As you can see, it was disclosed that the Chief Financial Officer and Chief Scientific Officer/Head of R&D were retiring right in the middle of this data being locked.  Given the unusual chain of events, here are a few things that should have weighed heavily on a skeptical investor’s mind in this case.

 

First, I cannot think of a worse omen for an investor than to see two staff departures announced just days before a pivotal trial result.  Honestly, it is almost beyond belief.  There are many ways to describe the timing, but I will be diplomatic and just leave it by saying it is highly abnormal.  To be fair, just as in the AcelRx example above, reasonable and perhaps true explanations were given for the departures, like family issues, but how can an investor not be swayed by the risk inherent in believing that?  Given how information is asymmetrical and Kindred clearly had the trial results in hand, to see such an announcement does not leave a reasonable person on the outside much room to expect that everything will be okay.  Such a warning sign is impossible to ignore, and as you saw, everything was clearly not okay.

 

Second, it is also a red flag that Kindred Bio is experiencing turnover in such key positions so soon after forming the company and going public.  In my opinion, that is a sign that they have either rushed things, or that the company’s story is not as good as it first appeared to be.  When you are investing in a relatively new company like Kindred, presumably you are a long-term investor and plan stick with it as it grows.  If the company’s leadership is not willing to make the same commitment, where does that leave you as the investor?  A more ideal situation would be for them to have a realistic business plan, and to stick with it over time.  Staff departures are not a big deal for mature companies, but disruptions at small ones tend to have a way of multiplying themselves.  That type of turbulence is rarely a good thing.

 

Third, the fact that a person as important as the Chief Scientific Officer/Head of R&D decided to leave also raises many unappealing questions.  For example, after CereKin failed, the company boasted how they have an entire portfolio of other assets that are already in development.  I am guessing the Head of R&D had a lot to do with choosing that pipeline, so why is he not seeing it through?  Furthermore, there are some things about how CereKin was developed that I personally think leaves a lot to be desired.  For example, Kindred did not first run their own pilot study with the drug before sending it on to the pivotal.  Rushing things in that way adds quite an element of risk so I am not entirely buying their explanation that the study’s failure was due to chance alone, as they suggested on a conference call following it.  So if the drug was not researched as thoroughly as it maybe could have been, what does it say about his role in that decision, and does this have any implications for the other drugs in the pipeline that are already in motion? 

 

The bottom line with Kindred Bio is that almost never in my investing carreer have I seen departures like that announced just days before the result of an important pivotal study.  It simply raises too many questions for comfort.  Given how the unusual nature of this seems to have foretold the failure of CereKin perfectly, I would be inclined to watch this company from the sidelines for a very long time before believing that the news is not the sign of an even larger problem.

 

Conclusions and takeaways

 

Now that we have seen a couple examples of how things can go wrong, there are a few parting conclusions I think we can take from them.

 

• Obviously you have to take staff departures very seriously.  This is especially the case if they happen in front of an important event like a regulatory decision or trial outcome.  Information is asymmetrical to the investor.  People on the inside who work at these companies have a lot of info to base their actions upon, and you the investor on the outside have very little on which to base yours.  Therefore, do not simply buy into what companies tell you through press releases and conference calls.  Watch closely how the people there actually vote with their feet

 

• You have to research stocks very closely to find out this type of news.  One thing that is tricky about turnover is that it is not always announced like regular news.  Many departures will be hidden deep within 8-K filings, and others might not be disclosed at all.  For example, I only knew that the Chief of Clinical Affairs left AcelRx in March because it came up on a conference call (he was not what is called a “Section 16” officer).  Other times you might find out about these things only as the departing person joins a new company and a press release announces the hire.  This information will not necessarily find you, so you have to be out there actively looking for it.

 

• While companies almost always provide a good explanation when departures do happen, you should view what they tell you with high skepticism.  I understand that people do have things like real family emergencies, desires to move to a different city, and other perfectly reasonable causes for moving out of a job.  However, since it is more or less impossible for you to verify those with any degree of certainty, you are usually better off assuming the worst.  Another thing to look for is if a departure is a standalone event, or looks like it might be part of a larger trend.  It might be reasonable to look past one person moving on, but a succession of departures could be a sign of a much bigger problem.

 

I hope this article was illustrative of some of the more glaring red flags to look out for as you come across them in the future.  While these things will not always turn out bad like they did in the two examples here, I have found that it usually is better to be safe than sorry when you are the investor on the outside looking in.