The Rise of the CFO Strategist: Balancing Numbers and Know-how

Oct 24, 2016
Volume 36, Issue 10

The role of the biopharma chief financial officer is ever-evolving. “Jack of all, master of none"—indicating the familiarity across a spectrum of scientific and financial disciplines—doesn’t cut it. Mastery of far more than the company’s balance sheet is a necessity.

 

The picture of an executive spending day and night pouring over a ledger and going cross-eyed staring at columns and charts doesn’t rightly portray today’s life sciences chief financial officer (CFO). Sure, keeping up with the bills and financial disclosures while managing a firm’s financial risk remain primary functions, but CFOs have matured with the industry.

Increasingly, the CFO must take on the role of a full partner and advisor to the CEO. Their responsibilities, both inward and outward facing, are greater than ever in a business that seems to multiply complexity.

The role today requires greater technical know-how to be ready for markets that move at the speed of automated buying, as they navigate financial markets and volatility that can be downright frightening. The zeitgeist can be dominated by politicians tweeting with hashtags like #DrugPricing and #EvilBigPharma, and while CFOs might not have much of a hand in the dialogue, they must do their best to weather the storm while modeling long-term potentialities of overarching trends.

While some threats are real, and some may be imagined, the possibility of industry upheaval can’t be ignored. The CFO must be vigilant and calculating, where the CEO is usually optimistic in their outlook.

As our chief editor wrote in his op-ed in the September issue of Pharm Exec, the CFO skillset must now combat a troubling macroeconomic landscape into planning by means of a “proactive assessment of currency, economic and tax trends.” John Cavan, CFO of ContraVir Pharmaceuticals, echoes this sentiment, noting that “risk management has gone from being about crisis management, and dealing with negative impacts from bad data, or something like Brexit catching you by surprise, to being more forward-looking—having a plan for different potential outcomes and events.”

Facing the street

This growth of the CFO’s role is not specific to the life sciences, though the technical and innovative nature of the industry, along with the additional layer of regulatory burden, makes the requirements that much more challenging. McKinsey & Company has reported the position’s functional expansion from “core responsibilities of financial reporting, audit and compliance, planning, treasury, and capital structure” to more and more tasks, including portfolio management, with many CFOs taking prominent voices in investor relations and in communications to the board.

Where CFOs have traditionally been responsible for the record books, they now need to synthesize this story more broadly, understand the technology and present it to the greater community. More than ever, the biopharma CFO needs to possess the skills to communicate their company’s story to Wall Street, notes Les Funtleyder, portfolio manager at E Squared and an adjunct professor at Columbia Business School, lecturing on the topic of asset allocation in the healthcare space. Possessing the skills to communicate the story to the capital markets is key, while having the ability to properly value licensing deals and/or acquisitions.

 

On the biotech side, the CFO can often be the de facto CEO when cash runs low, Funtleyder, a member of Pharm Exec’s Editorial Advisory Board, explains. “We’re seeing this happen a lot, so decisions around raising money, minimizing or preventing dilution and partnerships, involve significant input from the CFO.” As a result, biotech firms are seeing a greater number of Wall Street veterans taking top positions. Whereas these financial gurus may enter big pharma in lower operational roles and ascend the chain, in biotech, they’re likely to take the CFO seat more directly because these companies are smaller, Funtleyder adds.

“As a public company, we’re always for sale,” says Greg Gould, CFO of Aytu BioScience Inc. “You need to be able to tell the story, ranging from the sophisticated science to the product and sales details, while still being able to sign off on the Ks and Qs.” And for a small biotech like Aytu, experience with exotic financings might be required.

For many CFOs, a blended financial background is highly sought after. Many companies take nontraditional corporate paths such as reverse mergers, or encounter hiccups along their clinical developmental pathways, so it’s important that a biotech CFO can talk to the banker, then switch gears and get on the phone with the accountant who can negotiate atypical financial maneuvers, Cavan explains.

Being on top of the figures and deadlines is a major responsibility, as the CFO is generally responsible for maintaining the company’s stock value and creating value for shareholders. In addition, being on top of projections, like a Phase III clinical trial deadline, for example, has implications for shareholders and patients. A three-month delay for a trial could mean billions lost in revenue down the line, but it’s also a time in which patients can’t access your drug. The CFO is thinking about the patients and their company’s bottom line, as they stay disciplined in their metrics—and do what’s in their power to put forward realistic and aggressive deadlines, and stick to them.

A key issue for CFOs is stock volatility in the healthcare space, where it’s 56% greater than in other sectors, according to Brian Hagerty, senior director and head of healthcare capital markets for NYSE. “Considering the binary nature of news flows, you face a variety of groups on either end of the deal, be they investing in the growth of your company, or attempting to make gains by shorting your stock,” says Hagerty. “It can be important from early on that CFOs are well-equipped, and that they staff-up, with strong internal investor relations teams, or by bringing on solid outside firms for these services.”

The CFO is always talking to company investors, notes Buck Phillips, who holds the position at Novavax. The clinical-stage vaccine maker experienced a precipitous fall in September, as the Phase III Resolve trial for its RSV F Vaccine in older adults did not meet pre-specified efficacy objectives, causing the stock to tumble from $8.34 to just $1.40.

“Controlling the disclosures is key, and we do a lot of work to be sure our’s is managed from investor meetings down to statements,” says Phillips. “The CFO’s primary role is managing the company’s financial risk, but one has to be flexible. Mother nature doesn’t play along, so you face a constantly moving target.”

Novavax intends to further investigate the trial data and will update on additional studies, likely this month, the company states.

When an organization goes to the investor community, they often face a tough crowd, says Hagerty. More than ever, the investment professional in the audience is a highly educated, technically savvy individual with an MD or PhD or both on their resume. CFOs communicating the business, therefore, are facing tougher questions. It’s important that the investment community clearly understands a company—tight, crisp and accurate messaging is a must, Hagerty adds. “These companies’ stories are complicated. In the life sciences, you’re not managing widgets.”

“One of the worst things a company can do in giving its pitch to Wall Street is to get out ahead of their skis and wind up regretting it later,” says Hagerty. CEOs are usually quite optimistic, as one of the roles of being a true partner, and having a good fit to a CEO; the CFO needs to join the conversation with a real handle on risk and likelihood of success, notes Gould.

Looking inward

In June, The Economist warned against “the imperial CFO,” envisioning the powerful executives using the dark side to reign down on every corner of the organization. Influenced by the shareholder value movement and the fact that the financial crisis focused more attention on CFOs, these individuals are wielding the force—in this case, big data and computing power at their fingertips—to do their bidding. CFOs are now dropping in on “whomever, whenever,” the magazine foreboded.

 

“You’ve got to keep a finger on the pulse internally and externally, from your clinical and manufacturing teams, to those in the community,” says Cavan. And you can’t ignore the details. Biopharma employees are high tech and high salaried. So every day an employee walks in the door and turns on the light to start their day, the costs can be significant.

Getting things done faster and cheaper is always top of mind. But handling the day-to-day finances is just one aspect of the CFO’s internal angle. What’s changing is that the CFO is taking a greater role in overall corporate strategy, increasingly functioning as strategic advisor to the CEO and board of directors in determining the best way for the company to grow.

“I’ve seen a lot of changes over the last decade involving the CFO’s role in strategic decisions,” says James Dentzer, CFO of Curis, a biotech. Which program the company will be investigating in, how the company will be allocating its dollars—the “go/no-go” decisions—all require input, and the more effective CFOs get into this decision process. For many CFOs, the strategic advisory role has become the most stimulating part of the position, bringing them to the negotiation table to offer an assessment of what the value of an asset might be in “our hands or in someone else’s.”

But growth can be a tricky thing. Small companies adding assets can suffer from indigestion as much as starvation, so a strategy for bringing products on in a layered fashion while maintaining an overarching outlook for the firm is a must.

As in other industries, the role has matured in biotech as the industry itself has evolved. From Dentzer’s experience in an adjacent industry while working at Dupont, and in more mature industries like chemical and manufacturing, finance people add a great deal to a company’s overall approach as they make decisions around resource allocation and profit management.

During Dentzer’s entry to the industry at Biogen, it was becoming the norm for successful biotechs to raid these industries where finance people were groomed to have more substantial roles.

Whereas biotech CFOs may be more involved in fundraising, pharma CFOs are expanding into more of an operational role, with capital allocation decisions that require calculations around returns, says Funtleyder. Their modeling efforts feed into the overarching questions hounding many in the industry—of make vs. buy.

Across the life sciences, many struggle to define the difference between a biotech and pharma. Big vs. small became defining factors in a business where pharmas make and sell biologics, biotechs make and sell small molecules and both play in the generics and/or biosimilars space. For some, the new line is simply those with revenues and the rest hoping to get there. Thus, in some ways, the balance sheet is one place where the biotech/pharma line still exists.

CFOs for the two categories of companies may have traditionally managed different types of companies, and had different roles. And for a company hoping to transition from development to clinical, the CFO might have to undergo the metamorphosis with it. Because biopharma is lived in discovery stages, the CFO must change with it.

Is it too much to expect lone CFOs to master all these roles? Certainly many companies go through changes at the top when they maturate along preclinical, clinical and commercial phases. Many executives are hired for their experience in specific scientific stages, or for prowess in fundraising or unique financial circumstances and maneuvers; bringing a commercial stage-ready CFO to a company that has attained that level is not uncommon.

Ernst & Young and other business organization analysts have reservations about the increasing role that CFOs are taking. Is it too much for one man or woman? Should the traditional role of the finance guru be more ingrained in the title? In ruling over a vast array of metrics, one has more analytic tools than ever to perform the data side of the job. But with this comes the power to manipulate numbers and even misrepresent them.

The biopharma industry will continue to add complexity, which could make it ripe for certain detrimental practices. Once given, it could be a challenge to wrestle power and influence away.

 

Casey McDonald is Pharm Exec’s Senior Editor. He can be reached at casey.mcdonald@ubm.com

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