When Bad News Strikes

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."