The Advisors' Blog

Everyone who works in the life sciences space knows that early-stage pharma, biotech & life sciences companies are their own beast. In all the recent talk about doing away with quarterly reporting, these companies – particularly pre-revenue – have been called out as one group that would uniquely benefit from a shift away from the requirement to file quarterly financial statements, since investors focus on a limited number of key data points and developments, like remaining cash, trial data and regulatory approvals.

Compensation programs for early-stage pharma, biotech and life sciences companies must also be designed to address these differences. This ClearBridge alert says:

Most public companies align executive pay with shareholder value over time. But among PBLS companies, value creation is often binary and episodic, hinging on regulatory approvals, clinical trials, and more […] PBLS companies, particularly earlier-stage, favor tools that align with unpredictable value-creation:

– Milestone-based vesting reflects binary clinical progress

– Stock options preserve cash and reward long-term upsid

[A]s companies grow:

– Restricted stock unit (“RSU”) and performance-vested award prevalence increases, while the prevalence of stock options decreases (though options remain majority practice across all sizes)

– Note: Performance-vested awards typically introduced ~5 years post-IPO

– Most common performance award metrics shift from predominately project milestones to TSR and financial metrics

Because of the inherent volatility, quantums are benchmarked by “dollar value and as a percentage of market cap, to account for valuation swing.” The alert goes into greater detail on the evolution of the vehicle mix and addresses common performance periods and vesting terms.

– Meredith Ervine