and has recently made presentations at oncology conferences. But some analysts say such efforts may be misguided and cause a degree of confusion for investors and patients alike. "They spent millions of dollars over several years on this, so it's hard to cut bait. It's been their baby," says Reddoch, the securities analyst. "But sometimes, this approach can cause a more painful retrenching process, where you may run the risk of losing new investors. The idea is that, when you have bad news, keep things simple – the trial didn't work, so make a decision about the future."
Five Tips for Dealing with Bad News
1. Identify who needs to know. First things first: As soon as bad news is known, be sure to identify everyone who needs to know – patients who are taking your drug or participating in a clinical trial, doctors prescribing your drug or running a clinical trial, investors, regulators, and the media.
2. 'Fess up. Tell them what you know, and when you knew it. Being upfront and transparent is the best way to ensure you retain their trust and avoid accusations that you held something back. After all, if you've done nothing wrong, you have nothing to hide. "Patient communities are very vocal and they can be desperate," says Peter Steinerman, an independent public relations expert. "Be prepared to deal with them in a sensitive fashion."
3. Don't play favorites. Tell every group the same thing. Selectively telling one group, such as investors, more than you've told the others is a good way to get into trouble, especially if your stock is publicly traded. A warning: Buck Phillips, managing director at Vector Fund Management, says large investors may expect direct calls from senior management. If you make the call, though, just remember they're not entitled to any information not given to other investors.
4. Plan to investigate. Let everyone know you intend to find out what went wrong and will report back. Be clear about how you expect to proceed. If possible, provide a timetable so you don't create a black hole of information, and communicate any decisions you've already made. If the treatment just isn't working effectively, for instance, don't be afraid to admit that a complete reevaluation – or even dropping the program – is needed.
5. Be proactive. If all this seems like a lot of work, try developing a plan instead of waiting for something bad to happen. As the Boy Scouts say, be prepared. Abe Wischnia, a former investor relations specialist who now works at Ligand Pharmaceuticals, wrote a handy treatise on the topic in which he advises executives to run through possible questions, remain ethical at all times, expect the unexpected, and always continue to communicate.