How David Southwell Came to Sepracor
<<Some background reading that some might find interesting.
Note that the article is from 1997>>
Staying alive
Institutional Investor; New York; May 1997; Ida Picker;
Sepracor Inc
Abstract:
In mid-1994 David Southwell gave up his career as an investment
banker at Lehman Brothers to join a tiny biopharmaceuticals outfit
called Sepracor as its chief financial officer. Southwell did not
leap blindly. Three years earlier he had worked on Sepracor's
initial public offering. He liked the firm's strategy, which
involves developing and patenting purified forms of existing
blockbuster drugs. The tale of Southwell and Sepracor turns out
to be a yet unfinished biotech thriller.
Typically, a fledgling biotech company burns cash provided
by venture capitalists or early-stage investors as it strives to
push new products through R&D, clinical testing, and the FDA
approval process. This strenuous obstacle course can take as long
as 15 years and cost $500 million or more. Hence, keeping a biotech
company in cash is one of corporate finance's more daunting task.
This is one such tale.
Full Text:
Copyright Institutional Investor Systems, Inc. May 1997
With its bum rate and losses mounting, Sepracor constructed a
complex series of financings to raise cash. Welcome to corporate
finance, biotech-style. In mid-1994 David Southwell told his Lehman
Brothers colleagues that he was giving up his career as an
investment banker to join a tiny biopharmaceuticals outfit called
Sepracor as its chief financial officer. "You're insane," he
recalls being told. His boss and the head of Lehman's industrial
group, Robert Scully (now a Morgan Stanley & Co. managing director),
was more tactful. "Good luck," he offered.
And why not? In 1994 the biotechnology market was suffering through
one of its periodic rough patches, with stock prices swooning to
new lows. In June one of the industry's biggest biotechnology
underwriters, D. Blech & Co., was on the verge of collapse, brought
low by tumbling biotech stock prices. Meanwhile, Sepracor, based in
Marlborough, Massachusetts, was awash in its own woes, above and
beyond the stock market. "When I joined, it had $10 million in cash
and its burn rate" - a measure of how fast it was going through its
cash - "was $15 million a year," Southwell says. He admits, with a
smile, that he wasn't "completely forthcoming" to his wife about
Sepracor's financial situation. He was taking a big pay cut; in
return, he would receive a small salary and a garageful of
potentially worthless Sepracor stock options. The stock then
hovered at about $4 a share; his options could be exercised at $6.
In fact, Southwell didn't just leap blindly. Three years earlier he
had worked on Sepracor's initial public offering. He liked the
company's strategy, which involves developing and patenting
"purified" forms of existing blockbuster drugs - so-called ICEs,
or improved chemical entities with reduced side effects. He knew
that Sepracor was close to getting its first patents and recognized
how critical financing would be over the next few months -- giving
him a key role immediately. Encouraged by this knowledge and by the
enthusiasm of at least one of his banking colleagues - Lehman
managing director and superstar health care banker Frederick Frank
(now vice chairman), who told him he was making a "very astute move"
- Southwell had few regrets as he began his new career.
The tale of Southwell and Sepracor turns out to be a yet unfinished
biotech financing thriller. (In common parlance biotech and biopharma-
ceuticals are synonymous terms, referring to small, emerging drug
companies.) Typically, a fledgling biotech company "burns" cash
provided by venture capitalists or early-stage investors as it
strives to push new products through research and development,
clinical testing and the Food and Drug Administration approval
process. This strenuous obstacle course can take as long as 15
years and cost $500 million or more, during which time there are
few sources of revenue, intense competition and no guarantees of
success.
Few such start-ups succeed. They must navigate a long, perilous road:
products that bomb in clinical testing, stock prices that plunge
just as the need to replenish cash is the greatest, patent snarls,
delays at the FDA. To survive, company insiders are forced to sell
their equity cheap thus diluting their own holdings - or auction off
promising research or potential products to raise cash. Even if a
product does survive the FDA gauntlet, companies may have to seek
partners among the drug elite, which have the marketing might to
launch new drugs on a massive scale. Building a biotech company is
like running the Boston Marathon's Heartbreak Hill: The
difficulties, and the cash drain, mount as you stagger toward
the finish line.
Hence keeping a biotech company in cash is one of corporate finance's
more daunting tasks - and, over the past 15 years or so, the
challenge has spawned nearly as many inventive ways to raise money
as it has innovative pharmaceutical compounds. This is one such tale.
Southwell, 36, was born in London, the son of a partner in a small
London merchant bank, Laing and Cruickshank (now part of Credit
Lyonnais Laing) and the grandson of Sir Philip Southwell, former
president of the U.K. division of Houston-based engineering
colossus Brown & Root. After graduating from Eton in 1979, he got
a job through his family's Texas connection, driving a truck for
oil field supply and service outfit Wilson Industries - and working
directly for owner Wallace Wilson, son-in-law of the late George
Brown, co-founder of Brown & Root. Swept up in the oil boom,
Southwell decided to stay in the U.S. "I moved from gloomy,
boring old England to a Texas boomtown. Who would want to leave?"
he asks.
Instead, he attended Rice University in Houston. When oil prices
collapsed, he switched from engineering to business. After
graduating in 1984 Southwell entered Lehman's analyst training
program, then left two years later to work on his MBA at Dartmouth
College's Tuck School of Business. When he received his degree in
1988, he returned to Lehman, where he worked for Frank and later
Scully.
In June 1991 Southwell got a call from Frank, who asked if he'd like
to work on an IPO for a small biopharmaceuticals firm. Southwell was
intrigued. "I'd never done a financing before for a company that was
losing money," he says. In handling Sepracor's IPO, Southwell met
the company's irrepressible founder and CEO, Timothy Barberich.
"[In this business] there's really only one door out -. the door
of success, even though you'd like to jump out the window 365 days
a year times ten years," says Barberich. "Think about it. Who would
hire a guy who lost $454 million" - the funds Sepracor raised
through 1996 - "and had nothing to show for it?"
Equipped with a college chemistry degree, Barberich took his first
job at American Cyanamid Co. in 1971, where he worked on an early
version of the purification technology behind Sepracor. The next
year he joined Millipore Corp., a Bedford, Massachusetts-based
company that developed separations products for a variety of high
-tech markets. When he left in 1984, Barberich was a general manager
of Millipore's medical products division.
Barberich wanted to start a company that would use separations
technology to develop pharmaceuticals products to sell to other
companies. Through a friend, he met Robert Johnston, a Princeton,
New Jersey-based venture capitalist who had been thinking along
the same lines. Johnston, who in the early 1980s had funded Genex,
one of the first biotech start-ups, launched Sepracor by putting
up $500,000 of "seed seed venture capital," as he puts it, of which
$300,000 was his own and the remaining $200,000 a bank loan backed
by his then-robust Genex stock. (Genex later ran into difficulties
and was acquired by Piscataway, New Jersey-based Enzon in 1991.)
For his money Johnston got about 50 percent of the company at about
10 cents a share, later buying large chunks of preferred stock.
CEO Barberich and co-founders James Mrazek, president of Carnegie
Venture Resources, and Robert Bratzler, who became CEO of Sepracor
spin-off ChiRex (and is now a ChiRex director), shared the rest.
Barberich's role was to hire top scientists, formulate a strategy,
assemble a scientific advisory board and begin operations; Johnston
would help raise more venture capital.
Alas, the biotech companies that were Sepracor's target customers
were slow to develop and didn't need its products as quickly or in
the quantities Barberich and Johnston had hoped. In 1985 Barberich
shifted direction. He packaged Sepracor's chemicals purification
businesses into a new division called BioSepra and moved Sepracor
into what is today its main focus: purifying existing blockbuster
drugs to create new, patentable compounds.
Meanwhile, Sepracor needed more cash, and Johnston assembled a group
of venture investors, including Venrock Associates, the venture
capital arm of the Rockefeller family; the Rothschild family's U.K.
venture capital operation, Rothschild Ventures; and New Enterprise
Associates, based in Menlo Park and Baltimore. The group put in a
total of $3.5 million in equal amounts thus buying their Sepracor
stock at about $1 per share. Anthony Evnin, a Venrock general
partner, says that after the initial investment in 1985, his fund
participated in three more rounds of financings for Sepracor, until
its IPO. Subsequently, the fund distributed shares to the partners
most of whom still hold the stock, Evnin says, adding: "I still own
a lot. Personally."
Notes Charles Newhall, general partner at New Enterprise Associates:
"We had a relationship with Bob Johnston. Bob knew that Tony Evnin
and I were interested in financing a company based on separations
technology." NEA committed $2.7 million - and, along with the
original venture investors, helped the company raise an additional
$50 million to $60 million in private equity. |
