Derek Hennecke - Kincell Bio - Part 4

Intro - 00:00:01:

Welcome to the Biotech Startups Podcast by Excedr. Join us as we speak with first-time founders, serial entrepreneurs, and experienced investors about the challenges and triumphs of running a biotech startup from pre-seed to IPO with your host, Jon Chee. In our last episode, we spoke with Derek Hennecke about his transition from commercial roles to full operations, managing a challenging site in Egypt, and the teamwork that turned it around. We also touched on his move to a biologic site in Montreal and the significant hurdles he faced there. Lastly, we discussed the entrepreneurial journey of buying out a business and founding Xcelience. If you missed it, be sure to go back and listen to part three. In part four, we talked to Derek about what it was like building and scaling Xcelience, from leveraging innovative technology to disrupt the market, to navigating the impact of the 2008 recession. We'll also touch on his experience with strategic buy-side and sell-side transactions, his commitment to continuous learning, and his transition into investing and work as a board member.

Jon - 00:01:20:

As you're building out this business model, can you just talk about- the state of the market and how Xcelience, you know, kind of disrupted the status quo or found the opportunity set and how did you attack that?

Derek - 00:01:33: 

Yeah, so from the period from 2006 until 2010, it was using this technology to disrupt the market. Traditionally, back then it was to do a formulation, full formulation with the excipients, stability studies, and would take time and money to get an early phase one capsule. Xcelience allowed you to just put the API directly into the capsule and go for it. And then if your product was successful, then come back and do the formulation development, which of course now we had experience with the molecule and we had that contact with the customer so we could offer that afterwards. But we disrupted the market by being the first company to allow customers to do that. And our competitors weren't very happy with it. One said, why are you doing this? You're, you know, you're screwing it for all of us. And, as well, you know, we'll see you in the market. I'm not here to look after your employees.

Jon - 00:02:23: 

Yeah, yeah, yeah, yeah, yeah. Exactly. Exactly. Exactly.

Derek - 00:02:26:

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So that was very disruptive. And we added another machine and another machine and continued to grow with that area by doing that. And then another disruption we started just before there was the Great Recession of 2010 was now customers were asking us to do the clinical packaging and then also the distribution to the sites. So we bought a site in Tampa and we continued with that also with an operation in UK. So that was disruptive, too. We were one of the very first companies to do that. And that added another third of our company when we sold was clinical packaging and distribution. So that was disruptive. And then we hit the wall in 2010. 

Jon - 00:03:06:

Yeah, that's a big wall for everybody. And I guess you mentioned something that was interesting is an acquisition that you made. Was this your first acquisition on the buy side? Or in previous roles, did you have M&A experience as well?

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Derek - 00:03:22: 

No. So we built a place in the The UK. And then finally, in 2016, I was successful in bringing in the micronization. So that was after the recession. But we had come to the finish line on a couple of companies throughout that period. And in the end, for one reason or the other, the acquisitions didn't come through. But finally, in 2016, we were able to buy a part of Powder Size to do micronization. And so it was quite long. I guess it took a full 10 years before we were successful in making an acquisition.

Jon - 00:03:54: 

Oh, wow. And can you... Talk a little bit about that experience. One, we talked a little bit about the financing of Xcelience in the very early days. What was the strategy on financing the acquisition and making sure? Again, we talked a little bit about making sure there was a fit. Can you just talk a little bit about that experience for you?

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Derek - 00:04:17: 

Yeah. So we built up enough cash reserves and both companies were profitable. So we could borrow money against the profitability of both companies on that one. So the financing was not as big an issue as the chemistry. And I'd known the founders of Powder Size since 2011. And so just building up, you know, knowing each other, they were watching us, we were watching them and knowing their technology. So there were, there's still basically only two micronization companies in the United States. One is owned by a large, very, very large company. And then there's Powder Size. There was Powder Size. And between the two, the larger one was probably spending more money on marketing and better known. But Powder Size had better technology and makes it made its own mill. It made its own micronization mill. So it was very technical. And I made a bid to buy that other one, that other smaller piece of that other one and was unsuccessful. But I was lucky to be able to build up a relationship with the founders of Powder Size and understand their competitive advantage over that they technically better made a better product, better understanding of micronization.

Jon - 00:05:26:

Very cool. And I'm always curious about like the. The kind of like the run-up to eventual joining some companies. And it always, based on kind of listening to these stories, it's like they start with just like working together and then just kind of observing. And sometimes people just, you know, see the press release goes out. But these are like usually longstanding relationships that you kind of get a feel for each other's culture and the technology and making sure that it's complimentary. And after this acquisition, I think the tables turned, there was, you were on the sell side. Can you talk about the little bit about the run-up to that?

Derek - 00:06:04:

 That's also the same message that Capsugel had been following us for many years. We'd been buying their equipment. They realized that it'd be good to have the service provider of the equipment as well. And so I knew probably 20 people inside of Capsugel who understood what Xcelience was doing. And that's a great story too. I wasn't in the market to sell Xcelience because we literally had just closed on buying part of Powder Size and was wanting to start integration when Capsugel came and said, well, we'd like to buy you and here's the price. And I laughed. I told, again, I brought back to the family. And I told my management team. And I said, ah, look what we're worth. Isn't it great? Imagine what we're going to be worth in five years. And I was surprised by everybody saying, what do you mean five years? We should sell now. And I was hurt, of course, because you think, well, don't you have confidence in what's going to happen in five years? It was a feeling like, if you don't want to be here, then don't be here. I didn't say that, but that's what you're kind of going through your head. But good people on the management team explained. We went through it. And Lindon Fellows was my chief operating officer. He said, look, you went through a pretty bad recession in 2010. That was 2016, 2017, 2016. What's next? Do you want to go through it again? And we're at a certain size, too, where the market was changing. And it'd be good to be part of a big company. Capsugel was a great buyer. They were great reputation. And I know we would be doing well under them. I trusted them that they would conclude a deal. That's important, too, because if you're not going to conclude a deal as a small company, you will take a step back in your performance that year because you spent so much time on the transaction. So everything came together. And I'm glad we did do a small process just to make sure that we would get to the finish line that I promised a couple of other people. A couple of other bidders, a couple of other companies that were interested in our company, that they could also, if I was to sell it, I'd let them have a look. And in the end, finished with Capsule Gel. I'm very happy that it worked out that way for the company and for the employees.

Jon - 00:08:18:

Absolutely. And I think going through 08 must have been just like, you know, and it's all cycles, too. You're like, you got another one in you? And then look at what we just are kind of going through. It's not going through. You know, it's just kind of this thing. Like, do you have another one in you? And I guess now that, you know, you went through that process and you're on the sell side. For any of the founders or business owners who are contemplating a sale, are there any like... Considerations or common pitfalls or tips really for anyone who's embarking on that journey to have an effective sales process.

Derek - 00:08:56:

Yeah, it's a completely different thing than entrepreneurs are typically doing. So one can say, get as much advice from as many people as possible and talk through the terms and they have their own language. It's much more than just the price. And there's a lot of catches, a lot of pitfalls, earnouts, share swaps and things. So I think the most important thing is get as much advice. Even though we had a dedicated couple of buyers for us, I brought in an investment banker to help. That acts as a buffer because you're going to have to work with the buyer. You want to make sure that there's a buffer who's acting as the go-between sometimes, who understands the delay and he can advise the buyer and advise the sellers, bring things together. And I think make sure that you really, this is like a real commitment. You're getting married, you are going to sell. I think it was interesting in the last two years, there've been a lot of failed sales. And I don't understand that because you've put so much effort into the sale process. Your company has taken a step back. Now the whole world knows that you've been up for sale. So your customers are a bit more nervous. If you're going to sell, be 99% for sure that you're willing to, you're going to sell.

Jon - 00:10:16:

Yeah. And a couple things that like stood out to me is like kind of having that one conviction in what you're doing, because it's like almost like the same decision as like founding a company. It's another like of monumental size, just like you're selling your baby. And I can put myself in your shoes of having those conversations like, look at this price, like we got a thing about this in five years. And then they're like, what are you talking about? And it's almost kind of like, you know, calling your baby ugly. And you're just like, yeah, it's kind of like, oh, that's. I feel kind of personally offended here. Like, you know, what do you, but once you get that conviction, I think it's incredibly important because like, you know, there's no take backs. So like you, once you, once you make the, you make that decision. And I would also say on the. On the fundraising side, in addition to running a process for a sale. It can be just incredibly distracting. Your company, everyone's just like had their eye off the ball and it can just be debilitating. So I like the idea of having someone who can help you and kind of act as that buffer. Not that they're going to take the onus of all the work, but. Having someone that can kind of like be a, you know, a little bit of a in-between is incredibly valuable. And so you end up selling the company and did you know at that point in time, you're like going to the Bahamas or what was going through your mind at that time?

Derek - 00:11:44:

 You know, I thought a lot of energy, I like Capsugel. I thought that I could stay on with Capsugel going forward. I thought, so I stayed for another year and a half. And I thought, yeah, this is, you know, I'd had the experience with a big company and I thought that I could go back. So I really thought, I mean, definitely I thought that I would stay in Capsugel and that didn't happen. I, you know, once you've been the boss, it's really hard to go back into a box. And, you know, somebody else is making decisions for your baby, which you don't agree with, or you don't, you don't see it the same way, but it's not, it's not your company.

Jon - 00:12:18

Yeah.

Derek - 00:12:21:

 It's too late, you made your decision.

Jon - 00:12:22:

Yeah. It's kind of two other business, businesses where I can kind of see it from the outside is like with like Starbucks.

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Derek - 00:12:33:

 Yeah. He won't leave, really.

Jon - 00:12:35:

Yeah. Yeah. Yeah. He keeps going back, but he's like, he's like, I promise I'm done. 

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Derek - 00:12:40: 

Yeah.

Jon - 00:12:41:

He's back or like Bob Iger at Disney. He's like, all right, I'm back. Put me back in. But exactly what you said, it's kind of, it's hard.

Derek - 00:12:51:

It's scary. It's ego or something. But another good friend of mine who was the CEO of Austin PX, he was bought at the same time by a competitor to Capsugel and he was out within three months and he had these discussions and that was the right, the right thing for him.

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Jon - 00:13:09:

It's hard. It's super hard. It's just like, you know and so, you know, now you're like, okay, you know, I don't see the future for myself, Capsugel. I know, you know, at this point in time, you went back to school for further studies. And also, I believe, and correct me if I'm wrong, this is kind of the beginning of like investing in a lot of board work that you're doing. Can you talk a little bit about that? Like one, the decision, like you talk about being the boss and, you know, making a transition to being put into the box, which is probably not something you want to do. But going back to school, that's like, you know, that's also- Going way back. Yeah, going way back. And it's a different kind of box, but, you know, so can you talk a little about school, your, you know, furthering your education, investing in board work that you got involved with? 

Derek - 00:13:57: 

Yeah, so I went on a lot of helping out companies, private equity companies, to doing due diligences, looking at companies, and my own investment in companies, and realized that I felt a little bit like a fraud. I'd left molecular biology back in the 80s. Not only was it old, but it was wrong. 

Jon - 00:14:17:

Yeah, the textbooks have changed.

Derek - 00:14:19:

 Yeah, it wasn't like we build on the shoulders of giants. It was really more like, no, those shoulders are...

Jon - 00:14:27:

Wrong shoulders.

Derek - 00:14:28:

Wrong shoulders.

Jon - 00:14:30:

Yeah, yeah, yeah, yeah, totally.

Derek - 00:14:32:

So I did a complete reset, and I didn't know really where to start. So I went to do a master's in science in Boston, with trying to create some structure of what pieces would be, just as a way to get back. The difference in the box question you mentioned is that when I went to school back in the 80s and 90s, it was very much a... I need it for my career. I need to get this degree for my career to show somebody on a resume that I've done this. Now in my stage of my life, I'm doing it because I really want to learn that stuff. I put more time into each course to be that annoying old guy.

Jon - 00:15:14:

People in the back, they're just like, oh, not again, Derek. 

Derek - 00:15:18: 

Yeah, move it. 

Jon - 00:15:19: 

Yeah, yeah, yeah, yeah, yeah. 

Derek - 00:15:22:

But now you do it for different reasons. So it felt different. And now the subject matters are, it's just so mind-blowing what we've done in the last 20 years in cell biology, epigenetics, virology. CRISPR, everything is, it's not only techniques, but what we can do with those, those approaches, which is, which is fascinating.

Jon - 00:15:45:

I love that. And I love the kind of, as you're investing, you're like, I felt like a fraud. And you're like, no, like, yeah. And you're just like, how am I going to solve this? And that, I love that because it's, you know, again, it's just like, how do you level up? And you were talking about, you, you started off in sales, you did BD, you did product management, you got into ops, where even though it's just like, you're like, why do you want to get into ops? And you're just like, because I want to learn and I want to, and it doesn't stop. Like, it sounds like, you know, clearly it doesn't stop. You're, you know, we're, you're refreshing the kind of your molecular biology understanding and bring it to today. And can you talk a little bit about how you bring your wealth of experience and now you are, you're on the 2020, you know, 2020, go forward understanding of, you know, science, how you bring that to your investing and how do you bring that to your board work?

Derek - 00:16:39: 

I think it's confidence. And look, when you're making investments, you're, you're making a guess. Definitely. You know, you're making a call. And in the end, you have to make a call. You can't not make a call on something. Even not deciding to invest in something is a call. So you owe it to everybody around you to do your best on keeping current and then giving an opinion. And putting it out there that it's their responsibility to agree with your opinion based on your experience or to disagree with you. You can't take that responsibility away from them and the board. But at least that they know what you brought to the table, which is this last degree, for example. And that helps. I cannot give a specific, but in one board meeting. The decision was going to be to not get into a product because of misunderstanding of the risks of bringing that product into the plant. And I said, no, actually, the technology's moved on, and now we don't deal with live viruses anymore. We're dealing with, it was really early days, we're dealing with mRNA. And I had to explain to the board what that was. And I couldn't speak for confidence, rather than for newspaper, as we were learning on the fly, that it was a safe product and that we could. You know, really bring this product in. And that was a good decision. So I think the worst thing is to be a very quiet board member. And what I learned from the Dutch is that you just, you got to put your opinion out there and be, you know, be very frank and say, this is what, what is happening. And it's, that's the difference between the Americans where in the United States, we say, well, maybe this, maybe that, or you're trying to be careful, but put it out there. Board meetings only last three, four hours a day. You don't have time to waffle, and you've got to put it out there. But their responsibility is to make a decision based on that. Because it kind of helps. And the other thing is we're going to be living a lot longer than our parents did. So I think if you don't stay current, you're going to be left on the sidelines. I think sometimes I have another 30 years left in me. So what do I do for the next 30 years? I don't like playing golf. So I've got to stay current.

Jon - 00:18:44:

 Likewise.

Derek - 00:18:46:

We have more than 30 years.

Jon - 00:18:48:

Yeah, yeah, yeah, yeah. My co-founder is a big golfer. And he's like, come on, Jon, let's go. And I'm like, I'm okay. I'll get you afterwards. Or maybe if I go with you, I'm going to be in the golf. I'll do the golf cart.

Derek - 00:19:02: 

Yeah, I'll drive the golf cart. 

Jon - 00:19:03:

Yeah, yeah, exactly. And that's really interesting. So with all this wealth of, you're very active on boards. So there's a lot of our listeners are perhaps, you know, this is their first go at. Working with the board, running board meetings. And you talked a little bit about like putting your, as a board member, putting your opinion out there and then obviously letting management make the decision. In your opinion, what makes for a productive and effective board of directors? And then one level down, what's an effective and productive board meeting in your opinion?

Derek - 00:19:35:

 So the board members. Have to earn their right at the table. It cannot be because they put money in. Certainly, if they put money in, they can demand a right to be on board. But if you have the choice, you know, make sure every board member has a reason to be there and why you want them to be there. They're an advisor. They're on your side. And you can work with them and really improve the decisions. The second thing is have conversations at the beginning that maybe after a couple of years, you'll ask certain board members to leave and new ones to come in. And that happens very rarely. But, you know, just same thing. Companies will grow. Sometimes their employees and their management team, they can also outgrow their board. And I wish that happened a bit more. We're very quick and easy to get rid of our management teams, but not so easy to have a frank discussion with the board. To your second question about the meetings, I think the best practice is religiously make sure the materials are sent out two days beforehand, no matter what, and then demand that the board members have read the material. If they haven't, you're not going through the materials during the meeting. Have phone calls with the board members before the meeting, and then meetings as a CEO with the board members after the meeting for feedback. I think it's pretty productive to have a dinner, break the bread, beforehand. Sometimes it's not possible, but try to do that in person are great. And then as a CEO, don't be the one doing the minutes, you know, be focused and present at the time. Think solicit opinions again. I don't think I'm forgetting anything, but those are the key factors I think work best. 

Jon - 00:21:15:

Absolutely. I think about, as everything that you kind of listed, like my first, when I first started Excedr, I think I got all of them wrong.

Derek - 00:21:25:

Oh, yeah. What was the biggest mistake that you made?

 Jon - 00:21:30:

All of it. I was doing the presentation like in the meeting and I didn't send it beforehand. And I was also doing the minutes. So one, I was like, you know, you said about having one, you know, we only have one thought in your head. We can't, as humans, can't really truly multitask. We can like switch really quickly, but you're still splitting. So then, you know, this was a long time ago. It's like almost like 15 years ago. But I was like, okay, here's my deck. Also, let me take notes. So I wasn't even present. I couldn't even ask the questions that need to be asked. And so I was doing everything wrong. But I can't be alone in that. I feel like a lot if you're coming, if you're a bench scientist. You don't know how to run a board meeting. And, you know, especially when you bring in your first, you know, perhaps institutional capital in, there's like this level of governance. Who teaches governance when you're at the bench? Nobody. So I made all the mistakes.

Derek - 00:22:31:

Well, maybe in that way, it's good for new CEOs to get a mentor. You know, find somebody that is willing to say, you know, say, well, next time, don't write the minutes. You know, I don't want to write the minutes, but maybe Jack can write the minutes. You know, nobody wants to write minutes. So what do you do to the CEO who should be the last person to do the minutes?

Jon - 00:22:52:

Yeah, absolutely. And I think as we evolved and we're now doing kind of exactly what you're talking about, but it's a two-way street. Really. At least what we have found is that it's a give and take on both sides. But ultimately, hearing everybody out, making it an environment where people can voice their opinions, like we'll always hear you out. But then ultimately, it will be management's decision to, we're going to go in this direction and make that call because you're closer to it. But. There's something to be said about having very opinionated board members, because these are perspectives, especially when they're not in the weeds every day that are incredibly invaluable. Because like, I can get like tunnel vision, like all the time, especially and you know, with the team kind of like, we want this, we want that. And having a board member who doesn't have these kind of like pressures, these everyday pressures to be like. I don't know. Like I actually, it looks to be all right. And so there's that balance and kind of give and take. Sometimes you take the advice, sometimes you don't. And, you know, but. That's, at least in my opinion, what a kind of constructive and productive board meeting usually looks like and feels like.

Derek - 00:24:08:

 You raise a good point, Jon, because, you know, the board cannot run the company.

Jon - 00:24:12:

Yeah, that's exactly it.

Derek - 00:24:14:

 There is a CEO who's in charge. And if you don't, you know, you don't have confidence in the CEO, you know, there's only a couple of choices. There's only one choice, and that's, you know, to find a new CEO. So, you know, that's usually binary. So you can't be halfway in between. I think it's important, like, in this day, a lot of companies, you know, you have to check and make sure if you understand conflicts of interest. You know, that's okay. People can recuse themselves from decisions and back out. I'm on board of a nonprofit, and there, one member said, look, if you don't have a conflict of interest, you don't have an interest. You know, because people are really interested in a particular area, they're going to be in that field. But that's okay.

Jon - 00:24:58:

 Yeah. And also. You know, nonprofit boards are a whole different beast, too, sometimes.

Derek - 00:25:03:

They're publicly traded.

Jon - 00:25:04:

Yeah. And publicly traded, too. Where it's, you know, I'm only familiar with the private side, but holy moly, it is, you know. Sometimes the boardroom drama can be a lot. But hearing your journey is so, one, inspiring and refreshing. And I've learned a ton about what it means to be resilient and having the ups and downs and finding new opportunities and being willing to really raise your hand and try things that are new and also continuously learning, which is inspiring for me. So you've been so generous with your time. So thank you. And in the traditional Biotech Startups podcast closing questions, we have two. First, would you like to give any shout outs to anyone who supported you along the way?

Derek - 00:25:52:

I think after 30 years, every job has had somebody that I cannot thank enough. I made a few names. I mentioned a few through this interview. And I've forgotten or I've not mentioned others. So I don't want to call anybody out specifically now. I wish there was a way to repay them the way that they supported me. And there's no way. It's usually like a one-way street. They support you. And it's hard for you to return the favor. But I think through this, at least understand and pay it forward to the next person. And actually, that's the way that you repay the person that helped you. But every single position or job or opportunity, you know, from doing my master's and not having the lab to do the thesis in for Selesh Manji and Mike Nicholson to give me their laboratory to do the thesis to, you know, bosses who let me make mistakes and didn't belittle me to, you know, Robert Bland and Nigel Brown and Neil McCarthy to, you know, let me buy the company in 2006. There's many people I've forgotten to mention in this podcast.

Jon - 00:27:01: 

I love this question because it's- And you talk about that one way kind of nature. It's like when people bet on you, when you don't even, you know, you haven't really like quote unquote earned it. They just take that chance on you. That seems to be the through line for a lot of that. And exactly what you said is kind of like that. I can see it in your investing in board work. It's the. It's like paying it forward to the next generation and really moving the needle for those who are embarking on that journey. So I love that. And if you can give any advice to your 21-year-old self, what it would be?

Derek - 00:27:37:

I think stay curious. I think also, you know, you'll have more in common with people of your same experience than you will with your 21-year-old. I think, because we think, well, we're one person, but we've changed so much that the 21-year-old me is different than the 70-year-old me. And that's weird to feel. And then other things like you will stop drinking at some point. With earlier. Did you actually do it?

Jon - 00:28:06:

Yeah, yeah, yeah, yeah. That is so funny because my wife and I. We like look back and say, how did we do that?

Derek - 00:28:18:

Then you got the lesson earlier.

Jon - 00:28:20:

Yeah, yeah. We're just like. And also we're just like, oh, we have like a bedtime now. Like this is like. It's like, you know, and just like, it comes sooner than you think, too, is I think when you when you start working, you're just like, the day after I can't do this anymore. So I totally I don't I'm with you on that. Well, Derek, thank you so much for your time. I've had a blast. Thank you for coming on the podcast. I could do this for like another four or five hours with you. But I know you're a busy guy. So thank you again. Thank you. I appreciate the time.

Derek - 00:28:50:

 Really, it's been fun. And this time has gone by really quickly talking to you today.

Jon - 00:28:54:

Thank you. Thank you. And I'm sure we'll be talking again soon. I'll see you later.

Derek - 00:28:58:

Bye.

Outro - 00:29:00:

That's all for this episode of the Biotech Startups Podcast. We hope you enjoyed our four-part series with Derek Hennecke. Be sure to tune into our next series with Barbara Alcaraz Silva, a scientist entrepreneur whose graduate studies focused on telomeres and DNA repair. Barbara has also worked with many startups, including co-founding her own company, BioChron. While with the Manos Accelerator, she works as an advisor for biotech and medtech companies, providing mentorship in business, fundraising, capital, and guidance to startup companies. Additionally, Barbara worked as a senior investment fellow at Life Science Angels, investing in up-and-coming biotechs and managing investor relationships. After her time at Life Science Angels, Barbara became the director of early-stage West Coast Life Sciences and Healthcare at SVB and is currently the executive director of early-stage Life Sciences and Healthcare Startup Banking at J.P. Morgan, where she is leading the National Startup Banking Life Sciences and Healthcare practice. Barbara's dedication to building a strong community in the biotech space and her expertise in science, management and investing makes her conversation one that founders don't want to miss. The Biotech Startups Podcast is produced by Excedr. Don't want to miss an episode? Search for the Biotech Startups Podcast wherever you get your podcasts and click subscribe. Excedr provides research labs with equipment leases on founder-friendly terms to support paths to exceptional outcomes. To learn more, visit our website, www.excedr.com. On behalf of the team here at Excedr, thanks for listening. The Biotech Startups Podcast provides general insights into the life science sector through the experiences of its guests. The use of information on this podcast or materials linked from the podcast is at the user's own risk. The views expressed by the participants are their own and are not the views of Excedr or sponsors. No reference to any product, service or company in the podcast is an endorsement by Excedr or its guests.