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(originally published by Booz & Company)


Getting Big by Going Small

Francois Nader, CEO of NPS Pharmaceuticals, describes how a new model for biotech brought his company back from the brink.

In 2006 NPS Pharmaceuticals Inc., a midsized biopharmaceutical firm, was in trouble. For many years, the company had focused solely on developing a blockbuster osteoporosis drug. But in March 2006, the U.S. Food and Drug Administration (FDA) asked the company to run an additional, expensive clinical trial largely because of concerns over a side effect. The company’s stock price dropped 37 percent in a single day, and then steadily retreated in the months that followed. Cash reserves dried up, and the company faced US$191 million of debt coming due within 12 to 15 months. So Dr. Francois Nader, the company’s chief operating officer (who joined NPS shortly after the FDA’s news), came up with a bold strategy.

Nader, who became president and CEO in 2008, transformed NPS into a late-stage development company focused on rare (“orphan”) diseases. He shut down the company’s in-house discovery and manufacturing infrastructure in favor of outsourcing. He also hired a team of industry veterans to strengthen the new company’s capabilities. In the years that followed, what could have been a disaster ended up a success story. By specializing in one part of the drug development process rather than seeking to do it all, and by zeroing in on diseases that lacked effective treatments (and lacked competition from other pharmaceutical companies), NPS turned its prospects around. With only 60 employees, the company now has two promising, high-revenue-potential treatments for rare diseases in the final stage of clinical testing, a strong cash position, and growing royalty revenue from partnered products.

Nader spoke with strategy+business in August about the transformation and what other biotech firms can learn from NPS’s near-death experience. 

S+B: When you arrived at NPS and saw that the company’s future was in doubt, what was your initial plan?
We started out in survival mode. The first priority was to reduce the cash burn as much as possible. Regretfully, we had to dramatically decrease our head count.

The second step was to raise capital, which required a lot of creativity in those difficult circumstances. We used a number of financial tactics. For example, we received up-front payments for future royalties for drug compounds that we licensed to European partners, and we issued $50 million in convertible notes due in 2014.

The third step was to ask ourselves, Where do we go from here? We explored multiple possibilities, for example, becoming a royalty shell — abandoning all operational activities and cashing in royalties paid to the company by our licensees. But we realized that there was another way forward that could potentially build more value for our shareholders: We could completely transform ourselves. Although this was a more difficult option, we chose it because we knew that if it worked, it would pay off significantly.

S+B: What did this transformation look like?
First, we refocused the company on rare disorders, for which there is a clear need for treatments. Second, we switched our business model from the more traditional pharma or small biotech approach, in which all resources are in-house, to an outsourcing model, relying on experts in drug development, manufacturing, and commercialization who are not employed by the company. We closed three of our four sites, including our discovery facilities, and consolidated our activities in Bedminster, New Jersey. This meant that we would no longer be in the drug discovery business, but instead would in-license compounds generated by other research laboratories. It quickly became clear that the staff the company hired when it was building itself into a commercial company did not match what was now needed to become a drug development powerhouse. This led to a more difficult decision: to reduce our head count to 16, and then look for the expertise that we needed to bring our numbers up to 50. It was a challenging time, because we were letting people go while at the same time recruiting.

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