By: Robert J. Beckman -- Image Source - Wikimedia Commons

By: Robert J. Beckman
Managing Partner
BioMed Transition Partners

Companies in the Biomedical / Life Sciences industry having less than one year’s worth of cash are often referred to as “distressed.” The most common definition of a distressed company is one in which its financial position can no longer support its ability to pay debts as they occur and the value of its assets might be close to or less than its liabilities, contingent liabilities, and prospective liabilities. Interestingly, a company might find itself to be in distress or in a downward spiral with little prospects for maintaining or growing shareholder value long before its balance sheet indicates that the company requires external assistance. Boards and management have had a long history of ‘pulling the rabbit out of the hat” by completing a last minute financing or a strategic alliance often under terms that might save the company but offers little to support its long-term health, viability, and value creation desired by its shareholders. Nonetheless, the leadership of such companies often does little to fix the strategic and systemic conditions that infect the company.
In medicine the process of treatment always begins with a diagnostic workup. The physician needs to examine the vital signs of the patient, blood chemistry, anatomy, and physiology before coming to a diagnostic supposition. Similarly, within the biomedical industry, it is necessary to recognize symptoms of illness and then determine how to best evaluate the root cause and prognosis of a company’s problems. Symptoms might be overt as in a distressed balance sheet or they might be far less explicit such as the inability to meet deadlines or convert opportunities. Vital signs are partially measured by financial metrics as evidenced in the balance sheet and P&L, including a jaundiced examination of contingent or anticipated liabilities, cash flows, and prospects for capital formation or cost avoidance. A fuller picture of vital signs emerges when a more complete evaluation of strategy, competitive position, strategic prospects and plans are included. The equivalent of the chemistry component of a clinical exam requires a critical review of certain assets, including: intellectual property, contracts, personnel, leadership, facilities, technology, and R&D. The anatomic and physiologic components of the analysis encompass organizational structure, interactivity, and effectiveness.
Why should a company’s leadership, the Board and management, subject itself to a diagnostic work-up? The straight forward answer is that leadership has a fiduciary duty to those who own the company, the investor shareholders and often employees, to assure that the company can sustain itself and maintain or build value over the long run. Turmoil in financial markets clearly affects shareholder perception and company outlook, but the inability to raise capital or maintain share price are not the only reasons for which a company should undertake a diagnostic evaluation. Increasingly, activist share holders are evaluating their company’s leadership to determine malfeasance, breach of duty, wrongful trading, measures taken to avoid insolvency or distress and the general knowledge, skill, and experience to determine if the company is on the right path. By engaging an external team to perform a diagnostic
work-up the company’s board and management are demonstrating their commitment to assure focus on long-term shareholder value.
Following the diagnostic due diligence process, critical elements of the company might be identified that would require further evaluation or immediate action by the board. Such responses might include strategic intent and direction, asset utilization and value, financial considerations, organizational strengths and focus, and strategic alignment. A clear path forward should emerge and the planning process must begin with a sense of urgency and clarity. The board must engage management with a clear view of the future and the direction upon which the company will embark. This process might require a change in existing management, but it will often require external intervention and assistance to assure that change is implemented in a timely and effective manner. While the change process is being implemented, the board must act with a degree of urgency as well. The quality and timeliness of the implementation of strategic initiatives are critical. Frequent interactions with the team are required, a timetable must be established and maintained, and frequent internal communications is normative. The manner in which the company, including its board and management, communicates externally with investors, strategic partners, collaborators, and suppliers is critical to the long -term success of the initiative to de-stress a potentially distressed company.
De-stressing distressed or potentially distressed companies is a complex endeavor but ultimately valuable to the stakeholders of the company. Recognizing the symptoms of distress and committing to a diagnostic workup ultimately supports the perception of the performance and the effectiveness of a company board and management and might even be the difference between decline in value, survivability, and meeting the expectations of investing shareholders.