High Noon at Myogen

Most VC meetings provide a feel-good story for the portfolio CEOs—usually a variation on the business resurrection theme. The Atlas Venture retreat, which just finished up in St. Tropez, is no exception.

But it’s rare to hear one as compelling, or as compellingly told, as the story Bill Freytag related at the Atlas meeting of the showdown between Myogen’s management and its venture board.

Freytag, then Myogen’s CEO, told the story of a board meeting in the middle of the deadly 2003 IPO drought. To get its pulmonary arterial hypertension drug ambrisentan developed, Myogen needed the kind of money only an IPO could deliver – and for which Freytag and his team had found, despite the extraordinarily dry weather, some investor interest.

But at the board meeting, the VCs said no. IPOs were impossible, several maintained. It was “slash and burn time”--cut research radically, pare back the company, and prepare to unload the business. One apparently stood up, pointed a finger at Freytag, and said: through the whole history of the company “you haven’t created any shareholder value!”

Which was in fact literally correct. For the last several rounds, the company had raised money at the same $7 a share price—though since the VCs controlled the financings, the blame could hardly be laid at Freytag’s feet.

Freytag is a mild-mannered man—you certainly wouldn’t expect him, or frankly the kind of managers you’d assume would gather around him, to play the Gary Cooper role in some business version of High Noon. But according to Freytag, “I said, ‘Time out,’ that the management needed to caucus. And we left the room.” In the hallway, Freytag says he told his managers that it was “D Day.” Did they really believe that, given the resources of an IPO, they could develop ambrisentan and its follow-on, darusentan—and build the company around it? Their unanimous answer was “yes.”

The group went back to the board room—“I was shaking in my shoes,” said Freytag, who realized that contradicting the venture board could mean his job. “We’ve heard your advice,” he recalls saying, “but we’re going to go forward with the IPO.”

In fact, Freytag probably had little real reason to be nervous: the board faced a management team united in its opposition to them and would hardly want to inherit the responsibility for running the company. And indeed the board backed down; the IPO went ahead, raising $81 million at $14 a share, and opened the window for a host of other IPO candidates. Myogen went on to sign a $100 million ex-US deal on ambrisentan with GlaxoSmithKline and finally to sell to Gilead for $2.2 billion--the ultimate happy ending for investors.

Freytag says he’d thought he’d end up in venture capital and talked to a number of VCs about joining a firm. But when Aspreva CEO Richard Glickman surprised the board by resigning this past summer, Interwest partner Arnie Aronsky asked Freytag to run the company.

It’s a very different kind of challenge for Freytag: with $325 million in cash and marketable securities at the end of the second quarter, annual cash flow of about $150 million a year, and a drug whose clinical value outside of transplant has so far been surprisingly difficult to prove while its patent-clock races toward expiration, Freytag is hardly likely to try to face down the board in favor of product development. (For an analysis of Aspreva’s original strategy in in-licensing Roche’s CellCept, click here.) There are probably better uses of Aspreva’s cash—and plenty of unloved biotech R&D programs around to soak it up.