Biotech companies deliver rewards

Biotechnology is a lucrative sector for chief executives, judging by the remuneration paid by Perth-based companies such as pSivida, Regenera and Stirling Products

These companies are hardly household names, nor are they making profits, yet each of them had a senior executive who earned total remuneration in excess of $1 million last financial year.

The extraordinarily high remuneration at these companies is explained by their use of equity incentive schemes.

As well as paying cash salaries, they have issued highly lucrative share options or performance shares to their senior executives.

Not all of the biotech companies used shares schemes to such a large degree.

Clinical Cell Culture’s UK-based managing director Troels Jordansen has a base salary of $620,553, which is high by just about anybody’s standards. Only a small portion of his remuneration is ‘at risk’.

Similarly, Chemeq founder Graham Melrose had a base salary of $533,631, which was higher than all but about 20 chief executives in the state.

The past two years has been a difficult period for Chemeq, which has incurred cost blow-outs, mounting losses and a failure to meet business goals, so it is not surprising that Dr Melrose did not receive any performance pay last year.

The company’s newly recruited chief executive, former Epic Energy chief David Williams, could potentially earn more than Dr Melrose, depending on his performance.

Mr Williams’ package comprises a base salary of $400,000, an annual cash bonus of up to $100,000 and shares worth up to $150,000 a year.

The top earner in the biotech sector last year was pSivida managing director Gavin Rezos, whose company describes itself as a global bio-nanotech company.

pSivida is also the state’s biggest biotech stock, with a market capitalisation well ahead of Chemeq, Regenera and other biotech stocks.

pSivida’s Perth base disguises the extensive and global nature of its activities.

Its core research activities are based in the UK, it has multiple commercialisation programs under way around the world, and recently announced a $140 million merger with private US drug delivery company Control Delivery Systems.

The merged company will be 40 per cent owned by the vendors of CDS and will have a market capitalisation of about $333 million.

Mr Rezos’ total remuneration last year was $1.79 million.

He earned a base income of about $360,000 and the rest of his remuneration was ‘at risk’, meaning it was tied to the company achieving defined goals.

The company uses a mix of financial measures, such as cash burn, and operational measures, such as scientific progress on its projects, results of trials, relationships with research institutions and collaborations, to judge the performance of its executives.

It said it does not use earnings per share given that all efforts are focused on building the business and establishing self-sustaining revenue streams.

Mr Rezos was paid a cash bonus of $75,000 but most of his income was in the form of share options.

He told WA Business News pSivida reviewed international remuneration trends and that his salary and bonus was in the “lower 25 per cent” of UK-listed biotechs and was at the “low end” of Nasdaq companies with a similar market capitalisation.

Mr Rezos also noted that, despite the valuation of his options, they had no taxable value when issued and were still not “in the money”.

Stirling Products, which is developing ‘growth promoters’ for livestock production, is a minnow in the biotech sector, with a market capitalisation of $23 million at June 30.

Its managing director Calvin London and its executive director Murray Ward, formerly of Patersons Securities, were both big winners from share options. Mr Ward’s base income was a modest $135,000 but share options boosted his total remuneration to $1.07 million.

Similarly, Mr London’s base income was $223,000 but his total remuneration was $980,000.

The company noted that the value of the share options increased substantially between the date it agreed to issue the options and the date they were actually granted.

In Mr Ward’s case, the company agreed to issue the options on July 6 2004, when its share price was 26.5 cents.

It granted the options on December 1 2004, by which time the share price had risen to 47.5 cents.

As a result of the rising share price, the value of the options more than doubled over this five-month period.

Stirling Products’ share price has since fallen back to about 22 cents, which means the value of the options would also have dropped.

An unusual feature of Mr Ward’s employment contract was the ability to earn a cash bonus of $1,000 for every $1 million increase in the company’s market capitalisation.

He earned a cash bonus of $24,595 under this scheme.

Imugene also has an unusual incentive scheme, tied directly to the company’s share price.

Its executive directors – chairman Graham Dowland and managing director Warwick Lamb – were paid cash bonuses of $125,000 last year based on the growth in its share price.