Pivoting When The Science Does Not Pan Out
By Kevin Sarney, CPA
Life Sciences Practice Leader, Charles River CFO
The company has been on a years-long pursuit of results of a drug trial, perhaps a Phase 1 efficacy or a later Phase 2/3. The company has been around for 8-9 years and had multiple rounds of venture capital funding or perhaps a public company with $100’s of millions in market capitalization. The company has runaway cash on hand for six months, and the burn rate—after paying for drug trial expenses— is mostly headcount. Today is the day for the drug trial readout from the blinded trial and plotting the course for the next higher valuation and larger financing round …but the placebo worked better than the drug!
What is your doomsday scenario, the next course of action, and what should be your plan? There are numerous company examples, both current and from the last downturn in the life science cycle, that resulted in massive headcount reductions, executive personnel changes, asset sell-offs, and ultimately, an exit strategy. It happens more often than we discuss.
“CASH MANAGEMENT, CASH CONSERVATION, CASH IS KING”
Well-financed companies don’t go away; they morph and survive. If your company is not adequately financed, you need to take the following steps to buy time:
Create/update your cash runway model with multiple scenarios
Determine what can be monetized
Assess headcount and make decisions on the bare minimum resources needed
Ask/tell vendors that payment terms are extended from 30 to 90-120 days
Evaluate the remaining science portfolio and, with reduced resources, determine what has the best chance of advancing to the next valuation point
Reduce expenses in real estate leases, sell off unneeded lab equipment
In ongoing trials, determine what costs can be cut, especially if the path forward isn’t as clear
Take the temperature of existing investors to assess whether they will provide capital to continue
IF THE DETERMINATION IS MADE TO SHUT DOWN, WHAT’S NEXT?
For public companies, there are advantages and disadvantages to be aware of if you are considering a company shut-down.
There may be possible liquidity in public float (stock) to use to license an asset
You may be able to use equity to do a reverse merger with a private company
You may be able to put a financing mechanism in place to write checks against stock
It is difficult to shut down a public company—many expensive reporting requirements and increased overhead headcount to manage SEC reporting, audits, etc.
Quarterly financials expose your condition for everyone to see
Shutdown costs are significantly higher—D&O Tail policies are costly due to public exposure, executive pay is higher and more sophisticated with severance packages, etc. D&O Tail for 3-6 years could be 75%- 85% of the existing cost of the annual policy x the period purchased (not an insignificant expense)
Challenging to determine how to exit a public company and resolve BOD and executives of liabilities
WHAT TO KNOW WHEN PLANNING A HEADCOUNT REDUCTION
Before any layoff, employers can consider cost-cutting measures to reduce expenses (limiting travel, etc.). Other options include a hiring freeze, salary freeze, or salary reductions (ex., leadership takes a 10% reduction in pay or bonuses will not be paid out). If headcount reduction or RIF (reduction in force) is necessary, employers need to:
Select employees for layoff
Avoid adverse action/disparate impact
Understand requirements under Older Workers Benefit Protection Act (OWBPA)
Determine severance packages and additional services
Conduct the layoff session
Inform workforce of layoff
No one wants to have an adverse outcome, but science often dictates our next steps. Life Sciences firms must be modeling financial scenarios, planning for alternative outcomes, and providing for the most financial flexibility if the “science does not pan out.”
We can help.
We at Charles River CFO look forward to assisting you in getting ready for whatever situation you may suddenly be facing. We offer flexible, part-time, interim, or project resources for your financial, accounting, tax and HR needs. Contact Charles River CFO at firstname.lastname@example.org or (781) 431-0420 x1 to have a confidential conversation about your requirements and how our experience can contribute to your success.
We are smart, nimble, and flexible.