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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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« Today's Avandia Hearing at the FDA | Main | Five Minutes With Any Journal Article You Want? »

June 6, 2013

The Ax At Aveo

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Posted by Derek

The failure at the FDA of Aveo's kinase inhibitor tivozanib has had the expected fallout: the company has cut over half its employees.

I cannot resist linking to Adam Feuerstein's take on this news. If there's a case against his viewpoint, I'd be glad to link to that as well. But for now:

Aveo Oncology (AVEO_) fired 140 middle and lower-level employees -- 62 percent of its workforce -- on Tuesday in order to save money to pay the salaries and bonuses of its top executives who blew up the company, decimated shareholder value and are too cowardly to accept responsibility for their incompetence.

At Aveo, accountability starts at the bottom.

Comments (27) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. pjay on June 6, 2013 11:50 AM writes...

If upper management can bring in a new product, the situation can be turned around. The company is owned by its shareholders, and governed by its board.

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2. Hap on June 6, 2013 11:57 AM writes...

Where else does accountability start? Responsibility and blame are handed down to those not dishonest enough to lie or who lack the power to fight it, whether in government or in business.

Destroying a company is lucrative business. Maybe that's why we don't make anything anymore.

@1: Not lately - if the company you own stock in is tanking, what are the chances that you can tell the CEO to take a hike or even a pay cut? Your chances of winning might be better with a lottery ticket, or at least not much worse. Boards don't seem to help much - they seem to have the same interests as the management, but not necessarily those of their shareholders.

In addition, the probablity of bringing in a new product with no R+D is probably small, and the people that managed this drug into oblivion would be the ones left to shepherd it through approval. Good luck with that.

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3. bboooooya on June 6, 2013 12:02 PM writes...

" The company is owned by its shareholders, and governed by its board."

Indeed: it's their money and they can do what they please with it. That the board would not choose to hold the person responsible for AVEO's failure accountable seems a pity. I assume the current CEO had a hand in appointing most of the board?

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4. bboooooya on June 6, 2013 12:11 PM writes...

Unfortunately, same story recently at ZIOP and CLSN and probably a dozen other btechs over the past year: clinical trials fail, rank and filers (and a couple of token execs) get fired, and CEO keeps job and will likely get bonus for 2013.

As previously pointed out, doesn't work much better if you succeed in getting a drug approved, as former employees of CLDA or AMLN (among many others) will tell you: at least these folks had options that were worth something.

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5. anon on June 6, 2013 12:57 PM writes...

who are you guys kidding. Isn't this the SOP of all companies. Look at Endo as a recent example. what about Pfizer/merck/Amgen etc.. outsource all the low paying jobs and keep the (unproductive) fat cats in house !

Follow the Apple model - but in a true manner.

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6. smurf on June 6, 2013 12:57 PM writes...

Capitalism is the solution, capitalism for all of us.

Currently we have capitalism for the bottom per cent and socialism for the top 15 per cent.

Bummer.

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7. The Iron Chemist on June 6, 2013 1:01 PM writes...

It takes a lot of time and effort to drive a company into the ground!

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8. NoDrugsNoJobs on June 6, 2013 2:31 PM writes...

I reckon the higher ups will be around long enough to turn off the lights and lock the doors. The reality is that they will not be able to drive further R&d and the folks behind that will go first. Upper management will be around long enough to see if they can find some rescue financing or a license partner or whatever but they will be gone too most likely. Not sure how else to do it......

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9. Carbon on June 6, 2013 2:42 PM writes...

I wonder what Astellas will do with this molecule and with the all European licensing structure.
Pity for the guys loosing their jobs....

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10. Hap on June 6, 2013 2:44 PM writes...

You mean, other than "fire the expensive people who messed up first"? If you're trying to get value for what's left, that would also be a better option. Since the management couldn't make sense of the assets they had, why is leaving them to dispose of the remnants a good idea? Choosing a board member as an interim CEO might be a better choice - they might have a better chance of keeping at least someone else's interests in mind while doing the job.

This distribution of responsibility also happens at bigger companies where there is a lot more for whoever is about to do, and there again, rarely do the people who managed failure (and were well paid to do so) take the blame for it. Who paid for the financial scandals or the spates of P3 failures? It wasn't the people who engineered them.

You get what you pay for. When you reward people for bad performance (and dishonesty) and punish people for the performance of others, what do you think you're going to get next time?

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11. Oldnuke on June 6, 2013 6:35 PM writes...

The worst part of American Business is that the perpetrators of this madness (I call them Serial Corporate Rapists) will leave the victim and go somewhere else (with Other People's Money) to perpetrate the same offense.

It's as if there is no penalty for stupid...

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12. srp on June 6, 2013 7:36 PM writes...

I don't understand these sorts of posts or the commenter lynch mob.

1) From the link given, what did the CEO do that was especially wrong? You could just as easily blame the researchers for developing a drug that turned out not to work to the satisfaction of the FDA. Horrors, they rolled the dice on a clinical trial for a drug that met its primary endpoints.

2) If you have a company that just took a hit like this and you are trying to salvage what remains for its owners, who is best qualified to do that? The suggestion that the front-line researchers should take over dealing with the financiers in lieu of the C-suite is funny, but deranged.

4) You could fire the CEO and bring in a guy with similar/better skills, but that individual would have to get up to speed and would probably insist on being paid a lot of money. And he or she would still probably not come from the ranks of salt-of-the-earth organic chemists.

5) It's particularly bizarre when people act surprised that a CEO who fired a lot of people got a raise, or a bonus, or was otherwise rewarded. What do you think we (including you, through any equity investments you have) are paying these guys for? Nobody likes firing people. Adam Smith remarked long ago that executioners had to be paid wages in excess of the skill required for their jobs. The principle of the compensating differential has not changed.

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13. Anonymous on June 6, 2013 8:04 PM writes...

srp, you either can't read or were too lazy to finish the article. With credentials like that, maybe you should be a CEO.

He was in charge when FDA raised concerns about the tivozanib study and recommended the company run another one. Ha-Ngoc kept this information from investors and ignored the FDA's advice

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14. Mylz on June 6, 2013 8:05 PM writes...

@srp

I don't see anyone arguing that the scientists should take over the C-class positions as part of the remedy. That's a bit of a straw man. The general complaint is about the nature of rewards/losses. Rather than going down with the ship, management is taking sole ownership of the lifeboats.

As to Smith...It's clear that executioners bear the burden of cruelty. Paying them more however, would serve to incentivize the cruelty and grant economic advantages (power) to the callous.

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15. srp on June 6, 2013 9:22 PM writes...

A good executioner is clinical and not cruel. The premium was paid to compensate for the stigma associated with the job.

There are plenty of CEOs who make plenty of bad decisions. I even would agree that there may be systematic patterns among these errors (which would be a somewhat damning indictment). The same goes, with less accompanying visibility, for CFOs, CIOs, etc. Not to mention all the other senior and middle managers. (Everybody else is blameless of course.)

The question is whether shareholders want to impose the naval standard for ship captains (strict career liability for running aground and the like) to CEOs. Then when something goes badly wrong the guy gets cashiered, loses a chunk of wealth, and gets immediately replaced by someone uncontaminated by the mistakes to date. It's not a crazy idea, but the effects on selection and compensation of CEOs might not be what you expect. There would be a tendency to attract more types with less to lose and a need to raise the average compensation given the new downside risk. I don't think I'd vote for a company I own stock in to be run that way.

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16. Slurpy on June 7, 2013 2:47 AM writes...

"There would be a tendency to attract more types with less to lose and a need to raise the average compensation given the new downside risk."

So. . . hire bums off the street and pay them $20M per year instead of the $10M per year to career administrators?

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17. SteveM on June 7, 2013 8:05 AM writes...

Seems to me that the stakeholders that got screwed by management at Aveo are the shareholders.

Back out the decision process. At an earlier period, Aveo management had 2 fundamental alternatives, out-license the compound or continue the clinical trials.

Selecting the first alternative would have reduced risk and more importantly from their PoV upside potential. If management had selected the out-licensing alternative, the technologists may have been laid off on the spot anyway when their reason for being went away.

But management selected the second alternative which turned out to be a failure. Maybe they were stupid for throwing something at the wall hoping it would stick. But so what? The scientists remained gainfully by employed by Aveo for the duration of the testing phase. So in that context, they made out.

Given that the compound was doomed to fail no matter who owned the license, how is the haircut now especially egregious towards the staff?

Permalink to Comment

18. SteveM on June 7, 2013 8:07 AM writes...

Seems to me that the stakeholders that got screwed by management at Aveo are the shareholders.

Back out the decision process. At an earlier period, Aveo management had 2 fundamental alternatives, out-license the compound or continue the clinical trials.

Selecting the first alternative would have reduced risk and more importantly from their PoV upside potential. If management had selected the out-licensing alternative, the technologists may have been laid off on the spot anyway when their reason for being went away.

But management selected the second alternative which turned out to be a failure. Maybe they were stupid for throwing something at the wall hoping it would stick. But so what? The scientists remained gainfully by employed by Aveo for the duration of the testing phase. So in that context, they made out.

Given that the compound was doomed to fail no matter who owned the license, how is the haircut now especially egregious towards the staff?

Permalink to Comment

19. Hap on June 7, 2013 8:25 AM writes...

1) People in positions of power are paid for a combination of their skill at running a company, the work involved in running it, and the risk inherent in doing so (the company could go under). In this case (and, it seems, in most others of its ilk), the skill in running the company wasn't great. Management probably worked hard (probably harder than the employees, though in a startup, not all that much harder). However, the risk they were paid to assume isn't there. The employees (who, while responsible for doing the work, had little control over what work was done, or where, or perhaps how - hence the "they were blameless" part) assumed the risk while the people who determined the company's fate (and had - and were paid for - a disproportionate amount of responsibility for it) were relieved of it. In what world does that make sense?

2) You also seem concerned about the incentives faced for CEOs to run companies if they actually take the blame for their performance. I thought that was what they were paid for, but whatever. I am curious, though, why you think having one set of incentives for CEOs and upper management ("no matter what happens, you'll get paid.") and another for employees ("Work hard, and if we win, you'll probably get laid off when Big Pharma buys us (and maybe your options will be worth something), and if we lose, you'll get laid off.") is not going to affect the success of companies. If employees are more to blame than CEOs for a company's failure, and the incentives as currently constituted are good, then why would making sure that employees lose whatever happens to a company ensure good work and success?

3) The company ran trials that it was told by the FDA were unlikely to be sufficient for approval (unless the results were extraordinarily strong). That part of the drug's failure (the major one) was not a result of employee incompetence, but management's.

On top of that, the short snippet that Feuerstein wrote said that the CEO had misled investors as to the status of Aveo's compound (and thus to the performance of the company's assets and their value). If you're not honest to investors, why should they trust you to dispose of the company's assets when it fails? In addition, there is the possibility that (if the crucial mistakes were honest) that they would not recognize accurately the value of the company's assets; putting the people who misjudged such value in charge of selling off the assets would be unsmart at best.

The haircut is egregious because the people who paid the freight and the people who did the work (but weren't in control) lots their heads, while the people who had control did not. The compound may not have been good (although who chose it?), and its failure might have been likely, but the decision to run trials unlikely to gain approval for it if it worked was management's. If the passengers (the investors) and the car (the employees) get the ticket for the driver's failures, why is that reasonable?

Permalink to Comment

20. bboooooya on June 7, 2013 9:19 AM writes...

"The worst part of American Business is that the perpetrators of this madness (I call them Serial Corporate Rapists) will leave the victim and go somewhere else (with Other People's Money)"

Problem here is it's not "Other People's Money", it's the money of everyone who has a 401k or a pension. These funds, for the most part, invest in these companies and permit this type of outrage to occur.

AVEO's top holders from Q1 (http://www.nasdaq.com/symbol/aveo/institutional-holdings) include Wellington, Fidelity (FMR on list), Vanguard, State Street, Blackrock, and Barclay's.

If you have a 401k, chances are you were an investor in AVEO and all these biotechs that do likewise, and are directly supporting these "Serial Corporate Rapists".

Permalink to Comment

21. Anon on June 7, 2013 9:25 AM writes...

Sort of off topic but...
Depinho MD and Chin MD (Co-Founders) are taking a beating down in Houston. [Depinho was hired on as the pres of MDACC and his wife was hired on at a generous salary to start her own dept.] They are pretty much coming across as greedy MDs from Harvard. Originally he got bad press for touting the stock as a good investment, there have been numerous issues since then, and this week its about his wife's spending (she bought $7,700 couches for her office).

Permalink to Comment

22. SteveM on June 7, 2013 9:42 AM writes...

Well about those 401K's, there is that thing called due diligence. If those investment houses didn't do their homework, whose fault is that? The investors should blame the fund managers, not Aveo.

And speaking of Aveo, the investors in that game are generally well aware of the individual risks of specific companies, so buy portfolios of positions in the broader market segment. From their perspective, Aveos happen all the time between 10 bangers.

Of course high risk tech initiatives and Crony management do seem to go hand in hand. But then just about everything in America these days is polluted with cronyism (especially the oily DC Beltway - Wall Street Axis.)

So where else you gonna put your money when the Crony 1 Percenters own every game in town?

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23. newnickname on June 7, 2013 10:45 AM writes...

I find the hyper-remuneration for CEOs (and C-staff in general) to be repugnant, ridiculous and, IMO, unnecessary. I've known a few and they are no smarter than the rest of us. In fact, some of them were pretty dull. I even consider some of them to be morons. B-schools are spewing out MBAs at a fast rate and I've met with many newly minted MBAs. Some are are just hoping to get hired by the next Facebook; some are smart and seemingly talented and, I think, have the technical B-skills to lead a company (Finance 101, Contracts 101, Marketing 101, etc) and, with competent and trustworthy consultants and internal staff, make good corporate decisions.

There are plenty of new and used (old and discarded) MBAs who can lead these companies and would be happy to do so for reasonable ("my" definition of reasonable) compensation just because they want to have an exciting, challenging job and do it well. If someone says they need $10-$20 MM per year to do a good job, I'd let them look elsewhere.

I've only read about the Aveo and their C-staff here (Pipeline). I'm not surprised by any of it.

Permalink to Comment

24. Mylz on June 7, 2013 12:30 PM writes...

@srp

For the executioner point, it seems we're still on the same page. A bonus is paid to buy out an individual's over-riding sense of ethics/morals. That is the transaction. This has various consequences, many of them troubling.

As to the C-Class business aspects, I don't think many people are suggesting specific fixes but only expressing frustrations with the system as a whole. Any economic model will have downsides, just as a long total synthesis will have weaker steps. No one is suggesting to correct the weak steps by recklessly inserting incongruent steps from other routes. Rather, the point is whether the downsides of the current synthetic route (economic model) is the "best" route.

Permalink to Comment

25. Anonymous BMS Researcher on June 7, 2013 2:55 PM writes...

And even when BMS sacked Peter Dolan as CEO, he got a severance package exceeding my total compensation for all my years at BMS combined. Friends of mine in the trenches who have been laid off sure don't get packages like that.

Permalink to Comment

26. srp on June 12, 2013 8:36 PM writes...

Thanks for the interesting replies. A few points of agreement and disagrement:

1) If the CEO really did make deceptive statements to investors, then that should be actionable. And investors might not want to trust him going forward, to the degree that a less-informed outside guy might be preferred to do clean-up.

2) A new guy brought in to clean up the mess will still end up getting paid a lot of money to be the executioner.

3) "Hyper-compensation" of CEOs is a fascinating subject. One data point is that private equity-appointed CEOs appear to be even more generously compensated than public-company CEOs. Maybe that's because the private-equity hires are better on average, but it cuts against the pure self-dealing theory.

4) CEOs as a group aren't necessarily paid big bucks either for bearing financial risk or for possessing exceptional competence. (Those might be good reasons, but they aren't necessary.) It is just as much a matter of labor-market equilibrium. The kinds of people that investors seem to like as CEOs are expensive to hire.

Many plausible CEO candidates are wealthy to start out and literally could live a middle-class existence (or better) without ever working again. They know that if hired they will be set up as public pinatas. They are likely to spend a lot more time kissing up to analysts and other external constituencies than they will getting to run the business (which is usually a lot more enjoyable). They sometimes have to do distasteful things, such as mass firings, for which they will be further vilified. When fired, their reputations are often trashed and they lose the option to work again at a similar level. So they want a lot of money.

It would be an interesting experiment to more-or-less put some of these positions out for low bid to see what kind of candidates you could get. I'm not sure I'd want to work at the company that tried this, but I'd sure be interested in observing the results.

5) The level of compensation and the form of compensation are two different things, even in utility terms. For any level of executive utility, there is an infinite number of mean-variance combinations that will generate that. More risk usually means more average compensation is needed to hit any given level. But without a natural scale of what is "high" you can't readily tell if a CEO who doesn't bear risk is being overpaid or not.

Permalink to Comment

27. Hap on June 19, 2013 1:26 PM writes...

I'd be interested to know what's driving the equilibrium in CEO wages/options. I had perceived (you can wipe off the opinion if you like) that upper management pay has increased relative to average worker pay at quite a clip, so something must be changing.

With trades, the spread in wages between maximal and minimal pay is reputed to be increasing (more rapidly) because cheaper people or computers have replaced the average or below-average tradesperson. Now, people who are either very good or who do something that no one else can do get paid a lot more than people who don't because people who don't have to compete with computers or faraway cheaper people. That doesn't seem to explain management (CEO) pay.

It also seems like (wipe, wipe, wipe) that there are lots more MBAs, so that the supply of candidates for management and CEO slots ought to be increasing rapidly. Different businesses will have different requirements (not merely a degree, but experience in a field or a technology), but if more people exist with the basic requirements (and since management experience rather than technical experience seems to be the limiting factor), then you'd expect that wages would fall or rise more slowly because of the increase in labor. They could be rising more slowly then they would have (hard to believe) but then the factor driving that increase ought to be obvious and big.

What's wrong? Are my facts wrong, my logic, or is something missing?

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