NeoPharm in need of realignment

September 20, 2004


I just bought four new tires. They offered to mount and balance them. "Do you want an alignment?" asked the salesman. I decided to risk the dangers of uneven tread wear. Did I make a mistake? Alignment isn't something you worry about until something drastic goes wrong.

Consider Lake Forest-based NeoPharm, one of our region's promising biotech start-ups. This company is working on treatments for the worst type of brain cancer. Publicly held NeoPharm could become the poster child for Illinois biotech success and save lives in the process. Instead, it looks like a case study in stakeholder misalignment.

Earlier this month, John Kapoor, NeoPharm director and former chairman, filed a shareholder letter with the Securities and Exchange Commission saying, "I believe NeoPharm's current board of directors is poorly suited to meet the challenges facing your company." He proposed four of the company's directors be removed.

Kapoor's stake

Kapoor and his wife hold about 22 percent of the company's stock, and Kapoor wants NeoPharm to focus on commercializing its most promising drug, as IL 13-PE38QQR. He wants the company to cut its spending from a reported $55 million to $58 million to about $30 million annually.

NeoPharm's new chairman, Erick Hanson, says, "Our goal to bring our portfolio of promising cancer therapeutics to market has not wavered, and our focus will not be distracted by this action."

How can the company not be distracted by this misalignment?

NeoPharm CFO Larry Kenyon challenges Kapoor on the burn rate issue. "We have not talked publicly about what our '05 or '06 expected burn would be," says Kenyon. Some observers say the company is burning through $55 million to $58 million a year, but Kenyon says, "John (Kapoor) knows that that is not the case for '05."

Reading the SEC filings, it's hard to blame Kapoor. NeoPharm's stock closed Friday at $7.58, that's up 21 percent in the last two weeks, but still down from a 52 week high at $22.70. Kapoor doesn't want his investment diluted if the company sells stock to raise cash to continue pursuing multiple opportunities.

Last June, NeoPharm replaced CEO James Hussey with Greg Young, who joined from Baxter International Inc. This action appears to have been well planned and organized.

"They decided to get some leadership from a bigger company," says David Miller, president of IBIO, the local biotech industry group. "Hussey is great at taking a company from zero to $200 million. They wanted a guy with credibility with Wall Street that would take them to a billion dollar valuation."

Makes sense to me. Both Hussey and Young have strong reputations and are viewed as class acts.

The board also replaced Kapoor as chairman. According to a spokesman for Kapoor, the move came "without any prior notice." The move to replace Kapoor may have been done to give the incoming management team a free hand. It seems to have backfired.

You have to wonder why all these issues weren't worked out in June. Why wasn't there better alignment?

"All companies go through growing pains," says IBIO's Miller. "These people have shown their commitment to Chicago biotech. I don't see any long range impact."

Maybe, Dave, but this is a town where we have decades long, pitched battles over our most vital, job-creating assets, like expanding O'Hare Airport. If we're going to grow the local biotech sector, we need marketplace successes, not board room battles. I think I will take my car in for an alignment after all.

Bits & Bytes

The outsourcing trend may be a boon for local law firms. Michael Mensik, co-chair of Baker & McKenzie's global IT practice reports, "80 percent of the group's current projects relate to outsourcing."

Chicago Public Schools CIO Bob Runcie speaks at the City Club on Thursday. Indian IT powerhouse TaTa Consulting Services will open an RFID Center of Excellence in Chicago. TCS Vice President Prasad Raju will direct the center, which will develop RFID solutions.

The MIT Enterprise Forum examines technologies for safeguarding our troops Thursday at Timothy O'Toole's, featuring Ned Thomas, director of MIT's Institute of Soldier Nanotechnologies, and Jean-Louis DeGay of the U.S. Army's Future Force Warrior program.

Michael Krauss is a Chicago-based tech writer and consultant.


 ©2004 Marion Consulting Partners