Farewell to Zafgen: A Personal Reflection On Board Evolution

Posted June 7th, 2018 in Boards and governance | Leave a comment

Today, Zafgen announced my resignation from their Board of Directors after 12 years of service.

It’s a bittersweet moment for me: having been there since the beginning, I’ve watched, and supported, the Zafgen story through all the ups and downs that a dozen years can bring. My partners and I at Atlas Venture remain significant investors and supporters of Zafgen and its mission; my departure has nothing to do with a lack of enthusiasm, and my partner Peter Barrett remains Zafgen’s chairman.

But it’s time for me to sign off to focus on other startups in our portfolio and the “day job” of investing in new ideas; in fact, this board resignation is actually the first time I’ve left a Board of a portfolio company that wasn’t an “exit” event for Atlas. Importantly, Boards, like the companies they represent, have to evolve over time.

Before sharing a few thoughts on the evolution of both the Zafgen Board and my career, I think it’s helpful to first frame where Zafgen is today.

Over the past twelve years, Zafgen has worked to understand and harness a powerful new metabolic mechanism, driven by an enzyme called methionine aminopeptidase 2, or MetAP2, that works both peripherally and centrally to regulate energy utilization and hunger in different settings of obesity. For the first six years, we focused on the broader morbid obese population, and established clinical proof of concept. Over time we recognized the potential to address serious orphan diseases (e.g., Prader Willis Syndrome (PWS) and hypothalamic obesity (HIAO)) which became a core element of Zafgen’s strategy.  As many followers of the story know, despite seeing impressive efficacy in multiple early clinical trials, Zafgen was confronted with a serious safety issue related to fatal thrombotic events almost two years ago. The team, with full Board support, immediately went to work to understand the mechanistic basis for the issue, addressed it with next generation chemistries, and successfully returned to the clinic with the first of several programs. Initial positive signals of efficacy, indicative of MetAP2 modulation, were publicly announced earlier this year in diabetic patients with ZGN-1061. Zafgen is now also poised to return to PWS with ZGN-1258, and they are bringing forward an orally active MetAP2 program, highly specific to the liver, into development.  Along the way, Zafgen has continued to evolve and strengthen the team: Jeff Hatfield, former CEO of Vitae Pharmaceuticals, joined as CEO in the fall to work closely with Tom Hughes, who became President and CSO; and we recently added Brian McVeigh, former VP in business development at GSK, as CBO. With a solid balance sheet, and a great team, I’m confident they will continue delivering on the Zafgen mission: advancing insight-driven MetAP2 therapeutics to transform the lives of patients with complex metabolic disorders.

With that as context, let me share an insider’s perspective on how the Board evolved over time.

Board evolution

Biotech startups go through different stages, and each requires different skillsets from their Board. The private-to-public IPO transition is a major event in that evolutionary process, but good boards are always evolving. Some transitions are planned and some are opportunistic.

When we first invested, the initial Board at Zafgen was a small one, as is typical for many startups, coming together initially with the 2006 Series A round. Kevin Starr, who had just left Millenium Pharmaceuticals and hadn’t yet co-founded Third Rock Ventures (TRV), joined us as our first independent Director (and remained a Board member through TRV’s investment in Zafgen).

Over the course of the next eight years as a private company, Zafgen recruited a number of other great independent Board members, bringing both R&D and BD skills: Liam Ratcliffe, then head of clinical research for Pfizer (now a partner at New Leaf Ventures), Fran Heller, former head of BD at BMS among other roles, and John LaMattina, former head of R&D at Pfizer.  We also had several very good investor directors: Avi Goldberg and Andrew Perlman from Great Point Ventures, Lou Tartaglia when he was with Third Rock Ventures, and Ed Hurwitz of Alta Partners. And, of course, both Tom Hughes, and more recently Jeff Hatfield, have been excellent Board members as well.

As Zafgen approached going public, we sought out financial and general management expertise, and were fortunate to bring on Frank Thomas, who was CFO/COO of AMAG at the time of the IPO. Following our IPO in mid-2014, we (like most post-IPO firms) worked to more aggressively evolve the Board: in 2015, former Cubist CEO Robert Perez and SOBI CEO Geoffrey McDonough (now CEO of GenerationBio) joined the Board, bringing unique business-building, commercial, and R&D strategy input; in early 2016, Celgene’s former head of R&D, Tom Daniel, joined the Board as well.  And most recently, as of a few days ago, Wendy Everett has joined the board, bringing her unique perspective as special advisor and former CEO of the Network for Excellence in Health Innovation.

Today, the Zafgen board is exceptionally strong – one of the most highly functional Boards I’ve been a part of, bringing a depth of expertise that’s hard to match including six former or current CEOs, two former heads of large biopharma R&D organizations, and an excellent chairman (my partner, Peter Barrett, from Atlas Venture).

All in all, the Zafgen Board “alumni” now includes eight individuals in almost a dozen years. This isn’t out of the ordinary. As I’ve blogged in the past, the half-life of a Board member post-IPO is only 3-4 years, implying a turnover of about a board member or two per year.

Stepping back, the evolution of the Zafgen board since inception is very similar to other successful biotechs: with roots in early stage science, the early independent Directors bring R&D and early stage BD expertise. Downstream clinical input, as well as financial and commercial expertise, come later on in the journey as biotechs advance their therapies to patients and the market. Current or former biopharma C-level executives can fit many of those roles. Importantly, getting independent voices on the Board early is critical.

Personal evolution  

Zafgen was the first deal that I co-sponsored at Atlas, and it was my first Board seat on behalf of the firm.

In many ways, the formative stages of Zafgen were also formative moments for me as an investor focused on venture creation. The Zafgen team incubated in our offices and I had the privilege of working very closely with Jim Vath, still head of research at Zafgen, among others. Early on we had the discipline to shut down one of the two founding anti-obesity mechanisms in the seed phase, and focused the company on the MetAP2 approach.  We were willing to follow the science, rather than get boxed by our preconceived notions around mechanism (which were initially wrong). Raising capital wasn’t simple back then, so it reinforced for me the value of equity capital efficiency and tranching mechanisms. Working closely with our friends at TRV was also a great opportunity, emphasizing the truism that your choice of syndicate partner really matters. I personally learned a lot from working closely in the early days with Kevin Starr and his partners. Further, Tom Hughes was one of the first CEOs that I helped recruit, and I’ve built a close friendship with him over time (and he also serves on miRagen’s Board with me).

Since 2005, I’ve invested in and served on the Boards of lots of great companies at Atlas, but Zafgen, or “Zaffy” as we call it on the inside, holds a special place for me.  However, actively managing (and pruning) one’s Board load is an important part of the evolution of any venture investor; the time has come for me to focus more attention on other deals and on deploying our new Fund XI.  A bittersweet moment for sure.

As I step off the Board, here are a few reflections on what really matters:

  • People.  It’s all about the people you associate with.  Life is too short to work with folks you don’t have huge respect for or violate the N-A-R. We’ve tried to surround ourselves with great, talented, and decent individuals like Hughes and Hatfield, the rest of the management team, and the entire Zafgen Board of Directors described above. It’s a fantastic group, and I’ll miss working closely with them.
  • Perseverance.  You have to expect the ups and downs. Shoes will drop. Making it through the tough times, those non-linear moments, is critical and often requires teams to dig deep. We’ve had our fair share of those moments at Zafgen, both as a private company and in the bright spotlight of being public. But we soldiered on and are now in a great place with our pipeline and platform.
  • Patients. Keeping patients at the center of everything we do is crucial to success in biotech. Losing sight of what we’re really doing destroys the positive forward-leaning culture of successful biotechs, and fortunately that has never happened at Zafgen. Finding the right path to bring new medicines to patients isn’t always straightforward; PWS became core to the Zafgen story in 2012, six years after we got started and a full two years after we had initial clinical proof-of-concept. We never lost our keen interest in addressing PWS, even while our development program regrouped in 2016-2018, and we’re excited to return to clinical development in that setting. Focusing on patients, confident that we were unlocking something special, was what kept the story going. Patients are what motivates the passion behind Zafgen’s mission.

Time to sign-off.  To my friends at Zafgen, thank you for everything.  Onward and upward.

 

 

 

Comment

Biotech CEO Pay: Inflation Held At Bay

Posted June 1st, 2018 in Biotech financing, Boards and governance, Talent | Leave a comment

The private biotech sector is awash in capital today: funding over the last few quarters has been record-breaking, up over 250% since 2013, as biotech CEOs have worked hard to strengthen their companies’ balance sheets.  But in the process of filling up their corporate coffers, have they also filled up their own wallets?

To examine this question, I worked with Jody K. Thelander and her team at J. Thelander Consulting, a compensation data and consulting firm, and explored their recently completed 2018 Private Company Compensation survey dataset.  Several interesting findings worth noting.

First, as you might expect during the journey of a startup, the total cash compensation (base salary plus target bonus) for biotech CEOs goes up in a remarkably linear fashion as companies raise more capital – up until they approach public company CEO compensation. Here’s the latest 2018 data:

Second, over the past 6-8 years, the median CEO compensation across the biotech sector has been remarkably flat in the Thelander survey dataset (shown below at the median and top quartile of total cash compensation).  This is in part because it includes companies of all financings stages (integrating the curve above).  Other datasets, like Radford, which surveys a later-stage biased set of companies, suggest a modest change in the 2-3% per annum range, not far from the typical annual increase done across the board in many companies.

This very modest change (if any, according to Thelander) in total cash compensation, at the median or top quartile, obviously does not mirror the massive increase in aggregate funding into the sector over the past few years. This is somewhat surprising, especially since we’ve observed more capital going into roughly the same number of companies – creating somewhat of a disconnect with between that fact and these two charts (i.e., if companies are moving up the curve on the first chart faster, one would expect the second chart to show aggregate increases).

This disconnect likely reflects the steady graduation into the public markets of companies who have raised significant capital (thus taking higher paid CEOs out of the private pool) – which over the past five years includes more than 200 IPOs, as well as M&A exits.

In short, it also means that CEOs have largely remained disciplined and good stewards of their capital; they haven’t used the recent 250%+ increases in aggregate biotech funding to demand significantly higher cash compensation packages.  The focus, rightly, has been on equity compensation and the adequate “reload” of equity for the team after financings.

An additional observation from doing this analysis is just how different various compensation surveys are. Radford/Aon Life Science survey captures the upper end of the spectrum, systematically higher in their base and bonus data, suggesting (as noted above) a bias towards later stage and more mature companies; Park Square’s CompStudy survey appears to capture a much lower end of the compensation spectrum, likely reflecting smaller or earlier stage startups; and, Thelander appears to be somewhere in the middle, with a mix of both early and later stage startups.

Further, the surveys also have different geographic biases, which are important to consider: the market for CEO talent in Boston is different than in Boseman, for instance, and cash compensation differences should reflect that.

To highlight the difference between surveys, as an example, the median total CEO cash compensation for Radford in 2018 is above the 75th percentile in Thelander’s 2018 survey.  The absolute dollar value variation between them is also large: they can differ by more than 25-35%, or upwards of $100-125K, on their respective “median” total compensation packages.

The implications of this are that Boards and their compensation committees should make sure they are using the right sets of companies as comparables for their benchmarking exercise, rather than just plugging in one survey. While chasing the Radford data up the compensation curve may be great for executives in the short term, it may not be the right approach from a corporate governance and fiscal discipline perspective. It also may not represent truly relevant comparables. Instead, a “best practice” approach is to assemble either a custom cut of data tailored to the best set of comparables, or a composite compensation benchmark that integrates across multiple datasets from different surveys (e.g., CompStudy, Thelander, Radford, and others) to provide the best and most comprehensive view possible. This type of bespoke compensation metric allows for tailored flexibility by comp committees.  This flexibility is especially important when comparing roles across different geographies, sub-sectors, and scale of companies. Unfortunately, most compensation committees just default to the cookie-cutter (and easy) approach of using single broad surveys. Leveraging external and “independent” compensation consultants is often very helpful in creating a more bespoke answer (for other reflections on comp committees, see this blog post).

Lastly, the recent run-up in biotech fundraising is just that – very recent – since compensation committees work on annual time scales. Perhaps these CEO compensation trends will move dramatically upwards soon as the effects of the ongoing “war for talent” at the senior level collide with private balance sheets ballooned with money to burn. This could be a recipe for significant executive compensation inflation. Hopefully, good corporate governance, and an expanding talent pool, will prevail – keeping everyone aligned around equity as the real wealth-creating incentive.

 

 

Big thank you to Jody Thelander for both sharing her firm’s survey data and providing me with helpful input into this blogpost.  Thanks as well to compensation consultant Nancy Arnosti for her input. 

Comment