Vertex's planned CEO handoff could signal stagnant growth to come: analyst

Vertex Pharma
Vertex will hand the job of CEO to Reshma Kewalramani in April 2020. (Vertex)

Succession planning is usually nothing to balk at—in fact, it’s considered responsible governance, particularly at a fast-growing company like Vertex Pharmaceuticals. But could Vertex's plan to move CEO Jeffrey Leiden to executive chairman and hand his job to Chief Medical Officer Reshma Kewalramani augur an end to the company’s strong growth cycle?

That was the question posed by SVB Leerink analyst Geoffrey Porges and colleagues in a note sent to investors Friday. They’re worried about the transition plan—which surfaced without warning Thursday—for a variety of reasons, including the possibility that other top execs might jump ship.

They're also concerned Kewalramani, who has beaucoup experience running big trials but none as a top exec, will struggle to find opportunities in Vertex’s pipeline that can match the fast-growing cystic fibrosis (CF) franchise Leiden helped build.

“Leadership transitions in any company are always couched in the terms of ‘orderly transition’ and ‘company in excellent shape,’ but in effect the departing executives, if they have presided over a period of considerable value creation, are often signaling that ‘tougher times are ahead,’” the SVB Leerink note said.

RELATED: Vertex joins the new-CEO brigade with Leiden jumping to exec chairman, CMO stepping up

This is not to say Kewalramani lacks the qualifications for the CEO job, the analysts said. She previously spent 12 years at Amgen, where she gained valuable drug development experience in nephrology and other large indications. Vertex’s board was searching for someone like her—she’s both a physician and a scientist—and she has nurtured strong relationships inside the company even though she's only worked there for two years, executives told the SVB Leerink analysts.

Still, “the experience of leading and executing large clinical trials is not necessarily evidence of preparedness for the complexity of leading a large public company,” SVB Leerink suggested in its note to investors.

The analysts were reassured that Leiden would continue performing the normal CEO functions through April 2020, but they’re concerned the transition plan could lead to the departures of other key managers. And that could rattle investors, particularly on the heels of a couple of top executive exits. In the past eight months, Chief Financial Officer Tom Graney bolted to Generation Bio, and Chief Operating Officer Ian Smith was fired for a code-of-conduct violation.

RELATED: Vertex fires COO Ian Smith for unspecified code of conduct violation

“Undoubtedly the company’s progress and direction is a group effort, but further departures among the visible and known executives would be concerning for the investment community, particularly after the other recent departures from the senior leadership team,” SVB Leerink said.

For instance, Vertex’s chief commercial officer, Stuart Arbuckle, will be key to the company’s success over the next 18 months, the analysts said, because he'll spearhead the launch of its much-anticipated triple combination therapy for CF. The company submitted that med to the FDA for approval just last week.

There’s no indication that Arbuckle is looking to leave, but anytime a long-tenured executive like him is passed over for the top job, it’s a risk, SVB Leerink said.

As for the challenges Kewalramani will be facing once she is entrenched in the CEO suite, one is particularly worrisome for the analysts: capital allocation in research and development. The CF franchise will continue its cash-cow contributions for the foreseeable future, they said, but there’s “little to suggest that the company’s portfolio contains major untapped or unrealized opportunities” that will provide diversification for the long term.

Whether Kewalramani can identify and invest in pipeline projects that can keep Vertex on a strong growth path remains to be seen, SVB Leerink said. “Very few companies or positions give executives firsthand experience to develop the skill of capital allocation and drug investing, and the length of a ‘learning cycle’ in the industry is very long,” they warned.

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