While Maryland's publicly traded biotechnology companies brought in $2.2 billion in revenue during their most recent full fiscal years, they lost an average of $21 million apiece - for a combined net loss of about $553 million.
Many of the 26 reporting companies don't yet have products on the market and just five of them recorded profits.
Yet their chief executives earned average annual cash compensation of $611,312, according to a Sun analysis of figures found in regulatory filings. Perks such as housing and transportation allowances were taken into account in the review, though stock options and awards were not because they don't represent cash - something most biotech companies don't have to spare.
Biotechnology, which the state regards as one of its top industries, is unlike most other businesses. The industry is working to develop cures and treatments for some of the world's most troubling diseases, such as cancer, and it often takes hundreds of millions of dollars - and sometimes a dozen plus years of losses - to bring a single drug to market.
That makes it difficult to measure management success based on dollar figures, compensation consultants said.
Where other industries might look at sales and income, the biotech world often points to incremental advances and efforts for drugs and treatments to reach commercialization, which could lead to millions for both the company and its executives.
To achieve it, businesses have to bring in the best leaders money can buy, said Ellen Clark, who runs an executive recruiting firm in Shelter Island, N.Y.
"Everything lies on having the right management, so [companies are] going to pay for it, because unlike something that's producing a widget, this [industry] is more of a gamble," Clark said.
Biotechs are frequently acquired by larger companies (three in Maryland just this year) or are brought down by drug failures, making it a risky business for the executives who run them. CEOs are in constant danger of finding themselves out of work, given the volatility of the industry, consultants said.
That means executive compensation committees have to pay leaders to stay or to come onboard, according to Clark, otherwise "who's going to take a risk to go to a company that [could] close its doors in two years?"
But it's sometimes a tough proposition for shareholders to swallow when stock prices lag or refuse to move on company news.
Since many of these companies do not earn profits or issue dividends, biotech investors typically expect returns through stock price increases. And when that doesn't happen, many investors express concern.
Stockholder pressure
Dissatisfied shareholders pressured MedImmune Inc. to sell itself this year amid flat stock prices, for example, even though the Gaithersburg company was considered among the top 10 biotechs in the world (tops in Maryland) based on revenue.
It has a blockbuster product on the market. Its premature-infant drug, Synagis, earned $1.3 billion last year, which was more than the rest of the state's biotechs brought in combined.
MedImmune CEO David M. Mott also earned the highest salary among Maryland biotechs during the past fiscal year, with a paycheck slightly above $1 million for 2006 and a $650,000 incentive plan award.
The company declined to comment on Mott's earnings.
Many of the state's public biotech companies have compensation philosophies designed to attract and keep top talent as well as compete with peers.
Businesses often refer to biotech salary surveys when making their pay decisions, or hire outside consultants such as Watson Wyatt, which has headquarters in Arlington, Va.
"If they haven't generated any products, [earnings] are less relevant [in determining pay]. Investors would ignore that and focus on the product pipeline performance," said Steve Van Putten, an executive compensation consultant in Watson Wyatt's Boston office.
In such situations, compensation is often weighted toward stock options and awards rather than cash payouts, increasing the incentive to do well.
"If the company succeeds, there's potential for greater payoff," Van Putten said. "There's also more risk associated with those companies."
Rockville's Human Genome Sciences is a Watson and Wyatt customer.
Human Genome, which has a hepatitis C drug and a lupus treatment in late-stage clinical trials, had the largest loss among the state's biotechnology businesses: $251 million in 2006.
But Chief Executive Officer H. Thomas Watkins, who was hired in 2004 to replace retiring founder William A. Haseltine, had the second-largest biotech payout in Maryland. Watkins earned $650,000 in salary as well as $697,000 through a cash incentive award and other compensation.
"His performance has been awesome," said Charles C. Duncan, a biotechnology analyst with JMP Securities in New York.
"He's refocused the company both in terms of its pipeline focus as well as its drive to commercialization, and he and his team have done a lot to kind of reconcile the costs and the balance sheet issues of the past management," Duncan said.
The 15-year-old company employs about 770 people and earned nearly $26 million in revenue in 2006, but Duncan pointed out, "They still don't yet have a product."
Duncan labeled Watkins' combined pay of $1.3 million "high even by biotech standards."
Human Genome Sciences did not return telephone calls for comment.
Most public companies, including HGS, and those preparing to become public, have compensation committees in charge of top salaries. They're often made up of independent directors of the board and don't include company executives.
Changing formula
Neuralstem Inc. switched to this formula after it went public late last year. The company, which lists its stock on the over-the-counter bulletin board, added its first independent board of directors in April.
Before that, pay decisions at the 11-year-old Rockville business, which is hoping to develop treatments from fetal stem cells, were made by its two executives: founders I. Richard Garr, the CEO, and Karl Johe, the chief scientific officer.
Last year, as the company was waiting for approval to sell its stock to the public, the two men made up the board of directors as well as the audit and compensation committees, according to Securities and Exchange Commission filings.
Garr, an attorney, earned nearly $495,000 last year in salary, bonus and other compensation, including $24,000 for acting as the company's general counsel.
Johe took in $583,000, though a fifth of it was attributed to "certain additional work performed in connection with [the company's] grants," according to a regulatory filing.
The executives also received back-bonuses of $60,000 apiece from 2005, during last year's accounting.
Neuralstem executives said the payment decisions were made under the company's structure as a privately held business. The company went public in December and has since recast its compensation committee, executives said.
"The compensation committee is composed of 100 percent outside, independent directors [now]," said Neuralstem spokeswoman Deanne Eagle.
tricia.bishop@baltsun.com