Xconomist of the Week: NPS’s Francois Nader Shares Lessons Learned

Xconomy New York — 

NPS Pharmaceuticals (NASDAQ: NPSP) is gearing up for its first FDA approval, a mere 26 years after the company was founded. It is also six years since CEO Francois Nader joined the Bedminster, NJ, firm to engineer a dramatic structural overhaul, turning a fully integrated pharmaceutical company, which had spent decades developing drugs for osteoporosis, into a tiny virtual organization with a focus on very rare diseases.

The restructuring was a last ditch effort to save the then-struggling company, and this Hail Mary pass appears to have scored. Last week NPS’s drug teduglutide (Gattex), a treatment for a rare and deadly condition called short bowel syndrome, won a unanimous vote of support from an FDA panel of outside experts. The drug is widely expected to win marketing approval by year end. Waiting in the wings is a second drug for hypoparathyroidism, a rare endocrine disorder, which NPS plans to submit to the FDA for approval in mid-2013.

It’s a long way since two professors at the University of Utah School of Medicine decided to set up a company to commercialize the medical benefits of, no joke, snake venom (they named it NPS for Natural Product Sciences). Within a few years NPS gave up snakes for a focus on osteoporosis, a disease target it pursued until 2006, when the FDA asked for another clinical trial for the company’s lead product that would have delayed approval by at least four years—a setback that NPS could not afford, given its $191 million in debt and rapidly depleting cash reserves.

That’s when Nader arrived. A 25-year veteran of the healthcare industry, he had previously been a venture partner at Care Capital. Nader consolidated operations in Bedminister and closed down NPS’s discovery, manufacturing, and marketing operations.

Today NPS only develops later stage drugs it acquires from others, and only for rare diseases. It also gets royalty revenues, totaling $96.5 million in 2011, from four drugs it licensed to other firms in the 1990s. As Nader told me, “we were very prolific in discovering new compounds over our 26 year history and we reap the benefits today.” Most of those benefits come from cinacalacet, a treatment for secondary hyperparathyroidism that NPS licensed to Amgen (NASDAQ: AMGN) in1996 for a 10 percent royalty on sales. NPS renegotiated that deal in July, getting a short term infusion of cash in exchange for giving up royalties after 2018. The company now has no debt and $135 million in cash.

Nader, an Xconomist, talked to me by phone after last week’s advisory panel vote to discuss NPS’s journey from then to now and the lessons learned along the way.

Xconomy: It’s a pretty big cultural shift, turning a large company with drugs for large indications into a virtual operation with a few dozen employees and drugs that only treat a few thousand. What’s the key to make that transition work?

Nader: From 2006 to 2007 we had a dramatic reduction in head count from 450 to 40…. We only kept about 20 ultimately and recruited another 20 new people. The key point is that the profile is dramatically different for the employee…. Usually when you have strategic thinking in a traditional organization they are higher up and not in touch with operations. We needed people who could both think and act and act in an effective way.

X: By outsourcing so many of NPS’s operations, you give up a lot of control. How do you manage all your partners and retain authority?

N: In many ways we have the control but not the authority. We can control our outside vendors but have no authority over their people…. To make the arrangement work we have to be very dogmatic about clearly defining, internally defining what we need to do in a very specific way. If you ask for an animal with four legs and a tail and you are ordering a horse, but they deliver a mouse. You have to be very strict about what you are asking for… to avoid the mouse.

X: What are your key criteria for choosing your partners?

N: Size, location, previous experience—and the right blend. I admit we went through a lot of trial and error. We didn’t find them the first time around, it took more than one try. Once you find the right partner it’s important to make it an extended relationship, not a one-off…. Our vendors and partners… become an extension of our organization.

X: Are there any internal competencies you regret losing by downsizing to such a degree?

N: I don’t regret losing any competencies. We made the decision not to have discovery capabilities internally. I believe that was the right decision given the cost and productivity. Once we made this we made another decision—our pipeline growth will depend on insourcing. There are tradeoffs…. If we lost anything it would be the flexibility of the operational resources…. There is always a lead time while the outside vendors come up to speed…. When we work with third parties we need to be always mindful to have continuous competencies in house in case contractors decide to leave. We are very mindful of that.

X: Any lessons to impart to other companies contemplating this virtual structure?

N: The major shift from a research to a development company originally did not go as well as we had planned…. It is like a recipe book. It is not what is written down that matters, but the execution. The concept is simple…. We learned from our mistakes. I cannot pretend we did everything right the first time around…. But we were very committed and had the support of our board, which is very important. We also have a very, very strong corporate culture, and that permeates everything we do. We have worked very hard to have a very positive and supportive atmosphere. I truly believe that is the secret weapon of our success. People are smiling, they work long hours, they love what they do. We created this by design and I actively work to sustain this every day.