Biogen Makes Counterintuitive Move To Tap Exelixis's Scangos As CEO

Shortly after the market closed on June 30, Biogen Idec and Exelixis confirmed leadership changes that will result in Exelixis's long-time CEO George Scangos taking the helm of the Big Biotech July 15.

The move is counterintuitive, both for the commercial-stage Biogen and for Scangos, whose career has largely been focused on research and early development and free of activist shareholder pressure.

Scangos, a scientist turned entrepreneur, is best known for making deals of all stripes at a biotech with experimental medicines. In his 14 years at the South San Francisco, CA-based Exelixis, he has presided over more than 40 alliances, according to Elsevier's Strategic Transactions. He is also renowned for his use of alternative financing, such as a private-equity joint venture with Symphony Capital and a debt facility with Deerfield Management.

His research and development chief Michael Morrissey will move up to be Exelixis CEO. Morrissey is a key architect of Exelixis' powerhouse discovery engine, which created the pipeline of nearly two dozen small-molecule drugs that gave Scangos the ammunition to forge so many deals.

With Scangos' departure, Morrissey faces numerous challenges, including speculation that the biotech's lead compound, XL184, an oral inhibitor in Phase III trials, is somehow flawed. On June 21, the biotech announced its partner Bristol-Myers Squibb had relinquished rights to the product ("¹ (Also see "Exelixis Defends Cancer Drug XL184 After Partner BMS Walks Out" - Pink Sheet, 21 Jun, 2010.)). It's the second time XL184 has come back to Exelixis; GlaxoSmithKline declined to exercise an option on that molecule and four other earlier stage candidates in 2008 ("² (Also see "GSK/Exelixis: The End of an Era" - Pink Sheet, 24 Oct, 2008.)").

Scangos also faces his own challenges. As CEO of Biogen, which has built its reputation on its multiple sclerosis franchise, Scangos will have to navigate new waters with commercial products that face regulatory scrutiny and commercial threats. The company's top-selling medicine, Avonex (interferon-beta 1a), faces serious competition from three other interferon-betas in the marketplace as well as the advent of oral medicines such as Novartis's Gilenia (fingolimod) (³ (Also see "Gilenia's Risk Management Should Key On Initial Doctor Visit, Cmte. Says" - Pink Sheet, 14 Jun, 2010.)).

Moreover, Biogen's fastest growing franchise, Tysabri (natalizumab), which posted worldwide sales of approximately $1.1 billion in 2009, has struggled in the wake of concerns that patients are at risk of a rare but deadly infection, progressive multifocal leuokoencephalopathy. Following a year-long withdrawal from the marketplace soon after the drug's launch, Tysabri's use is now strictly monitored.

Adding to Scangos' challenges, he must also find a way to work with activist investor Carl Icahn, who now controls three of the 12 board seats at Biogen Idec thanks to a deal struck earlier this year that boosted Icahn Partners' representation from two to three and allowed the biotech to avert its third proxy fight with the activist investor since 2007 (⁴ (Also see "Agreement Averts Another Proxy Fight Between Biogen Idec, Icahn" - Pink Sheet, 22 Mar, 2010.)).

During the Biogen conference call announcing the news, Chairman Bill Young made it sound like Icahn and his representatives gave Scangos their blessing. Young, who was responsible for overseeing the search, made a point of noting that Scangos met with every single member of the board and emerged "as the clear first choice" in what was a rigorous review process.

In an interview, board member Alex Denner of Icahn Partners confirmed Young's statement. Denner, who is generally Icahn's right-hand man when it comes to biotech, emphasized his excitement at the prospect of Scangos joining Biogen. "As a shareholder, I believe George brings a great breadth of knowledge and I have confidence that he can push forward with the commercialization of Biogen's products and make appropriate investments in the pipeline. Shareholders will see a return for the investment made in the pipeline" under Scangos' leadership, he said.

Indeed, Scangos invoked the need to "enhance shareholder value" multiple times in the conference call in which he announced his decision to join Biogen.

Shifts In R&D Coming To Biogen?

Biogen, which generated $4.4 billion in sales in 2009, has one of the highest R&D burns in the industry. It has programs in myriad therapeutic areas, including multiple sclerosis, cancer, inflammatory diseases, and even cystic fibrosis. A frequent complaint of Icahn Partners during the earlier proxy battles was Biogen's investments were scatter-shot, with too little focus concentrated on core areas of expertise.

Scangos echoed these concerns in his brief statements to Biogen investors on June 30. "We need spend thoughtfully [on R&D] and get a return on our investment. We can do better; we have to do better," he told analysts.

Scangos' oncology expertise could result in a shift in focus at Biogen, but not at the total expense of the multiple sclerosis franchise. Scangos said Avonex and Tysabri will continue to be the company's primary growth drivers and he sees "opportunities" for expanding the commercial presence of both compounds. Since he doesn't officially take the helm of Biogen for another 15 days, he declined to be specific, emphasizing that he enters the CEO position with "no preconceived notions."

But Scangos' comments also suggest Biogen - like many other companies in the industry - may choose to focus on externally derived products to fill its pipeline. In order to spend R&D dollars wisely, "that means taking a hard look at things on the outside as well as internal R&D," Scangos told investors.

Scangos A Dark Horse Candidate For The Position

Wall Street investors were clearly taken aback by the appointment of Scangos. In a report issued June 30 shortly after rumors of his selection appeared, J.P. Morgan analyst Geoffrey Meacham wrote "George Scangos has ample experience effectively managing a research organization and in the area of business development...That said, Biogen is a commercial stage company and George's limited experience in this area does pose some challenges."

In addition to competition in multiple sclerosis, Meacham highlighted the recent announcement of the retirement of Chief Operating Officer Bob Hamm as a point of uncertainty with a build-out of the commercial leadership team required in the near future.

Perhaps anticipating such skepticism, Chairman Young said during the call that Biogen has "a strong commercial team in place" and promised the company would address the challenges to the multiple sclerosis business on the company's quarterly call, scheduled for July 20.

Most investors were betting another Boston-area executive, Deborah Dunsire, would be the top choice to lead Biogen. In demonstrating the commercial potential of Millennium Pharmaceutical's first-in-class proteasome inhibitor Velcade (bortezomib), Dunsire orchestrated that biotech's $8.8 billion sale to Takeda in 2008 (⁵ (Also see "Takeda/ Millennium: The Price is Right" - In Vivo, 1 Apr, 2008.)).

Sources close to Dunsire confirmed she was approached early in the search but as of May 2010 was clearly not the top candidate. "She is strong-minded, and very direct, diplomatic and firm. Would Icahn tolerate someone like that when what he really wants is a general manager?" asked one industry veteran who knows Dunsire.

The involvement of an activist board may have made numerous qualified candidates leery of taking the position, unsure whether they would have full decision-making rights or simply become the person implementing Icahn's wishes.

"There's a lot of ego to manage," said one industry veteran who asked not to be named. "How do you steer a middle course, when half the board members have done nothing of note and there is an activist side that has an agenda?"

Indeed, other candidates who were approached but uninterested reportedly included Kurt Graves, the former chief commercial officer of Vertex Pharmaceuticals, Susan Desmond-Hellman, Genentech's former president of product development and currently chancellor of University of California, San Francisco, as well as Jeff Leiden, the former president and COO of Abbott Laboratories' Pharmaceuticals Products Group and now a managing director at Clarus Ventures.

Investors were largely unmoved by the appointment of Scangos as Biogen's CEO. The biotech's stock price closed down only 2.5 percent June 30 on the news to $47.45.

- Ellen Foster Licking ( ⁶ [email protected] )