Treasury Outsourcing: A Vaccine for Risk?
The biotech industry is a classic example of a high risk, high potential return
industry. Every year many new companies with highly educated and motivated employees
start with a new venture hoping to bring a bright new idea to the market. Many
fail but a few go on to great things. How does a company manage going from being
a small start up to becoming a major producer, literally overnight? The story
of Acambis plc, demonstrates how one high tech firm managed the transition,
using treasury outsourcing as a means of increasing financial control.
One of the interesting facts about the ‘hi tech’ industry is that
so many of the firms tend to cluster in a few, very specific locations, often
around a world-class university. In the United States you have Silicon Valley
around Stanford University and Cambridge, Massachusetts around MIT. In the United
Kingdom, most hi tech firms cluster around either Oxford University or Silicon
Fen, the name given to the hi tech cluster around Cambridge University, just
north east of London, which is where Acambis is based.
One of history’s great economists was Alfred Marshall (1842 – 1924)
who himself taught at Cambridge University. Although a great theorist, he strongly
believed that students should apply themselves to the ‘real world’
and was very interested in the concept of an industry cluster:
“When an industry has chosen a locality for itself, it is likely to stay there long: so great are the advantages which people following the same skilled trade get from near neighbourhood to each other.”
This is the bas is of Silicon Fen; many extremely talented people working in
close proximity to each other and often collaborating with each other. A by-product
of this industry structure is that companies and management are more open to
alliances and third party collaboration. The competition is very fierce and
everyone has to strive for the best in everything they do. If someone from the
‘outside’ can add value to your firm, you are open to considering
this alliance; focusing on ‘core competencies’ is critical. We have
a number of operational and manufacturing alliances with the major biopharmaceutical
companies. Whether it is venture capital firms raising finance, university research
departments or specialist financial providers, the ‘people network’
Acambis is a biotech company discovering, developing and manufacturing vaccines
against infectious diseases. For the first few years we were a loss making company
heavily investing in research and development. In September 2000, the US Government
Agency, the Centers for Disease Control and Prevention, awarded us a 20-year
contract to develop and test a new smallpox vaccine, get it licensed and then
manufacture and maintain a stockpile of 40 million doses of the vaccine. The
headline value of this contract was USD 343 million. Our work on this contract
put us in pole position to bid for a second contract when, in 2001 following
the events of September 11th, the US Government decided to establish a stockpile
of vaccine large enough to provide a dose for every man, woman and child.
Winning that contract transformed Acambis. To illustrate the bottom-line impact:
in 2000 our revenue was GBP 6.2 million with an operating loss of GBP 9.4 million,
whereas in 2002 our revenue increased to GBP 79.9 million and we had our first
ever profit, of GBP 9.9 million. Prior to the contract our cash and liquid resources
fluctuated between GBP 10-20 million, now they are in excess of GBP 120 million.
Over this same period our staff has increased from about 130 to around 300.
It’s well recognised that when the number of employees reaches between
250 and 300 a company hits a critical point on its growth curve when it must
either establish stronger management structures or risk facing a crisis that
could cause the company to regress. Given how quickly we grew, formalising risk
management processes and procedures became critical. Thus, we established a
working committee designed to review all business operations to allow us to
take control of this new and much larger business. Given my responsibility for
finance, I undertook a complete review of all our financial procedures, controls
Despite having a relatively high cash balance, our banking relationships were
always quite simple. We used one financial institution to invest our money and
did not have a lot of risk management issues, be it interest rate or foreign
exchange. Now that cash balances were increasing dramatically, we wanted to
revisit whether we were getting the best returns on our money and looked at
diversification of funds for the first time. To support fulfilment of the US
Government contract, we built up our operations in the US and foreign exchange
risk management suddenly became an issue. Also, becoming profitable meant that
we were faced with much more tax planning.
We faced a choice at that time: we could materially build up our internal financial
staffing, which would have to be done very quickly, or we could find a third
party to provide us with this treasury expertise for a fee. We investigated
both alternatives but soon discounted the ‘build from within’ approach.
Individuals have to be brought in one by one; there are no ‘teams for
hire’ in corporate treasury. Technology has to be bought and integrated
into the company and that can take up much management time. Given how quickly
things were moving on the business front we needed to find a comprehensive and
proven solution that could be put in place fast.
We looked at a number of financial institutions’ treasury offerings.
I had had some experience with outsourcing in the past and, after our internal
review, we knew exactly what we were looking for. For us, three things were
an immediate priority:
The first criterion proved to be a problem for a number of would-be providers:
most were set up to invest in their own in-house funds but not to provide us
with a large number of counterparties. This narrowed the field quickly.
We had our first meeting with The Royal Bank of Scotland’s (RBS) Agency
Treasury Services (ATS) group in March 2003. As part of the proposal we visited
the ATS dedicated dealing room (separated from the remainder of the ATS business
which is in London) in Edinburgh and got a first-hand feel for the level of
sophistication of the service. What was interesting for us was the number of
existing clients that were happy to provide testimonials so that we could get
a private, objective assessment of the bank’s service.
We put a recommendation to our board to go with RBS, which was approved. The
board participation ensured that Acambis had fully ‘bought into’
the relationship. We signed a one-year agreement with RBS in June and went live
one month later. The set-up went quickly and smoothly.
ATS provide us with a liquidity management service for the majority of our sterling,
US dollar and euro cash balances. This involves managing relationships on our
behalf with a panel of counterparty banks, ensuring appropriate credit diversification.
They provide a foreign exchange risk management service for our US dollar exposures,
providing us with alternative dollar strategies to meet our defined risk / reward
requirements. ATS is also creating a tailored reporting system structured to
our own need for management information. In effect, we surveyed the market and
got a customised, effective and proven treasury operation in four months that
met all our objectives.
We have taken an incremental approach to working with ATS. We resolved not
to transfer our full cash balances over at the beginning. Rather, we started
with about half and will look to build that up over time, as long as the business
continues to perform well. At the beginning we established very specific benchmarks
for measuring performance, so we can say quite clearly how well the service
is operating at any time. The investment performance to date has clearly exceeded
past experience and exceeds any fees. The substantial credit diversification
benefits are over and above this. We have just over six months of experience
to date and have been building a closer relationship the whole time. We meet
regularly to discuss strategy and also talk over the phone and communicate electronically
on a frequent basis, as the transactions require. We are now at the point where
there is very good control over the transactional and reporting side of the
business. The next step is to make the relationship more forward-looking in
terms of risk management. As our business becomes more US oriented, foreign
exchange risk, and particularly the value of the dollar, becomes more important.
With the research and expertise of the bank we should, over time, be able to
take more of a view on markets and become much more active in hedging anticipated
The last couple of years at Acambis have been quite extraordinary for all of
us. To manage a company that has seen its revenues increase 14-fold and its
cash balances six-fold has been a major challenge. When companies go through
that sort of growth, it is very easy to have problems in the area of financial
management and control. Given the time it takes to hire people, train them in
your processes and add the necessary supporting systems, I don’t think
it would have been possible to achieve what we did inhouse. Outsourcing treasury
to manage our growth was a necessity.
We have other vaccines in the pipeline although the smallpox vaccine remains
the key driver for the moment. With our relationship with ATS we are confident
in our treasury processes and know that if another major contract were signed
we would be well positioned to handle it as well.