This study’s aim is to investigate elements that make up a good system of corporate governance of biopharmaceutical firms. It is, however, acknowledged that the findings only are tentative hyphoteses and not solid evidence due to the nature of case study research.
With a vantage point in traditional corporate governance mechanisms (executive compensation, the board of directors, and monitoring) and theory on governance of innovation, the corporate governance systems in a sample of Danish biopharmaceutical firms are mapped.
A cross-case comparison of the findings reveals that the sampled firms employ a mixture of mechanisms that resemble the solutions offered by both principal-agent theory and theory on governance of innovation. In line with O’Sullivan’s (2000) concept of governance, the use of mechanisms that empower collective learning have been found to be central to successful innovation.
Specifically, more successful biopharmaceutical firms disperse, challenge, and refine knowledge through a collective learning process that is empowered by facilitating interaction among actors that have complementary objectives and capabilities. In order for such interaction to be fruitful, decision-making power is delegated to individuals that are insiders to the process that generates innovation (i.e.
scientists and researchers). More successful firms also actively work towards forming alliances with big pharmaceutical firms and centers of scientific excellence that provide financial and intellectual commitment in exchange for control rights and/or economic rents. However, mechanisms that focus on the principal-agent relationship between managers and owners are also prevalent in the form of share-based remuneration, a composition of the board of directors that favors monitoring and strategic guidance, and concentrated ownership structures. There has not been found any differences between successful and unsuccessful firms in terms of their use of traditional mechanisms but this does not mean that they are not important. In fact, they are argued to be the foundation any system of corporate governance.
Page 83 of 92
The two approaches are in fact argued to complement each other in forming a good system of corporate governance; the mechanisms of governance of innovation primarily support innovative investments in reaching their potential while the traditional mechanisms’ limit agency costs. This implies an expansion of the concept of corporate governance to one that employs existing mechanisms as a foundation while supporting mechanisms offer ways in which innovation can be promoted, as called for by Lacetera (2001).
Consequently, the formulated recommendations of elements that make up a good system of corporate governance of biopharmaceutical firms focus on supplementing traditional mechanisms.
The recommendations are
1. Biopharmaceutical firms should establish cross-functional teams and scientific committees, which join together individuals from different levels and functions of the organization.
2. Biopharmaceutical firms should offer warrants, or similar share-based incentives, for all members of the organization
3. Biopharmaceutical firms should actively integrate alliances, and particularly out-licensing, as a central part of the strategy.
4. Biopharmaceutical firms should implement internal control systems that not only oversee but also evaluate and guide the scientific decisions of the employees that are central to innovation.
These preliminary recommendations lead to suggestions for topics of further research that aim at elaborating and verifying the findings. Specifically, it is proposed that alliances and the de facto delegation of real/formal control to insiders from the learning process should be investigated further through conducting field studies and econometric analyses.
The combination of initial recommendations and follow-up topics of research are regarded as a significant step towards identifying some of the elements that make up a good system of corporate governance of biopharmaceutical firms – of which alliances are believed to be particularly promising.
Page 84 of 92
Bibliography
In Print
Anderson, M. C., Banker, R. D., and Ravindran, S. (2000). “Executive Compensation in the Information Technology Industry”, Management Science, Vol. 46, No. 4, Information Technology Industry, pp. 530-547
Coase, R. (1937).”The Nature of the Firm”, Economica, Vol. 4, No. 16, pp. 386-405
Core, J. E., Guay, W. R., and Larcker, D. F. (2003). ”Executive Equity Compensation and Incentives:
A Survey”, FRBNY Economic Policy Review, April 2003, pp. 27-49
DiMasi, J. A., and Grabowski, H. G. (2007). ”The Cost of Biopharmaceutical R&D: Is Biotech Different”, Managerial and Decision Economics, No. 4/5, Economic and Policy Issues in the Pharmaceutical Industry, pp. 469-479
Duncan, W., Ginter, P. M., Shewchuk, R. M., and Williams, D. R. (2006). “Do Governance, Equity Characteristics, and Venture Capital Involvement Affect Long-Term Wealth Creation in US Health Care and Biotechnology IPOs?”. Journal Of Health Care Finance, Vol. 33, No. 1, pp. 54-71.
Eisenhardt, K. M. (1989). “Building Theories from Case Study Research”, Academy of Management Review, Vol. 14, No. 4, pp. 532-550
Elton, E. J., Gruber, M. J., Brown, S. J., and Goetzmann, W. N. (2011). “Modern Portfolio Theory and Investment Analysis 8th Edition”, John Wiley and Sons Inc.
Flick, U. (2006). “An Introduction to Qualitative Research”, London: Sage Publications Ltd.
Ghauri, P., Grönhaug, K., and Kristianslund, I. (1995). “Research Methods in Business Studies”, New York: Prentice Hall
Hermalin, B. E., and Weisbach, M. S. (2003). “Board of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature”, FRBNY Economic Policy Review, Vol. 9, No. 1, pp.
7-26
Hillman, A. J., Nicholson, G., and Shropshire, C. (2008). “Directors’ Multiple Identities, Identification, and Board Monitoring and Resource Provision”. Organization Science, Vol. 19, No. 3, May-June 2008, pp. 441-456
Holderness, C. G. (2003). “A Survey of Blockholders and Corporate Control”, FRBNY Economic Policy Review, April 2003, pp. 51-64
Jensen, M. C. (1986). ”Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers”, American Economic Review, Vol. 76, No. 2, pp. 323-329
Page 85 of 92
Jensen, M. C., and Meckling, W. H. (1976). “Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure”, Journal of Financial Economics. 3, 305-360.
Lacetera, N. (2001). ”Corporate Governance and the Governance of Innovation: the Case of Pharmaceutical Industry”, Journal of Management and Governance, Vol. 5, No. 1, pp. 29-59 La Porta, R., Lopez-de-Silanes, F., Shleifer, A., and Vishny, R. (2000). “Investor Protection and Corporate Governance”. Journal of Financial Economics, Vol. 58, pp. 3-27
Lazonick, W., & Tulum, Ö. (2011). “US Biopharmaceutical Finance and the Sustainability of the Biotech Business Model”. Research Policy, Vol. 40, No. 9, pp. 1170-1187.
Linck, J. S., Netter, J. M., and Yang, T. (2008). “The Determinants of Board Structure”, Journal of Financial Economics, Vol. 87, pp. 308-328
Makri, M., Lane, P. J., and Gomez-Mejia, L. R. (2006). “CEO Incentives, Innovation, and Performance in Technology-Intensive Firms: A Reconciliation of Outcome and Behavior-Based Incentive
Schemes”, Strategic Management Journal, Vol. 27, No. 11, pp. 1057-1080
Myers, S. C. and Majluf, N. S. (1984). “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have”, Journal of Financial Economics, Vol. 13, No. 2, pp.
187-221
Saunders, M., Lewis, P., and Thornhill, A. (2000). “Research Methods for Business Students”, England: Pearson Education Ltd.
Shleifer, A., and Vishny, R. W. (1997). ”A Survey of Corporate Governance”, The Journal of Finance, Vol. 52, No. 2, pp. 737-783
O’Sullivan, M. (2000). ”The Innovative Enterprise and Corporate Governance”, Cambridge Journal of Economics, Vol. 24, pp. 393-416
Pisano, G. P. (2006). “Can Science Be a Business?”, Harvard Business Review,Vol.84, No. 10, pp.
114-124
Thorsted, C.K. (2007). “Arbejdsro hos Genmab”, Pharma, March 2007, pp. 20-24 Tirole, J. (2001). “Corporate Governance”, Econometrica, Vol. 69, No. 1, pp. 1-35
Yin. R. K. (2009). “Case Study Research: Design and Methods, 4th Edition”, London: Sage Inc.
Page 86 of 92 WorldWideWeb
Bavarian Nordic Corporate Website Link: www.Bavarin-Nordic.com
Berlingske Business (August 10th 2005). “NeuroSearch Partner Stopper NS2330 til Alzheimers”, Berlingske Business, August 10th 2005
Link: www.business.dk/investor/neurosearch-partner-stopper-ns2330-til-alzheimers
Boyson, N. M., and Mooradian, R. M. (2010). “Corporate Governance and Hedge Fund Activism”, Research Working Paper
Link: papers.ssrn.com/sol3/papers.cfm?abstract_id=992739
Børsen (January 29th 2009). “NeuroSearch Udvider Aftale Med GlaxoSmithKline”, Børsen Investor, January 29th 2009
Link:borsen.dk/nyheder/investor/artikel/1/150016/neurosearch_udvider_aftale_med_glaxosmithkline.html Børsen (February 17th 2009). “NeuroSearch I Stor Aftale Med Eli Lilly”, Børsen Investor, February 17th 2009
Link: borsen.dk/nyheder/investor/artikel/13/151327/neurosearch_i_stor_alliance_med_eli_lilly.html Børsen (March 10th 2011). “Bavarian Nordic Slagtet På Trist Aktiedag”, Børsen Investor, March 10th 2011,
Link: borsen.dk/nyheder/investor/artikel/1/203191/bavarian_nordic_slagtet_paa_trist_aktiedag.html Børsen (June 27th 2012). “Topchef Forlader NeuroSearch”, Børsen Karriere,
Link: borsen.dk/nyheder/karriere/artikel/1/236057/topchef_forlader_neurosearch.html Børsen (December 3rd 2012). “Jyske Bank Opgiver NeuroSearch”, Børsen Investor, http://borsen.dk/nyheder/investor/artikel/1/247136/jyske_bank_opgiver_neurosearch.html California Biomedical Research Association
Link: www.ca-biomed.org
Cadbury Committee (1992). “The Financial Aspects of Corporate Governance”, the Cadbury Report¸
December 1st 1992
Link: www.ecgi.org/codes/documents/cadbury.pdf
Carroll, J. (August 17th 2009). “NeuroSearch Snags $46M in CNS Pact with J&J”, Fierce Biotech, August 17th 2009
Link: www.fiercebiotech.com/story/neurosearch-snags-46m-cns-pact-j-j/2009-08-17 Committee on Corporate Governance in Denmark
Link: www.corporategovernance.dk The Danish Company Act
Link: www.retsinformation.dk/Forms/r0710.aspx?id=135933
Page 87 of 92 Dansk Biotek
Link: www.DanskBiotek.dk
Darby, M. R., and Zucker, L. G. (2007) “Star Scientists, Innovation and Regional and National Immigration, Working Paper
Link: ssrn.com/abstract=1001112 EuroInvestor
Link: www.EuroInvestor.dk Genmab Corporate Website Link: www.genmab.com
Grøndal, M. (August 30th 2012a). ”Store Omvæltninger i Topotarget”, Jyllands-Posten, August 30th 2012
Link: epn.dk/brancher/medicin/article4824585.ece
Grøndal, M. (August 30th 2012b). “Aamund Fortyder NeuroSearch Brøler”, Jyllands-Posten, August 30th 2012
Link: m.epn.dk/brancher/medicin/article4824924.ece
Heel, J. and Kehoe, C. (2005). “Why Some Private Equity Firms do Better than Others”, McKinsey Quarterly, February 2005
Link: www.mckinseyquarterly.com/Why_some_private_equity_firms_do_better_than_others_1572 HealthCap Venture Capital AB
Link: www.healthcap.se
Hodgson, J., Falconi, M., and Spencer, M. (October 25th 2012). “Patent Cliff Hits Europe Drug Makers”, Wall Street Journal Online, October 25th 2012
Link: online.wsj.com/article/SB10001424052970203897404578077882348809420.html
Johnsen, M. (March 12th 2008). ”Stor Usikkerhed Om Topotarget Fremtid”, Berlingske Business, March 12th 2008
Link: www.business.dk/medico/stor-usikkerhed-om-Topotarget-fremtid
Larsen, K. B. (2007). ”Zealand-Direktør Forstår Ikke Sin Fyring”, Børsen Online, December 3rd 2007 Link: borsen.dk/nyheder/investor/artikel/1/121596/zealand-direktoer_forstaar_ikke_sin_fyring.html Lassen, L. H., and Svansø, V. L. (June 16th 2010). ”Overgangsfigur eller Redningsmand?”, Berlingske Business, June 16th 2010
Link: www.business.dk/navne/overgangsfigur-eller-redningsmand Medicon Valley
Link: www.mediconvalley.com NeuroSearch Corporate Website Link: www.NeuroSearch.com
Page 88 of 92
Nymark, J. (May 1st 2012). ”Jørgen Lindegaard Jager Skræmte Investorer”, Børsen Online, May 1st 2012
Link: borsen.dk/nyheder/investor/artikel/1/231643/joergen_lindegaard_jager_skraemte_investorer.html Orbis Bureau van Dijk
Link: Orbis.BvDinfo.com
Politiken (March 10th 2011). “Aamund Skyder Flere Penge i Bavarian Nordic”, Poitiken Erhverv, March 10th 2011
Link: politiken.dk/erhverv/ECE1219069/asger-aamund-skyder-flere-penge-i-bavarian/
Rode, E. O. (August 30th 2012). ”Op- og Nedture er The Nature of Biotech”, Berlingske Business, August 30th 2012
Link: www.business.dk/medico/op-og-nedture-er-the-nature-of-biotech
Steensgaard, N. (June 15th 2010). “Lisa Drakeman Forlader Genmab”, Berlingske Business, June 15th 2010
Link: www.business.dk/medico/lisa-drakeman-forlader-genmab Topotarget Corporate Website
Link: www.Topotarget.com
TV2 Finans (2010). “Bavarian Splitter Forretningen I To For At Vokse”, TV2 Finans Online
Link: http://finans.tv2.dk/nyheder/article.php/id-33923927:bavarian-splitter-forretningen-i-to-for-at-vokse.html
Venderby, C. (April 28th 2011). “Jørgen Lindegaard På Plads i Zealand Pharma”, Børsen Online, April 28th 2011,
Link:borsen.dk/nyheder/investor/artikel/1/206350/joergen_lindegaard_paa_plads_i_zealand_pharma.html Winther, J (August 30th 2012). “Genmab Viser Vej for Biotekbranchen”, Berlingske Business, August 30th 2012
Link: www.business.dk/brancher/genmab-viser-vej-for-biotekbranchen Yahoo! Finance
Link: finance.yahoo.com
Zealand Pharma Corporate Website Link: www.ZealandPharma.com
Page 89 of 92
Appendix A – Schematic Cross-Case Comparison
Exhibit 1 – Alliances
Exhibit 2 – Composition of the Board of Directors Genmab
Out-licensing is an integral part of the overall strategy
Source of financial commitment
Source of collective learning
Topotarget
Out-licensing is an integral part of the overall strategy
Source of financial commitment
Source of collective learning
Zealand Pharma
Out-licensing is an integral part of the overall strategy
Source of financial commitment
Source of collective learning
Bavarian Nordic
Primarily used to supplement in-house R&D
Less emphasis on financial commitment
Source of collective learning
NeuroSearch
Partnerships are not central to the strategy
Research agreements are a way to facilitate future out-licensing
Not a source of collective learning
Genmab
Majority of directors are independent
No overlap with the executive board
Knowledge of the technical aspects of drug development is dominant among the directors
Has employee representatives
Topotarget
Majority of directors are independent
No overlap with the executive board
Knowledge of the technical aspects of drug development is dominant among the directors
Zealand Pharma
Majority of directors are independent
No overlap with the executive board
Knowledge of the technical aspects of drug development is dominant among the directors
Has employee representatives
Bavarian Nordic
Majority of directors are independent
No overlap with the executive board
Knowledge of the technical aspects of drug development is dominant among the directors
NeuroSearch
Majority of directors are independent
No overlap with the executive board
Knowledge of the technical aspects of drug development is dominant among the directors
Has employee representatives
Page 90 of 92 Exhibit 3 – Composition of the Executive Board
Exhibit 4 – Executive Compensation Genmab
Dominated by individuals with high technical capacity
Clear link between the learning process and decision-makers
Topotarget
Dominated by individuals with high technical capacity
Clear link between the learning process and decision-makers
The value of strategic partnerships is emphasized by the presence of a VP in charge of Business Development
& Alliances
Knowledge of the technical aspects of drug development is dominant among the directors
Zealand Pharma
Dominated by individuals with high technical capacity
Clear link between the learning process and decision-makers
The Scientific Director has significant experience with strategic partnerships
Bavarian Nordic
Dominated by individuals with high technical capacity
Clear link between the learning process and decision-makers
NeuroSearch
Dominated by individuals with high technical capacity
Clear link between the learning process and decision-makers
Genmab
Focus on aligning short- and long-term incentives through a combination of annual cash bonuses and warrant programs
No behavior-based performance indicators
Topotarget
Focus on aligning short- and long-term incentives through a combination of annual cash bonuses and warrant programs
No behavior-based performance indicators
Zealand Pharma
Focus on aligning short- and long-term incentives through a combination of annual cash bonuses and warrant programs
No behavior-based performance indicators
Bavarian Nordic
Focus on aligning short- and long-term incentives through a combination of annual cash bonuses and warrant programs
No behavior-based performance indicators
NeuroSearch
Focus on aligning short- and long-term incentives through a combination of annual cash bonuses and warrant programs
No behavior-based performance indicators
Page 91 of 92 Exhibit 5 – Ownership Structure
Exhibit 6 – Product Portfolio Genmab
Broad pipeline
Sustained ability to come up with new promising drug candidates
Topotarget
Small pipeline
Has previously successfully developed and commercialize d a drug
Zealand Pharma
Broad pipeline
Development programmes are designed to target big pharmas
Bavarian Nordic
Broad Pipeline
Replenished via research agreements
NeuroSearch
Small Pipeline
Has started many projects but few make it to the late clinical stages
Genmab
Concentrated ownership with four investors owning 40 percent of equity
Blockholders have not been used as a source of capital post-IPO
Topotarget
One investor holds a block of 13 percent of equity.
Remaining ownership is dispersed
Blockholders have not been used as a source of capital post-IPO
Zealand Pharma
Concentrated ownership with six investors owning 73 percent of equity
Activist investors
Blockholders have not been used as a source of capital post-IPO
Bavarian Nordic
Concentrated ownership with four investors owning 30 percent of equity
Blockholders have several times supplied capital through right issues
NeuroSearch
Concentrated ownership with four investors owning 30 percent of equity
Activist investors
Blockholders have several times supplied capital through right issues