Managing Pharmaceutical Alliances

The global biopharmaceutical industry has, for some time, faced a significant R&D productivity challenge. In the 1990s, industry revenues grew on the back of a surge in the stock of blockbuster drugs. But with patent expirations increasing, the stock of blockbusters is set to level off in the current decade. To avoid a sharp decline in revenue growth, big pharmaceutical companies will need to find new ways to boost their diminishing pipelines. One important way companies have been addressing this productivity challenge is by licensing new compounds developed by small biotech companies. Small biotechs, defined as all biotech companies except for the 10 largest, currently account for less than 10% of the industry’s cash, market capitalization, and R&D spending. And yet, these firms are responsible for two-thirds of the worldwide clinical pipeline of biopharmaceuticals. Given the powerful economic logic for collaboration between big pharmaceutical companies, which provide resources and know-how, and small biotech companies, which furnish clinical candidates, it should be no surprise that dealmaking in the industry is growing in value at more than 20% per year and penetrating into earlier and earlier stages of drug development. But as licensing has become critical to R&D productivity, it has also become immensely competitive. The worldwide clinical pipeline of biopharmaceuticals currently boasts more than 2,500 compounds. But nearly 1,000 of these compounds are already licensed. And the rate of deal making is growing rapidly, at approximately 10% per year, while the total pipeline is increasing slowly at around just 2% per year. What’s more, only about 30% of the remaining unlicensed compounds would pass even a cursory licensing triage, the rest being unsuitable, not novel, or of low value. As a result, the stock of licensing candidates is rapidly draining away. Effective licensing is very much a partnership game. Although, obviously, the amount of money a company has available for licensing deals is important, paying the most is neither the only way nor necessarily the best way to win a deal. A company’s ability to identify and attract the best partners and effectively manage its alliances will be critical to future competitive success. Five steps are key: Establish clear licensing objectives The first step is to determine precisely how much of the company’s clinical pipeline needs to come from external sources. What is the likely size of the earnings gap that licensing must fill? What are the odds that existing opportunities, given realistic assumptions about the types of projects to target and typical hit rates, can fill those gaps? Is it feasible to expand the range of compounds to target? Or is it more appropriate to revise earnings guidance? When defining its licensing objectives, a company should make sure to do more than merely set dollar value targets. Last year’s licensing may turn into this year’s deep partnership or acquisition. It’s important for the senior management team to be aligned on how to approach deals that could evolve further into broader partnerships or outright acquisitions. Define a strategy for where to focus Once the financial boundaries of the licensing partnership challenge have been set, it’s also important to develop a clear strategic focus for the kind of deals to pursue. Most companies will choose to emphasize those therapeutic areas and modalities in which they already have internal expertise. This approach ensures that the company has the requisite capabilities both for evaluating potential projects and for taking them forward once they’re licensed. The choice of where to focus in drug development, however, is more complicated. It depends partly on the company’s appetite for risk and also on its attitude toward different types of deal structures. Earlier-stage deals, for example, are better suited to projects that involve deeper collaboration or shared control. One final criterion is financial: Any strategy should include an agreed-on minimum for expected peak sales. Manage the partnership message Once a company knows what kind of deals it’s looking for, the next step is to communicate a clear and consistent message to potential partners about the advantages of allying with one particular company as opposed to another. There’s a lot that a licensor can do to shape the perceptions of potential partners. And yet, unclear messages are all too common, either because the company’s general licensing strategy is itself unclear or because the company undervalues or mishandles the art of communication. It’s largely a matter of balance. Send too vague or faint-hearted a message, and potential partners will suspect a lack of commitment; come across too strong, and they’ll be on their guard. An effective message needs to both resonate with potential target partners and be consistent with a company’s overall image and intent. By viewing licensing efforts as being in part a branding exercise, a company can better grasp the requirements for success – namely, defining clearly and simply a promise of value that meets the needs of potential partners and then reliably and consistently following through on that promise. Such follow-through requires efforts from more than just the licensing or business development functions because perceptions are shaped by interactions with the entire company. Develop internal processes To deliver on its strategy and image promises, a pharmaceutical company also needs to put a set of processes in place for licensing – from candidate identification and screening, through negotiation, to execution and management. Take a simple example: Emphasizing a company’s “responsiveness” to potential partners doesn’t mean much if there’s no process in place for ensuring that inquiries are handled promptly. Establishing and managing effective processes for licensing are challenges because so many functions are involved and need to be consulted. Experts from R&D, commercial, and manufacturing all need to assess a potential project for validity and attractiveness. To reduce the burden on these functions, those within licensing must have the requisite knowledge to triage opportunities appropriately. Anticipate organizational tradeoffs There’s no single best-practice organization design for managing licensing. As with most organization-design choices, different models necessarily entail different tradeoffs. It’s important to be aware of the tradeoffs inherent in the model chosen and to put mechanisms in place to address the issues that arise. For example, should licensing and even M&A activities report to a single head, or should each distinct activity report to its own group head? Split reporting – with technology licensing reporting to discovery, clinical licensing reporting to development, and M&A reporting to corporate – allows for better coordination of each group with its key stakeholders. But single reporting facilitates coordination among these groups. Depending on a company’s specific situation, one model may be demonstrably better than another. A company that seldom contempltes technology licensing, for instance, shouldn’t have a separate technology-licensing group. But even when the structural choice is clear, it’s important to think through the resulting tradeoffs and develop mechanisms to offset them. (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com