Achieving the Exit with Dr. Hugh Rienhoff & FerroKin

Shareholder Representative Services’ latest Q&A features Dr. Hugh Rienhoff.  Rienhoff led FerroKin to an acquisition by Shire valued at up to $325 million. Trained as a physician, Rienhoff spent eight years working as a scientist and eight years as a venture capitalist focused on biotechnology prior to becoming an entrepreneur. These roles were the foundation upon which Rienhoff has been able to build and lead successful life sciences startups. He discusses the advantages of focusing on product development first to create value and choosing an acquirer based on the likelihood that it will carry the product forward.

Q: How did your training as an internist and geneticist impact your entrepreneurial process?

At heart, I approach most problems as a physician first, then as a scientist and then thirdly from a business perspective. That’s not to say one is less important–it’s just my personal orientation to evaluating technology and problem solving.

What made the difference here was that I understood the clinical problems firsthand, so I could see a path from the bench to the bedside, and that was a continuous and unbroken vision. That continuity helped in building a credible story for investors and anybody else who needed to be persuaded, including prospective employees and partners. It comes down to being able to tell a very cogent narrative and to each of us on the team having a very strong grasp of the details of a product development plan. Our team and I could tell the story. That’s the essence of getting funded. My background provided the necessary experience to describe each part of this project credibly.

Q : What is the best approach to creating value in biotech?

In biotech there are a number of different strategies for trying to create value, but I think the proven one is to focus on product development. Although, there are certainly counter examples that might make you question that, such as building a financial institution with the clout to acquire products.

I looked for a product opportunity where the clinical needs were high–meaning that the existing therapies were not satisfactory and the patient need was still great. I was interested in a product where the clinical trials would have very clear and unambiguous endpoints that could be measured objectively, that could be obtained in a reasonable period of time–six months instead of five years–and that could be measured by a machine or a clinical test, as opposed to a subjective assessment of patient progress. I found an opportunity that fit those criteria, and that became FerroKin.

The imperative with FerroKin was to really focus on product development as opposed to creating a successful investment opportunity. I was convinced that by focusing on product development, we would be able to create value, as opposed to creating value by amassing capital and using that as a way to build a business. That strategy is, in essence, just buying other people’s products. It works, but it is not my preferred strategy.

Q : When you launched FerroKin did you have a specific timeframe in mind for when you planned to exit?

One of my criteria for choosing a project was that we could take the product all the way to market. So we–the FerroKin team and the investors–were prepared to do that. We also knew that we couldn’t generate any interest from strategic partners until we had proven the basic thesis in this therapeutic area–that the drug we were developing was safer and provided some measurable clinical benefit over the current standard of care. That required a phase two study.

We had always planned to look at the data at the end of that phase two study and introduce ourselves to potential corporate partners, while at the same time, in a parallel path, moving forward with respect to product development. If we needed to raise money to do the phase three studies, we were prepared.

Q : How did you introduce FerroKin to potential strategic partners?

We didn’t introduce ourselves to anybody until the phase two study was initiated. The process was straightforward. I put together a list of thirty or thirty-five potential companies based on their therapeutic interest and their product portfolios and size, and sent out letters in June 2010 to all of those companies. That began the process. For the most part, it was cold calling. We reasoned, I think rightly, that the data on the product should do most of the talking.

Q : Did you find that to be an effective strategy to reach the right people?

There are only forty-two pharmaceutical companies with revenues over $200 million in the world, so our strategy was effective in the sense that I reached everybody. However, they did not all respond appropriately. I doubt it would have made a difference if I had known the CEOs personally. These discussions always gets pushed down to the right level. When you enter too low in an organization, sometimes they can’t bubble up to the right person. Sometimes it takes some work to figure out exactly what the entrance point should be.

The deal with Shire came about through the letters that I sent out. That’s the way I got to every organization. I had no particular inside track–I knew people here and there, but that made little difference. I knew nobody at Shire.

As with all initial offers, we rejected their initial offer outright. At that particular juncture, it was about the gross economics of it, and their bid was way under. The initial discussions were all about the total consideration. Then, once the bidders got into the ring, we started having deeper discussions and got into a range that we considered appropriate.

Q : Did you hire an investment bank to evaluate the different offers?

We used Seaview Securities because I knew Dr. Joe Dougherty very well. I wanted to have a lot of input into how the process went, and I didn’t want to be flying around for the sake of flying around to have useless meetings with people who might already not be qualified.

One style of investment banking is the roadshow, where you go to twenty different potential bidders in a period of time. That’s very expensive and we were generally fairly cautious about how we spent money, but more important was the time issue. Running clinical trials and running the non-clinical activities, I was one of a small number of people who were super busy every day, so I didn’t have a lot of time to waste on people who weren’t serious about buying the company. Joe understood that and could tell the FerroKin story quite well himself to prospects.

Q : What were some of your chief considerations in negotiating earnout milestones?

We were focused on the commitment of the organization to product development. So, we wanted high penalties for not taking it forward. In other words, if there wasn’t going to be a phase three study, it had to be based on a fundamental failure of the product. I also wanted the milestones to be fairly spaced out over the earnout period, because a product acquires more value as it is used by more people in different places. I wanted it to be as smooth and as linear a process as possible, so the milestone payments were not particularly lumpy.

You can contractually oblige your acquirer to do certain things, but you can also pick your acquirer based on the probability of them carrying the product forward. A really big company is more likely, for global strategic reasons, to abandon a certain therapeutic area–especially a niche product like ours–than a smaller company that pays the same up-front but has a really strategic vision in a particular space. If your product is central to that strategy, then your product has a higher probability of getting to market. Shire fits that bill.

Q : Was there was one overarching lesson you learned as CEO?

The most important lesson was to stay focused on product development. In this company, I didn’t really function as a CEO, in the sense that a CEO is a figurehead out there in the stratosphere, running around from conference to conference talking about the company and making promises about product development. Once we got the financing in place, my job was to work as a peer with the other core team members, monitoring all of the clinical studies. I did a lot of the writing for the company. In other words, I had an operational role within the company that was completely divorced from being the founder and CEO–I was just one of several key people working on the project. And, of course, those key people constituted a small team of professionals who were very close, deeply trusting of each other and constantly keeping the standards high. I have never in my life worked with such a great group of people.

Playing an operational role worked really well for me because that gave me intimate knowledge of what we were doing. I didn’t have to rely too much on people telling me what was happening, and I could influence our course by being familiar with the details. That doesn’t work once the company is a certain size. I would say that it probably would not work in that way if the company was even fifteen or twenty people. The dynamic changes radically once you get over ten people and again if you are thirty full-time people. You can’t have too many people on the conference call or too many in on the discussion–it just becomes unwieldy.

When you start a company, you also learn about yourself. I have failed and done so spectacularly before as a CEO. I’m very well suited, however, to this kind of project. Even though I worked as hard as I’ve ever worked, it was also the most satisfying thing I’ve done in a very long time.

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