CEOs In Transition: Internal The Norm, But External Delivers Strong Returns
Executive Summary
CEO changes are underway across big pharma and biotech, marking a time of substantial leadership transition for the industry. New CEOs are usually insiders, but external hires appear to be more willing to implement change to improve shareholder returns, according to an analysis from Leerink.
CEO changes among large cap pharma are relatively rare, but several transitions at the top are currently underway across the biopharma industry, most notably at GlaxoSmithKline PLC, Eli Lilly & Co., Biogen, Gilead Sciences Inc. Valeant Pharmaceuticals International Inc. and Novo Nordisk AS, marking a time of important leadership transition for the industry.
Whether a CEO is appointed from inside the company or outside may impact how a stock performs over the 12 months post transition, and investors might want to pay attention, according to Leerink analyst Geoffrey Porges.
Most CEO succession strategies involve insiders promoted from within the company, but outside picks appear more willing to implement change to improve shareholder returns, Porges concluded, after analyzing the stock performance of 17 companies pre- and post- CEO transitions. The analysis, released in two parts on Sept. 2 and Sept. 6, focused on companies with a market cap of more than $20bn and analyzed CEO transitions over 15 years, from 2001 to the present (see infographic below).
Large cap biopharma CEO transitions occur once every seven to eight years, according to the analysis, and 68% of the time they involve internal promotions. The majority of CEO hires come from an operations (29%) or commercial (26%) background.
As might be expected, stocks of companies appointing outsider CEOs delivered inferior performance prior to the transition compared with companies appointing internal candidates. However, the analysis found a big difference between the two approaches when it comes to returns for investors over 12 months after transition.
External hires resulted in an average absolute return of 38% over the post-transition 12-month period and a relative return of 18%, whereas internal hires delivered an absolute return of 2% and relative return of 4% (adjusted for the respective market returns during each transition period).
“Internal hires appear to be more inclined to continue the status quo, and the stock follows its existing performance trajectory over the post-appointment period,” Porges said.
“External hires appear more willing to change or alter direction to improve share price performance. Whether this is cause, or effect, or simply mean reversion, remains to be seen,” he added.
A pattern emerged in the analysis: the best post-CEO stock performers were underperforming companies leading into the transition that picked outsiders as CEOs. No major movement was typically seen in the first three months, but in the following nine months the stocks with external CEOs were among the best performers in the group.
In addition, the analysis found that biotech CEO transitions appear to offer more upside than pharma CEO transitions on both an absolute and relative basis. Biotech CEO transitions delivered upside of 8%, 21% and 32% at 3, 6 and 12 months respectively, while pharma transitions delivered 3%, 5% and 8% at the same time point.
Pharmaceutical manufacturers usually plan for a smooth leadership succession strategy, so lengthy transitions like the one Novo Nordisk announced Sept. 1, in which incoming CEO Lars Fruergaard Jørgensen has been at the company for 25 years, working most recently as exec VP and head of corporate development. (Also see "Novo Nordisk Names Jørgensen CEO As Sørensen Steps Down Early" - Scrip, 1 Sep, 2016.) A similarly smooth transition is underway at Lilly, where the company appointed a groomed insider, President-Lilly Bio-Medicines David Ricks, to succeed longtime CEO John Lechleiter. (Also see "Lilly BioMedicines Head Ricks Tasked With Overseeing Growth Phase As Next CEO" - Scrip, 27 Jul, 2016.)
But there remains uncertainty about who might be the next CEO at GSK or Biogen, two companies that have announced plans for the retirement of their respective CEOs Andrew Witty and George Scangos, but are running searches for a successor. (Also see "Scangos Leaves Biogen Transformed And Transitioning" - Scrip, 21 Jul, 2016.)
In both cases, the stocks have been under-performing investors’ expectations, which could present an opportunity for a bigger change – both at the top spot and when it comes to strategy.
Changes At The Top, CEO Transitions 2001 To The Present
Leerink, CEO Transitions, Sept. 2, 2016