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CFO Rick Baron (Zynerba Pharmaceuticals, Globus Medical) gave us his perspective on being a chief financial officer in the life science industry at the 2015 10x Medical Device Conference.

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Rick Baron: I thought the best way to do this is since there are multiple views of the office I’m going to do a brief introduction of the subject matter.

So the first thing is I think the CFO’s role is sometimes helping people not necessarily just investors but helping people see the forest in the trees. Much of the discussions we’ve had from the company that made its presentation immediately prior to break, to the regulatory consultants, to IP, to all of those types of things here have been not financial in their origins or not financial in the way that they presented but one way or the other they come down to financial choices.

So all of those things complicate what it is. If we could all develop devices in a vacuum, put our good product, help save people’s lives or enrich their lives, it would be easy. It would be totally fun. It wouldn’t be complicated.

So somewhere along the line, you need that board of advisors that was presented in the last presentation or a group of people that help you out. You might need it earlier, you may need it later, you may need it whenever. And it gets down to why do you ever need a CFO?

I think the CFO tends to be the most maligned, not regulatory. It’s probably the most … there’s a whole bunch of us that are the most maligned in an office but I think you need a CFO because sometimes we can help you differentiate the forest and the trees in certain situations.

Now, when I’ve been recruited or I’ve looked for help in the area, I always want to find a really well-equipped person.

So here’s a picture of a well-equipped CFO and I’d like you to start as you’re looking at it on the upper left and on then we’ll go around but the first thing you have to have is someone that comes in with a briefcase.

The job’s evolved over many years. It first started with you needed lots of beans because after all accountants are bean counters, right?

So you need that because if you don’t have the beans, it probably means that CFO was not experienced enough and can go back in time enough to understand the debits and the credits and things like that.

You also need a green eyeshade because when I came into accounting, we wore green eyeshades. We had little garters on our sleeves because we had to roll up the sleeves a lot and do things like that. So that’s part of my historic bag.

No. When I play tennis maybe but … thank you. I need him occasionally just to ask the question.

You need slide rules but no, no. You don’t need that anymore. You need calc … no, no, you don’t need a calculator. You need a computer maybe just need a cellphone. And clearly you need a variety of maps.

The reason why you need a variety of maps not in the literal sense but in the figurative sense is, I think we’re all going to find out as you go through the various projects that you’re working on there probably is not just one way to go. There’s probably multiple ways to go. There’s multiple paths.

You choose one direction, it may be a straight line. Most likely it’s not. You’re going to get to another stop sign. You’re going to have to figure out whether it’s right or left. Maybe start. Maybe stop. Maybe restart. But you’re going to have to have a map or a group of people not just the CFO that will help lead you through the various paths that you have to choose to go through.

Third thing you need is a protection for a rainy day. Some of you may think that that’s an umbrella. It’s really the extra cash that you’re always going to need because all projects that I’ve experienced generally need two, three, four, 10x the amount of cash that you all thought that it would need in the beginning.

Things take time. If you don’t start off the regulatory pathway and do it exactly the way the FDA wants, you have to go back and start again. That takes extra cash.

One of those patent trolls comes and picks on your little device and says you know, there’s an IP thing from a long long time ago that you have to be concerned with.

It takes extra cash.

Whatever it is, you need the umbrella, you need it. Not so much for the protection but the extra cash, the extra time that it takes you to do it in.

And then in the end, there is light at the end of the forest. It’s as you begin to develop the team, the process, the device, et cetera, et cetera, you will begin to see that your device will be able to be as successful as you hope it is.

So now that I’ve kind of given you the introduction, about a week ago, I asked a bunch of colleagues about 30 or 40 people who I’ve worked with over time, my family, everybody, what does the CFO really do?

Because sometimes that’s confused and the first person that responded is my daughter who lives up in Berkeley and is doing the things that one might think you want to do in Berkeley. She will save at least one person’s life as she’s doing social work and things like that but this is her perspective of what her father the CFO did as she was growing up.

We talk to lots of investors because I always seem to be on the road. We do lots of quarterlies. Always sitting at my desk while I was doing all that extra work. Travelled to lots of places and talk to people in suits. Not as much in suits.

My kids pointed out to me when I was reticent to give them how much I earned because I was with a public company that they already knew because they Googled me. So you might as well fess up if you’re public and tell them.

And in her way, the “they” in quotes means, excuse me women but it’s the “men.” They’re watching you so be careful.

But then I also got responses from various people. What I did was I picked out a group of things that people thought CFO’s could do, would do from the various perspectives and I’m not using this to go through each of the items on the list but at any point in time from this point forward, if you have questions about what it is or as a consultant, how do you get to that CFO? As an owner of a company or the founder of a company, when do you want to hire that person and what’s the perspectives that are valuable?

As an attorney, the CFO calls you up and yells at you because you’ve just spent too much of their money. Those types of things. Let’s ask questions if you want to or I can go through a couple of these and respond to the little stories.

To go back to Joe’s introduction of that wonderful little clip, unfortunately as an owner, a CFO and other people involved in companies sometimes things like that are not that far from reality.

Those of you who work with companies may have an aspiration to do the public thing. That does happen the minute your company doesn’t do what everybody wants it to do.

Which leads me to the item on the middle on the right-hand side. Part of the CFO’s role is to develop the story and be the under promiser and the over deliverer. That’s hard because the more you under promise and the more you over deliver, the more the investor begins to adjust what they think you can do.

So you need to have the balance of a reasonable underestimation and then a reasonable over delivery because Joe’s stock wouldn’t have gone just to 9 ½. It might have gone to 15 and then dropped to 2 and that kind of a conversation with an investor, I don’t think Joe could’ve shown up on the slide.

So it’s the balance and it’s that way not only for a CFO. It’s that way for the CEO. It’s the tightrope that you all walk.

Can I stop for any questions or any thoughts?

Joe Hage: Hey, it’s your show man. Do you want to ask some questions of Rick or you just want more stories because they’re great?

Audience 1: What’s the psychologist’s side?

Rick Baron: Oh, what’s the psychologist’s side? Most of my career, I’m a little bit different if you haven’t already figured it out than many other buttoned-up financial types. Most of my career I’ve spent with startups. What I’ve noticed in this group over the past two days or so is that I don’t think anybody here from either the company side or the consulting side or the professional side is short on passion.

You demonstrated it the other night. The speech you gave was inspiring. The person that gave the global discussion yesterday, I think everybody lined up just to get his card and said, how can I be involved?

So everybody here had the passion. Now with passion and events that sometimes don’t go in that straight line to the upper right-hand corner of the chart, occasionally takes a dip and I think the opposite of passion in the way that we present and we motivate people could actually become depression.

So what any good exec and I think this is broader than just a CFO. But any good exec has to do is to be mature enough, sharp enough or whatever to be the psychologist. You have to be the cheerleader. You have to be able to say even if things aren’t great, why things will get better or best at some point in time?

So that’s the amateur psychologist. I don’t have my degree but I’ve been told that occasionally, I’ve helped the executive wing out and I know for a fact on probably more occasions my colleagues have helped me out.

So it’s the psychology of what it is that you’re trying to do and the challenge associated with it.

Joe Hage: I’m thinking that the manner of your speech and your presence and I’ve come to know you a bit that you’re even temperament is very helpful.

Rick Baron: Is it that deceptive?

Joe Hage: Isn’t it?

Rick Baron: Well no but it’s … I’ll go off on the deep end. Absolutely. I’m as human or more human than anybody else.

At the end of the day, you love what you love to do. And that’s the part that makes it fun. That’s the easy part of the psychology.

Joe Hage: So tell me about the under promise and over deliver. Is the formula, we’re reading the tea leaves and we’ve come to know Rick and his various careers and we’ve tracked him and the like. Should we just expect that you’re going to guide me to a penny a share less than you’re really going to deliver and so it’d be a penny a share more than we thought, that’s good old Rick. That’s what he does and if it’s 2 or 3 or 4 pennies more, wow, we have a rally and if it’s just under, then you know, that kind of thing. It’s a game, I get it.

Rick Baron: So I probably should’ve put another word up and this really will be an answer to your question. It’s a little bit of a chameleon also on the sea level. I believe from a good CFO level that I’m probably a step behind the CEO and the chairman.

Joe Hage: I think most people in the room would agree with that.

Rick Baron: So sometimes the things that I might want to do and I don’t know if this is advice or just you know, I’m going to pay you all $150 for my hour of therapy. But I don’t necessarily have a personal philosophy. Each of the companies I’ve been with is different.

To be honest, I would rather give everybody an accurate read, arrange and say, “I’ll be happy if we come within this $10 million range of revenue.” Many of you are saying, “Boy, I would love to be in the position where I can give a $10 million range and it doesn’t mean zero to ten.”

But we’re a million dollar range or something, I would rather do that and say, “I’m happy to come within the range.” But I know that in many companies, they like to game it and put it under and within two or three quarters, the analysts, I’m not sure they’re … I don’t see them. But the analyst will pick you up and say, “You know, even though you hit what you said you would do, you underperformed.”

Because they figure it out. People are smart.

Yes? You had your hand up I think.

Michiel de Bruin: I did. Michiel de Bruin, Amgen. Thank you so much. My question more comes from how do we balance innovation and financial success?

So you know, Amgen, the stock price has doubled over the last two years which is awesome but they’ve done that through kind of reduction of workforce, closing locations and really leaning out a lot of the existing processes. And we’ve seen things as the leaner you get, great. You can still achieve your goals and develop repeatability but your ability to innovate and kind of add a little bit of chaos which the innovation comes from goes away because you’re running such a lean workforce.

And so from the CFO perspective, how do we keep a share available for the innovative processes we need while maintaining the performance that Wall Street is looking for?

Joe Hage: Thank you.

Michiel de Bruin: Thanks.

Rick Baron: I’m going to rephrase the question maybe by giving you the answer. I would rather innovate in the most effective way that will add to both topline and bottomline and set the standard ideally that Wall Street is looking for.

Now, I also believe in Tinker Bell and the good fairy and everything like that because one of the hardest things to balance with any investor, let’s take this out on the public realm, is setting realistic expectations at the same time that you’re trying to find an investor to buy your stock and invest in your company.

I think human nature says, you know, if I could just do a little bit more, the value of the stock would be just a little bit more, if the stock was a little bit more then you know, I get deluded a little less and therefore I make more money.

So it’s the balance between all those things. I know that at times I’ve calculated or presented a model and I don’t think that I’m the all-knowing and all-being person where the innovation suggested by someone just didn’t fly but it didn’t fly not because innovation is bad and evil. It didn’t fly because either the rationale for growth and sales, profitability and those types of things just weren’t there.

So anybody that says, “I’m doing this just to make a bottomline,” I think you also have to look at the metric of, can I sell more? And there’s some other stories along like you know, don’t worry I’ll make up in volume what I lose in profits. That type of thing.

So a good financial person will help balance that.

Joe Hage: Cesar, I understand that in addition to being a cardiologist you are also developing or have developed a medical device?

Cesar: With all respect, this is a very naïve question from somebody in the valley to somebody that has already climbed the mountain and I’m sorry about that. But at what point in the evolution of a startup do you need a CFO?

Joe Hage: Good question.

Rick Baron: It depends. Next question.

Now, it goes to I think the executive suite and I think it goes to the full executive suite too. And I don’t want to lay everything out like my brain sits here and goes, cost benefit. Plus minus. But it goes to when I think the executive team needs that extra person.

So I’ll tell you that many startups invoke today and probably a healthy thing off of the 2008 crash is that companies start virtually. It used to be in 2007 and before that you raise an obscene amount of money, built out manufacturing, built prototypes and had offices with excuse me, my friend from Silicon Valley, I don’t know where he is but we don’t have gyms anymore in many other companies that we startup. It’s like you find the place near a gym. It’s those things.

So you don’t spend the money in the way that you used to. Well, you used to also hire, a CFO is one of the first five, six, seven, eight, nine, ten people that you hired.

Now, there are really good accountants that can help you do your books. You have really good people that can help you raise money and do those types of things but when the cost of that or the convenience of that is such that you need someone fulltime, go fulltime.

The other thing you can do is, how many people here that have started companies have a really well-rounded board?

Okay. How many are now thinking about having a well-rounded board and you don’t have to raise your hand but what that does is you can find the expertise with one of your advisors who can help that accountant do the things you want to do.

So that’s one thing. Angel rounds maybe not. By the time you want to start going institutionally to raise money, you probably need a more sophisticated group of people. That’s a rule of thumb.

Joe Hage: Would you tell us the story of bringing Globus Medical to IPO in 2012? A very difficult year for medical device players?

Rick Baron: So I’m actually going to tell three stories.

Joe Hage: Have at it.

Rick Baron: If it’s okay.

Joe Hage: Absolutely.

Rick Baron: So I’m one of those crazy perhaps lucky guys who’s done an IPO more than once. Each one of them have been different. The first one was with a pump company called Animas. In some pump company, I was there as employee 23. Some called me Michael Jordan. Most didn’t call me Michael Jordan but I like the number.

It was a case where I was hired just as the device was approved. Salespeople were getting hired. Launch was six months out and that was an experience where literally as we were filing our IPO documents and just about ready to pull the string on the IPO, the rules for revenue recognition and all sorts of rules changed. And I would say that that was perhaps the best IPO I had ever done and I simply did it with and give credit to the people that saved my life during that process.

It was my CPA. It was an incredible advisor from an accounting firm that is no longer around. A lawyer who’s out there and coached me through the process in a way that I don’t think I could’ve done it myself but that was fascinating because in that one we were the first device company to go out in about a year and a half to two years and we’re oversold by three, four, five times.

The next one was an IPO that didn’t happen. It was with that other kind of a life science company called Pharmaceuticals. It was something that the minute that we filed, we got put in play which meant that not only did investors see what we were doing, it was in the Alzheimer’s space. But so did a couple small pharmaceutical companies ultimately the little guy that bought us was a company called Lily and we ended up with a competing round of financings and offers and such that one made too good simply more than you could’ve raised in an IPO and the investors kind of went home with I think it was a wheelbarrow full of money and we’re very happy and it was the IPO that never happened. And that was a good story and a good ending for that company.

Globus was very different. Unlike the other two companies that needed money in order to continue in their ways, Globus by the time I got there which was three and a half, four years ago at this point was already a $300 million almost $400 million company. Its adjusted EBITDA was 35%. So it made a whole lot of money.

It had two hundred and some odd million dollars in the bank and didn’t the money from an IPO. It needed it for liquidity of its investors that had been around for ten years.

So that IPO was simply a way to get investors’ liquidity and we had a funny thing happen after the IPO. For a company that really went for liquidity, we found that the public markets and the orthopedics space actually helped the company like Globus become more legitimate.

It helped in recruiting, it helped in the pay remix, it helped in a whole lot of ways that people had lots of questions about.

So in that case, for a company that went for liquidity, I think it did more for the company than just liquidity.

The IPO had a whole bunch of banks on the cover. You select banks because you find who you think can do best, who can market the stock more and who and which of those analysts that maybe will cover your stock after the fact but in this day and age, you don’t know for certain.

So we had a great group. It was post-Facebook. If you remember the Facebook IPO, it was as good as the stock is now. That was how bad the IPO was. We went into a very very challenging market. We thought we were worth a lot more than the markets thought we were.

So we went out higher than we ultimately sold. We got out. We were public and we succeeded and I think we went out with $1.2 billion dollars in market cap and I suspect today it’s about $2.4, $2.5 billion dollars in market cap.

So it’s something that the markets determined both for orthopedics and the general market. I can talk more about it. I don’t know how much and how detailed but that was the Globus IPO.

Joe Hage: I’d be interested to know with you being at the helmet of pharmaceutical company now, how different if at all is it to be Chief Financial Officer in different parts of the life science industry.

Rick Baron: I’ve been really lucky. I’ve gone kind of back and forth on both sides of the life science area. One thing I love is startup which is what I’m doing. Globus was a more mature company and my charge going into that was to help go public, stabilize a position and do all those things and hopefully that happened.

Pharmaceuticals side, your horizons are much longer. So you deal with a little bit different animal. Many of the devices that you’re talking about here are 510(k)’s.

So the horizon and the need to raise money is different and the expectation of commercialization is significantly sharper. Your definition of the market, the economics of what you do, the reimbursement, the coding that you heard briefly before is extremely important for anybody with a short horizon.

Pharmaceutical company I’m with now is involved in pain management and anti-inflammatory. It happens to have two compounds synthetically made that are derivatives of a certain cannabinoid that we all know and perhaps at some point in your life you loved.

But we’re going to deliver it trans-dermally. We’re going to deliver it in a different way. It will not be medicinal marijuana. It will not be those types of things but our horizon is about 2 ½ years out to get through phase two and then another couple years for phase three. Which means we need a long-term very patient investor who will deal with market trends differently than those of us in the room that also deal within devices.

I’m fortunate to be on as a director for a device company also which is going through its acceptance and that type of process it’s in the bariatric space and I’m living in two investing worlds at the same time. It’s actually very fascinating.

Joe Hage: Can we give you our money and invest in all your things?

Rick Baron: Pardon?

Joe Hage: We here in the room, can we give you our money and invest in your things? You have a very winning track record and I’m sure that is part of why you are recruited into these companies. We have Rick Baron type of thing, yes?

This isn’t false humility time. Tell us.

Rick Baron: No actually I think it’s that Rick’s a beneficiary of dealing with a couple of really good entrepreneurs and I hope I’m not being immodest or being false here. The thing that I’ve learned which is the hardest thing to do is the people that I worked for surrounded themselves accepting the CFO position with really smart and good people. And I think that’s the key variable that we all should look for.

Either in choosing who you sit next to in the C office or any office and who you hire as professionals. Find good deep knowledge. Find someone that has been there and done it before. I love the fact that you’re working with the 20-year-old’s and giving them a chance because when they’re old and crotchety like me, they will remember you.

So find people along the way who are really smart and do those things and that’s an incredible thing to do.

So it’s a combination of people.

If any one of the companies that I get credit for being the CFO of didn’t have good products with good innovation with good regulatory components and things like that, you wouldn’t even know who I am.

So it’s the company and the team more than it’s any one individual.

Joe Hage: Fair enough.

[Applause]

Joe Hage: Spontaneous applause from the crowd.

Rick Baron: I paid her. I’m a CFO.