 I am sitting at a large conference table in the Worldwide Business Development Department at E.R. Squibb & Sons Pharmaceuticals. In my first position in the industry, I have been charged with creating a 35-mm slide show to help promote Squibb to potential business development partners. This is a novel idea at the time: Most pharmaceutical companies do not perceive a need to market themselves in order to in-license desirable new products.  

In fact, the industry at this time is flush with new products: 20 new molecular entities (NMEs) will be approved this year. Squibb is no exception. Although it's a relatively small pharma company, Squibb discovered the blockbuster drug Capoten, the first ACE inhibitor, in the venom of a snake. We now have several follow-on ACE inhibitors that we are seeking to out-license, perhaps in 

 deals. Our researchers also recently discovered Azactam—representing an entirely new class of antibiotics—in the dirt of New Jersey.  

To complement our internal drug development, we are evaluatingseveral in-licensing opportunities forwarded to us by academic researchers, small chemical discovery companies, foreign pharmaceutical companies, and even one of the new biotechnology companies, Centocor. The most interesting licensing opportunity, though, is from Sankyo, a Japanese company that is offering us worldwide rights outside Japan for Pravachol, a statin for lowering cholesterol. We are quite interested in this product because Merck, our major competitor, has already successfully launched the first statin, Mevacor, into our stronghold—the cardiovascular marketplace. Merck, with its stable of former NIH and academic researchers, almost always discovers its own compounds and very selectively enters into licensing partnerships.   

 I am sitting at a conference table at a New Jersey hotel with executives from three biopharma companies (Genervon, Medarex, and Neurogen) and four pharma companies (Eisai, Merck, Novartis, and Pfizer), all eager to promote their companies to others, especially biopharma executives, who will read about our roundtable discussion in this special copublished supplement.  

Formerly flush, pharma is in the midst of a severe drug discovery drought. Despite spending more than four times as much on R&D than in 1988, the number of NMEs receiving marketing approval is nearly the same —and half derive from in-licensing. The current failure rate of compounds entering Phase III is almost twice the 1988 rate. Big pharma companies need to introduce three new products annually to maintain their historically high growth rates, but the current industry average is half that.  

Big Pharma desperately needs new compounds, and biopharma represents its best potential source. But competition among pharma companies—and, increasingly, among their biopharma counterparts—is fierce. The typical licensing deal has at least five suitors vying for each compound. In 1988, most such deals had fewer than three.  

Consequently, today's pharmaceutical companies aggressively market not only their functional capabilities—developing, marketing, and selling products—but also their partnering capabilities: creating, coordinating, and managing alliances.   

While all major pharma companies have significantly improved these  capabilities, each has taken a different approach to obtaining new compounds. Pfizer, for example, bought two mid-size pharma companies, Warner-Lambert and Pharmacia, primarily for the rights to two blockbusters—all-time bestseller Lipitor and Celebrex. Novartis built a new research facility near Boston to gain access to cutting-edge research and technologies. Eisai established administrative offices and sales forces in the United States to enhance its global reach in the competition for partners.  

The best example may be Merck, which has lately undergone a business development makeover. Long regarded as the industry's best at internal discovery and development, Merck now aggressively pursues external licensing and alliance opportunities to feed its pipeline. "In 2001, we completely transformed our approach to external collaborations," said Merck CEO Ray Gilmartin. Over the past five years, Merck's partnership transactions have risen by nearly 80 percent.  

Merck is also changing how it makes deals, showing surprising flexibility about sharing development and marketing control with partners. To gain access to late-stage compounds, Merck is actively engaging in copromotion. Three of its next four drug launches will probably be copromoted.  

In contrast to 1988, today's pharma marketplace is rife with pricing pressures, generic erosion, and increasing public, political, and regulatory scru-tiny. But, just recognize that the drug drought is the "disease" producing these troubling symptoms, and the cure becomes apparent. An industry that has gradually become reliant on biopharma and other third parties to stock its pipeline must continue to be creative in its business development approaches. Pharma must formulate new business models as well as new products. Its future depends on it. 

, MD and MBA, is president of Bernard Associates LLC, a management consulting firm that provides strategic planning, business development, and marketing services to health- care and pharmaceutical industry clients. He is also a senior fellow at The Wharton School of Business, where he has been teaching Pharmaceutical Management since 1991. Dr. Bernard can be reached at (908) 234-2704 or at 

Articles

Introduction

Recognize that the drug drought is the "disease" underlying many of pharma's troubling symptoms, and the cure becomes apparent.

Back to the Pharma Future

 the first BioPartnerships Roundtable recently brought together some of pharma's busiest and most visible people. Executives involved in  business development and licensing sought to uncoverthe elements of success that productive pharma-biotech alliances have in common. This article offers a small sampling of insights gleaned from an edited transcript of the day's discussion, which was surprisingly casual and friendly, considering the participants' ultimate job responsibility—to compete with one another to stock their companies' pipelines with the most promising products. Many of them already knew other participants; a few already had deals in place. Whatever their relationships, though, they are key players in the increasingly critical field of business—and science—and seemed genuinely pleased to allow us to learn from their varied and relevant experiences.				

The Dealmakers Sitting: Winston  Ko, MBA, chairman and CEO, Genervon Biopharmaceuticals; Carol Fisher, editor-in-chief, BioPharm International magazine; Stan Bernard, MD, MBA, president, Bernard Associates; Ed Broughton, senior vice- president of business development and new products, Eisai; and William H. Koster, PhD, president and CEO, Neurogen. Standing: Herbert S. Ormsbee, PhD, senior director, licensing and development, Pfizer; Barbara Yanni, vice-president and chief licensing officer, Merck; Ron Pepin, PhD, senior vice-president, business development, Medarex; Gary Cupit, PharmD, vice-president, global business development and licensing, Novartis; and Patrick Clinton, editor-in-chief, Pharmaceutical Executive magazine.			

It's no secret that pharma and biotech companies are finding success in their codevelopment arrangements. What might be surprising are the changing reasons for their growth rate. 			

Both industries seem to be working together more closely. What's driving the increase in partnering activities? 

Having lived on both sides, a key issue for biotech today is accessing capital. On the pharma side, we were trying to achieve double-digit growth in the 1990s. But to achieve even 15 percent growth, we would have to put 20-30 preclinical candidates into the pipeline a year just to account for the attrition rate. And since that hasn't changed for large companies, they're still looking at portfolio expansion to meet those attrition rates. 

NEUROGEN'S WILLIAM H. KOSTER, PhD (second from left) was on the team that built E.R. Squibb & Sons into a $12 billion business before it became Bristol-Myers Squibb in 1989. PFIZER'S HERBERT S. ORMSBEE, PhD (second from right) was vice-president, scientific assessment for Wyeth-Ayerst Research before he joined Pfizer in 1999. Today, his licensing responsibilities span several therapeutic areas.			

There's also the maturation of the biotech industry. Cutting-edge companies did everything internally—built their own manufacturing facilities, developed their own protocols. Clinical endpoints weren't defined for some of the diseases they pursued and the mechanisms they discovered. But over the last 12-15 years, it has developed an infrastructure of its own. 

The second thing that's occurred is more cross-fertilization. It's not unusual now for us to interview people from biotech in the Big Pharma jobs and vice-versa. The advantage is that biotech people think "speed." That doesn't mean [Big Pharma's] slow, but they think about taking the most rapid path possible. We add in the moderation—adhering to regulatory guidelines and so forth. That's worked well.  

Stan Bernard, MD, MBA is a senior fellow at the Wharton School of Business, where he has been teaching Pharmaceutical Management since 1991.			

Senior executives from large companies who say, "I'd like to go out there and really live a dream" bring biotech the knowledge of what it takes to make something commercially successful. It's not getting to market, but getting to Phase I so that when Big Pharma partners come in, they're pleased with the work that's done. 

As a small company, we're pretty well financed, but it's nice to have someone else share the risk, especially when the partner has expertise and other resources to throw into the mix.  

GENERVON'S WINSTON KO, MBA (center) founded that company as a subsidiary of another one he founded, KM Biotech, whose focus is the discovery of proprietary trophic factors and their genes.			

For Japanese companies, it's the tremendous urge to globalize. Not just to generate sales outside of Japan, but actually grow businesses through partnerships that can take on new opportunities. 

We're seeing that same trend with small-and midsize European companies that want to enter the US market, and one way to do that is through a partnership. That's been true for a long time, going back as far as the Astra-Merck deal struck in the early 1980s, but the trend has picked up a little. 

The kinds of deals done today are perhaps different from those done in the past with biotech companies, many of whom started out thinking they were a discovery house but now want to bring things all the way through. They often look forward to mounting a sales force and commercializing and marketing their drug. [Biotechs] know, generally, that that is not something they'd be able to do on their own, which is why they take on a partner. They look for a deal—and this is particularly true for the Japanese companies—that can help them launch into a new territory, or launch them into the development or commercialization phase of their product. 

Just to follow up on the cross-fertilization point, I find myself traveling from the West Coast back here to "Pharma Country" all the time because, like many biotech companies, we buy the expertise we don't have in-house. We're very good at discovery, we can do that in our laboratory. But we need outside expertise for product development, and all the CROs, CSOs, and CMOs are here, a product of Big Pharma downsizing. 

MedarexÃ¢ÂÂs Ron Pepin, PHD (center) was responsible for building research collaborations as executive director, external science and technology at BMS before he joined Medarex as vice-president of business development in 2000			

At Cupit's suggestion, everyone agreed that today's deals are more about relationships than products, an idea that's illustrated by the companies' growing emphasis on alliance management. 			

Ten years ago, large pharma was focused on licensing. But in the research labs, the biotech deals that were being done were primarily around platforms, intellectual property, and pulling things out of academia. That created a different type of relationship, in many cases for access to intellectual property. You got that and went on with your business. As we realized that platforms were not going to be the end-all for biotech and that we needed to have business plans to be profitable, we moved to the product end of the spectrum and started playing closer to Big Pharma. 

At that point, the "not invented here" syndrome necessitated that more attention be paid to alliance management, which is why you now see a lot of large pharma companies building formal processes to manage those relationships and look into what goes wrong. We're now marching closer together than we were in the past and aligning around products. 

Eisai's Ed Broughton (far right) was a key leader in the 1997 launch of Eisai's first US product, Aricept (donepizil), which is copromoted with Pfizer and indicated for the treatment of mild to moderate Alzheimer's disease. 			

What are your thoughts about a dynamic described in recent research from the Wharton School of Business that suggests products co-developed by a pharma and biotech company are more likely to be commercialized than those that are developed by a single entity? 

 From a smaller company's perspective, specialization in one area can sometimes lead to a true expertise that exceeds that of larger companies. The larger company may have  breadth and experience across an entire therapeutic area, but you take people who worked for years on a particular disease and that can be a great contribution to the partnership. Couple that with the tremendous breadth of resources and  experience in a large company and you have a winning team that can often accomplish something that—and do it more quickly than—neither company could do alone. 

Big Pharma tends to be looked at for their breadth, but what's lost on occasion is our depth. You can capitalize on the expertise from the biotech company bringing in the discovery. But it's critical to understand the science when it comes in, or it's a lot harder sell. That's why when biotech companies come in and talk to us, they're obviously looking for people who understand what they have. They want to see the internal champion. They're always looking at our processes and how they're going to work, and who's going to be responsible, because they want to make sure that their baby is well taken care of when it comes in the door.  

Having said that, you can't be all things to all people. There are areas where the science is simply better on the outside—those are the areas where you want to create relationships. 

Merck's Barbara Yanni held a variety of legal and financial positions, including executive director of corporate development, before earning the title of vice-president and chief licensing officer. 

The idea of champions is very important, and it gets lost in big organizations. It's not that [Big Pharma] people aren't committed; they are. But in the corporate culture structure, you can't really be a champion. That's where the biotech people come in, and their commitment only costs the pharma company a limited investment. All they have to do is let [the biotech people] work their tails off to push their product, which needs a lot of care and intense nurturing to bring it to a stage where you can actually bring the drug to a partner. After all, who is a better champion of a drug than the one who invented it?  			

 One thing that adds to partnership success is the cherry picking going on. When you're developing your own compounds, you have to live with what you come up with. But if you can go out and shop around, you can find the gems out there and access the whole world of R&D rather than just what you have internally.  

 When I saw the Wharton study's statistics, it crossed my mind that it was the cherry picking, the ability of companies to license in something they had already seen a little bit about. It's less random, say, than your own discoveries. But on the other hand, do you really have that ability? The probabilities of success are so low at those early stages that it might be hard to argue that you actually do a better job in that situation. 				

It depends on the stage when the product is brought in. You can cherry pick late or you can cherry pick early. It depends on the strategy. 

That's true. If you were looking at a product that a biotech company brought all the way to Phase III and you're going to have to lay out quite a lot of money to license it. Presumably you know a lot about it and you want to many more questions answered at that time, and maybe you're willing to take the risk. 

It's always interesting to me when the biotech companies think that if they keep their product until Phase III they'll get more money so it's obviously the right thing to do. But if you think about that economically, maybe you're not going to get to Phase III or maybe there'll be some other problem that will crop up that you might be able to solve if you had a partner. If the pharma company is looking at it and saying that the upfront payments are going to be very large and so is the total value of the deal, it is not taking into account that's because most of the risk has fallen out of the system by then, which is why it is paying less. So on a risk-adjusted basis, those deals might actually be more expensive or about the same as the earlier- stage deals. 

NovartisÃ¢ÂÂ Gary Cupit, PHarmD held positions in business development, sales, product management, and new product development at a variety of pharma and biotech companies. Before pharma, he held academic faculty positions at major medical centers and teaching hospitals around the country.

For a biotech company to get to Phase III, it is probably going to focus on a single indication whereas the partner will probably take it to three or four, so that if the lead indication doesn't succeed, you have that hedge.  			

That gets back to the point of getting there as fast as you can. 

 Pharma companies are very reluctant to go in on preclinical drugs. But I encourage them to look at Phase I—which is a fraction of the cost. You put in your investment and then let them run the shop for you. Within two years, you'll have the Phase II data, which is worth it. 

 That's absolutely right. Although there have been a bunch of Phase II deals that have gotten attention, there are also many deals that are done at the Phase I level and at the preclinical level. Certainly if you look at Merck's partnering history—and I'm sure this is true of everyone—we've done far more deals at the basic research level, at Phase I, than we've done at Phase III. It's just that the ones you hear about, of course, are the big ones with the huge amount of money paid at Phase III. But I would argue to the biotech companies that partnering earlier is an advantage for both companies. 

 If I could send one message to a biotech company that's going to partner with Big Pharma, I would say that if you're going to be the first product on the market in a new therapeutic area, you've got to set a high hurdle to be as competitive as possible. You want to have all the drug interaction studies and all the disease interactions. You want to do some kind of monitoring that shows that safety is better than anything else that may come later. 

Let's say you're second to market. Now you've got to work even harder to overcome the position the first-to-market product has in the marketplace. You've got to do a more robust clinical development package. So either way you look at it, you've either got to be the first, or the second with better. That all speaks to time, money, and opportunity. 			

A McKinsey study about two years ago actually references this issue. It claims that if large pharma started moving back toward preclinical and Phase I, and then looked at the price of current deals and actually doubled them, they would still come out ahead versus going for Phase II and III deals. An issue, though, for biotech is that the Street is pushing back the opposite way. And if you just look at price-to-book on various companies, you'll see that as you get into Phase II or III, the multiples start going up dramatically. So it's a difference between getting a partner to come in and help you do the heavy lifting, and help you be competitive, versus actually increasing the shareholder return as quickly as possible by taking your own compounds downstream. The right balance has to be found and struck. 

			At one point, the conversation looked as if it would turn to some early negotiations between licensees and licensors. That was when the topic of hot therapeutic areas came up.  			

 What are the exciting, appealing, strategically fitting types of compounds or technologies out there today? 

 The answer depends upon what your portfolio and your sales force look like, where you think you can sell, and whether you're selling to a specialty group or to primary care. The answer crosses over many therapeutic areas and indications.  

There are areas of unmet need that still require a lot of attention. Pain is very underserved. Inflammation is another area that, broadly speaking, has been underserved and offers a lot of interesting opportunities. But in many cases we're talking about pretty heavy-duty anti-inflammatory agents that are generally immunosuppressive. There's a lot more opportunity for more specific agents. 

The Art of the Deal

Big Pharma execs bring to biotech the knowledge of what it takes to make something a commercial success-not getting to market, but to Phase I.

Oiling the Engines of Invention

EVERYONE KNOWS THAT ROCHE WAS, AND ARGUABLY STILL

 is, the driver of Genentech's success. But not everyone knows that Roche owns a majority stake in the biotech behemoth, as it does in Japanese powerhouse Chugai. And that's by design. Roche's management has long held that the best way to derive good and lasting results from its smaller partners is to let them do what they do best and leave them alone while they do it. That philosophy has served them well, especially when revenues of some of their codeveloped and comarketed blockbuster products are considered. Just two, Genentech's Herceptin (trastuzumab) and Chugai's Epogin (epoetin beta), have earned billions. 

Peter Hug is global head of pharma partnering at RocheÃ¢ÂÂs headquarters in Basel, Switzerland.			

Roche's business model continues to emphasize strategic partnering to boost its R&D and global marketing efforts. The company is particularly proud of its continuing relationship with Memory Pharmaceuticals, which specializes in developing therapies for neurological and psychiatric disorders such as Alzheimer's disease and schizophrenia. In this Q&A, two leaders share their visions of what has made their alliance so successful. 

Q What is the most important thing your partner is doing to make the alliance work?

 Memory is giving the compounds the very best chance of success. Its excellent development process and expertise in CNS allows us to have trust and faith in its work. Memory is aware that the trust is there, and this is very important for making the alliance work. Each side can feel confident and positive about the alliance and its potential. Memory is very open and communicative. This ensures that any issues are brought out early and up-front so they can be dealt with quickly. Memory shares our philosophy on partnership. This means that we know each side is genuinely acting in good faith and that every action taken will be for the benefit of the collaboration. At the prediligence meeting, it emerged that Memory shared our philosophy on rigorous testing and analysis at all stages of development. 

Gardiner Smith is vice-president of business development at Memory Pharmaceuticals in Montvale, New Jersey. 						

 Roche has consistently delivered on its commitments to our alliance, which is based on the development of two CNS drug targets. The commitment starts with Roche dedicating scientists and business staff to support the progression of Memory's novel compounds. Roche has a long-standing presence and deep expertise in the CNS field. Access to Roche's people and extensive R&D infrastructure complements the capabilities that Memory brings to the alliance. In addition, the Roche commitment importantly includes providing the financial resources required for joint R&D efforts. In these agreements, Roche concentrates on thoroughness and flexibility to ensure that we are able to generate the novel molecular approaches and robust data needed to move products forward. Roche has also built a leading business development and alliance management group. This enhanced aspect of its commitment greatly benefits operational processes, from initial negotiations to product development and through to commercial considerations. What's notable about the alliance is that both companies have approached the collaborative activities with a spirit of openness, and they are willing to put in the extra effort to resolve technical and business issues in a timely manner. In a business that is regulated by technical complexity and patent life, it is critical to have consistent support, progress and rapid problem-solving to maintain a competitive advantage.  

For example, in our 2002 PDE4 collaboration for indications including Alzheimer's disease and depression, Roche provides up-front payments, R&D support, and potential milestone payments and royalties on worldwide sales. Research activities under this agreement were extended and expanded in August for an additional two years to continue work on new compounds and new indications. In September 2003 we announced a second deal with Roche for the nicotinic alpha-7 target, initially addressing schizophrenia and Alzheimer's disease. This agreement includes licensing fees, R&D support, potential milestones, and royalties and an option for Memory to co-promote in the United States. In conjunction with the agreement, Roche made a strategic equity investment in Memory. Both agreements are governed by a matrix approach of informal and formal information systems, making communication a priority. Roche's commitment of global pharmaceutical capabilities to the alliance is an excellent  fit with the Memory strategy.  

 Q What is the most important thing you’re doing?

 We are approaching the partnership with a "light touch." This is a philosophy we use in the way we manage our alliances around the world. What this means is that we allow our partners the space and autonomy to pursue their goals while adding our support and expertise where it is needed. In this case, we structured the deal so that Memory is responsible for the development of the nicotinic alpha-7 compounds through to Phase II a. This aspect of the alliance works for both partners: the risk is balanced for each side, and Memory is able to further enhance and develop its own infrastructure. The knowledge that each side is winning in this alliance means everyone can feel very positive and enthusiastic about it and feel determined to make it work. We ensure that the channels of communication are always open. There are no surprises, and we ensure absolute transparency. It helps that we have excellent chemistry between our people and theirs. We also have a communications framework in place that includes close and regular contact among alliance directors, project teams, and oversight committees, for example. 			

 Memory brings a focus and entrepreneurial drive to discovering and then developing novel compounds for the treatment of a broad range of CNS conditions that exhibit significant impairment of memory and other cognitive functions. The CNS impairments range from neurological diseases associated with aging, such as Alzheimer's disease, vascular dementia and mild cognitive impairment, to psychiatric disorders such as depression and schizophrenia.  

Although therapies for treating Alzheimer's disease, depression and schizophrenia have been available for a number of years, many of the approved drugs for these disorders are not effective in a large number of patients and can produce significant side effects. Our CNS drug candidates are designed to address biological targets within the cellular pathways that we believe are critically involved in memory formation and other cognitive functions. The relative specificity of these biological targets provides an opportunity to develop drugs with reduced side effect profiles. Our drug discovery programs are designed to yield effective and safe drug candidates in a shorter time frame relative to industry norms. By performing benchmark safety and efficacy tests early in the process and only advancing the most promising drug candidates, we believe that we are able to accelerate the overall drug development time line and provide higher-quality drug candidates.  

We are able to bring novel drug candidates to our Roche alliance through the efforts of our interdisciplinary drug discovery and development approach. Our target screening, CNS chemistry, behavior, preclinical development and information technology departments are headed by accomplished pharmaceutical scientists working together in a single facility. The teams are driven by the high growth requirements of a biopharmaceutical company, in which achievement of R&D milestones is linked closely to the company's success.  

We put an emphasis on communication and decision-making processes with our partner, to enable the alliance to benefit fully from Memory's R&D capabilities. Using a variety of real-time information formats, Memory and Roche address the key issues and share current thinking. Optimal coordination of the resources and assets in true partnership is a key factor for success in the alliance.  

Q What’s the biggest challenge your company presents to your partner?

 Whenever Big Pharma works with a developing biotech company, there are the issues of bringing together two companies of very different size and culture. The smaller company will have a sense of urgency, sometimes to which a bigger company, with its various processes, might not be able to respond. What eases the challenge in our case is that the management team at Memory has Big Pharma experience, so they're aware of the way we operate. In turn, it's good for us to respond to this sense of urgency. We believe that the challenges of bringing together different cultures creates a really dynamic and beneficial partnership.  			

 Memory brings a vision, an organization and a unique capability to address some of the largest and fastest-growing markets in medicine. According to the WHO, more than 180 million people worldwide suffer from CNS disorders that exhibit significant impairment of memory and other cognitive functions. These disorders include neurological diseases associated with aging, such as Alzheimer's disease, vascular dementia and MCI, and certain psychiatric diseases, including depression and schizophrenia. The cognitive deficits associated with these disorders result in symptoms ranging from mild impairment of short-term and long-term memory to the inability to engage in cogent conversation and perform routine tasks. We expect the market for drugs treating these diseases to grow significantly over the next several decades as the baby boomer generation ages, life expectancies increase, and improved drugs and diagnostic techniques become available.  

The challenge for Memory and Roche is to do everything we can to dedicate the right people and resources to our projects through the preclinical and clinical drug development cycle, to offer improved CNS medicines to patients. 

Q What is it about your relationship with this partner that leads you to believe it’s better than merging? 

 We don't believe that mergers are what necessarily create value. A merger was not appropriate in this case. Our approach to innovation is based on the belief that bigger is not necessarily better. Mergers can stifle innovation, and our aim obviously is to allow it to flourish. We have such faith in Memory's capabilities that we believe a strategic approach is much better. This ensures that we keep its entrepreneurial spirit alive and allow the company to develop its own capabilities as is wishes. We are creating a high-growth environment in this way, and Roche benefits as Memory becomes more innovative. Memory gains excellent validation of its business model, and it is free to partner with other companies. That means that we, in turn, gain access to a wider hub of innovation.  				

 It is our policy not to comment on matters like this.

Success Story

EVERYONE KNOWS THAT ROCHE WAS, AND ARGUABLY STILL is, the driver of Genentech's success. But not everyone knows that Roche owns a majority stake in the biotech behemoth, as it does in Japanese powerhouse Chugai. And that's by design. Roche's management has long held that the best way to derive good and lasting results from its smaller partners is to let them do what they do best and leave them alone while they do it. That philosophy has served them well, especially when revenues of some of their codeveloped and comarketed blockbuster products are considered. Just two, Genentech's Herceptin (trastuzumab) and Chugai's Epogin (epoetin beta), have earned billions.

Fruitful and Prosperous

 of 261 CEOs and licensing executives of biotech companies, 84 percent acknowledged that they face one or more of the following challenges:  

 The competition for attractive compounds

Overexposure of US-based licensing opportunities that drive up headline values 

Large pharma companies that were historically proud of their protective R&D "not invented here" mentality have developed impressive and effective licensing organizations. So it's no surprise that in 2003, more than 24 percent of sales from the top 20 pharma companies were derived from in-licensed drugs. Following this trend, more and more biotech companies are realizing that they should match licensing competencies to stay competitive and meet investors' requirements for a balanced pipeline.   

A majority of executives surveyed (78 percent) said they were "unsatisfied" with the use of commercially available databases. While it may reassure management that all bases are covered, in reality, business development executives who work closely with such systems admit that they spend too much time reviewing out-of-date information and that when an attractive opportunity is finally identified, it tends to be overvalued and too expensive for in-licensing because of its high visibility to all subscribers. 			

Most companies are mining for gold in the same location—the United States. Because the majority of partnering meetings and financial institution showcases take place in the US, local companies gain higher visibility —and a higher licensing price. Companies that are looking to in-license should move further downstream and dig in a more attractive mine where very few other companies are looking. Exciting technologies are emerging from and are available in less-familiar places such as Israel and Italy, where biotech companies have built solid science but lack the PR resources to share their story. In the next five years, there will be a growing need for licensing collaborations and an increase in headline value of licensing deals. As the supply of attractive licensing opportunities dwindles, more and more companies will be looking both into unexplored biotech regions and into earlier stages of product development. 

 is a principal with 2Value, a New Yorkâbased business development firm that identifies licensing opportunities originating from international private biotech companies, start-ups and universities. He can be reached at   212-897-5808 or 

Back Page

Companies should dig in a more attractive mine where very few other companies are looking.

Private Industry's Most Eligible

Most pharma-biotech alliances don't succeed. 

Though some breakdowns are to be expected—the science at the core of each deal will not work out in every case—many are entirely preventable. A deep look reveals that these full or partial failures are frequently a result of factors that can be controlled: timely decision making, effective communication, and goal alignment. Given the importance of such alliances for industry R&D, this article highlights what pharma and biotech companies can do to salvage faltering partnerships, or, better yet, design them to be successful from the start.  

First, pharma and biotech partners must acknowledge that their significant differences make working together difficult. Transactional alliances—licensing agreements with arms-length relationships—used to be the rule. Today, strategic alliances are more collaborative, calling for integrated decision making and problem solving with multiple interactions among employees from each side. Many people from both partners jointly decide, plan, and exchange data, working side by side or in constant touch day after day.  			

To do this with people working within different organizational structures, following different strategies, using different processes, and guided by different implicit and explicit cultural norms is far more difficult than many realize. Consider a group asked to make a seemingly simple alliance investment decision. Matters are swiftly complicated because they all don't possess the same willingness to share strategic information. Their tolerance for risk is dissimilar. They work with mismatched budgeting cycles and use incompatible decision tools. The potential for frustration, time wasting, and bad feelings is enormous. That some successful decisions are actually made under these circumstances is something of a miracle. 			

These challenges, when poorly understood and handled, regularly lead to suboptimal alliances and, if left to fester, create full-blown fiascoes. Negative perceptions, misunderstood motives, feelings of disrespect, resentment, mistrust, or coercion contribute to the partners' inability to effectively work together. They lead directly to project delays, missed milestones, lack of innovation, mutual dissatisfaction, unresponsiveness to market changes, and ultimately, failure.  

Challenges of this magnitude do not take care of themselves. Alliance partners must make collaborative behaviors flourish. Companies that are consistently successful at forming and managing alliances not only understand the kinds of behaviors people need to overcome organizational divides, they take pains to embed those behaviors in the processes that constitute their alliances. There are many such behaviors—too many to survey. But the three that follow serve to illustrate the potential usefulness of all:  

Keys to Effective Alliance Implementation						

 are defined as a party's needs, desires, fears, and concerns. In contrast, its 

 are its demands—the things it wants the 

party to do to meet its interests. The distinction is crucial. Imagine two sisters arguing over the last orange in the house. They each angrily demand to have the fruit. Finally, their mother makes a Solomonic decision, cuts the orange, and gives each girl half. One sister peels her portion and eats the fruit inside. The other peels her half, tosses the fruit away, and grates the rind into a cake she's preparing to bake.  

The moral of the story? Each could have gotten 

 of what she wanted, not part—if she had discussed her interests instead of just making her demands loudly known.  

Perhaps more important is the diminished quality of their working relationship that results. The sisters remain angry and frustrated, each feeling she didn't get all that she wanted. They may even hold grudges and try to "even the score" later. Had the sisters shared their underlying interests, they would have understood each other's true needs more clearly. Such understanding would create empathy, build trust, facilitate communication, and expand the possible solution set, eventually creating greater value for both.  

The same lesson applies to alliance managers. When dealing with a demand, they should separate positions from interests and work toward mutual understanding. 

The concept of "joint contribution" is founded on two premises: situations are rarely black and white; and alliance relationships exist within a system of actions and reactions. In other words, actions are generally reactions—responses to actions taken by others.  

The upshot is that each party is likely to have played a role in creating a situation. This does not mean they are equally culpable or legally responsible—merely contributory. A person mugged walking across a poorly lit park at night has done nothing to deserve punishment, but the route chosen was nonetheless a factor in that person's misfortune.  

Troubled Relationship Lead To Alliance Failure.			

Breaking down a situation's causes from a joint-contribution perspective allows alliance partners to see how different people, groups, and systems 

produced unwanted results. This expansive examination of causes generates better problem-solving options and helps avoid a repetition of the pattern of interaction that created it in the first place.  

An organization may even gain from looking at its own actions in isolation from within a joint-contribution stance by helping it identify unilateral changes that might improve or remedy systemic or recurring problems.  

			If alliance partners are to successfully overcome their differences and consistently make good decisions, they must try to persuade, not bulldoze or coerce. Each side needs to make its case "on the merits." If the alliance is to last, the companies must share a belief that resolutions are legitimate and based on standards that both accept as reasonable. If not, the relationship will deteriorate, decision-making quality will decline, and the partnership's life expectancy will be diminished. 			

Alliance partners must therefore be prepared to implement the behaviors associated with "on the merit" decision making. This means partners have to explicitly commit to this kind of decision making as a matter of principle. They have to articulate and agree on what the appropriate standards of decision making are. They have to be open to the possibility that they might be wrong at any stage of discussion on any point, and be equipped to engage in conversations about metacriteria—the standards used to evaluate the appropriateness of other standards. By so doing, partners are likely to arrive at joint decisions both believe in; both feel were fairly made; both can accept, understand, and trust; and both can carry out. 

Collaborative behaviors are fundamental to overcoming any  differences in pharma-biopharma alliances and a key to preventing them from occurring at all. But they won't happen if firms do not have the organizational capability to implement them in a systematic, ongoing way. Companies need to develop and institutionalize ways of managing alliances that have these collaborative behaviors at their core. Indeed, many organizations engage in multiple alliances and therefore must manage several relationships concurrently, a significant managerial challenge. Seen in this context, an organization that fails to focus on how it can support collaboration puts all its alliance-dependent strategies at tremendous risk.  							

Organizational management of alliance differences is a complex and seemingly forbidding task. But it is actually built from a relatively small number of essential components:  

. Collaborative behaviors begin with people with the appropriate skills and orientation. Companies tend to rely on training programs to build necessary skills. Whether it's continuing education for executives working on strategic alliances or quarterly workshops for internal alliance teams, training though important, is not enough. Individual mindsets must be consistent with desired behaviors if employees are to apply them for more than the few weeks that follow a training course. To instill the desired skills and outlook in a lasting way, companies must use a three-pronged approach—training and hiring, leadership messages, and incentives:  

Training is necessary to teach those involved the collaboration skills needed to solve day-to-day issues (separating interests from positions, conducting difficult conversations, negotiating, and conflict- resolution techniques). But companies must also emphasize the ability to engage collaboratively across organizational boundaries in their recruiting efforts as well as their employment criteria. Hiring people with the requisite technical, but not collaborative, skills will not help the organization manage alliances. 

Even skills do not lead to the desired behaviors if leadership messages and examples are inconsistent with what management would prefer to see. Leaders in the organization must be effective role models, supporting and demonstrating the collaborative behavior they insist on from others. Senior alliance members should send clear, strong messages about the power of joint problem solving and their expectations that people will engage in it without prompting whenever that is called for.  

Formal incentives (compensation structures, review criteria, and reward systems) and informal incentives (giving public accolades to those who exemplify collaboration and telling success stories) should be established to motivate employees to exhibit collaborative behavior.  

Companies with the right people still need processes and tools that support collaboration. "How to Grow an Alliance"  illustrates the alliance management lifecycle and offers examples of processes and tools that assist collaboration at each stage. 			

Companies should establish structures specifically designed to support collaborative behaviors. This might be either a central alliance function, a center of alliance excellence, or an alliance manager community of practice (a cross-organizational support mechanism that links alliance managers across the enterprise). This last structure enables people throughout the organization to call on alliance management expertise, ensuring it is applied when and where it is needed. 

They should also develop roles, responsibilities, and reporting relationships that describe and support collaborative behaviors. One way to foster them is by deputizing qualified people to play the role of alliance management mentor, coach, relationship manager, and executive champion.  

The "Alliance Capability Model" describes the elements of alliance management and how they inter- relate. Putting a system like this in place allows collaborative behaviors to form, raising the likelihood of alliance success.  

. Directly linked to alliance management—both at the portfolio and individual level—strategy informs alliance choice and modification. Results are then fed back into strategy. 

. The primary functions—launch, implement, review—are undertaken by participants across the alliance.  

. New alliances are launched with partners guided by the collaborative procedures that recognize and help both sides overcome the differences that divide them. 

. Day-to-day conflicts are resolved collaboratively, applying concepts like joint contribution. 

. Mutually agreed upon and monitored to optimize performance, measurements are essential to know what is going on and how it varies from expectations.

. The company's various alliances are treated as a single portfolio and managed as a whole, keeping in individual alliance performance as well as organizational strategy. Alliance types are tiered so that resources are allocated according to predetermined criteria—partner interdependence and internal complexity, for example.This also ensures that multiple relationships with the same partner are managed with optimal efficiency.

Note that alliance capability is built in at every level so that every activity can be executed across many people and many alliances consistently and collaboratively.  

As alliances between pharma and biopharma companies become increasingly complex and the sums and reputations at risk continue to rise, the importance of developing the ability to systematically manage differences between companies that elect to partner will only grow.  			

Companies can manage these differences by creating a collaborative mindset and cultivating appropriate behaviors with all the tools and techniques at their disposal. 

Companies that meet these challenges will eventually be rewarded with more than just new relationships. They will also see their existing alliances function more smoothly, making it more likely that they—and their partners—will succeed.

 are all consultants at Vantage Partners, a Boston-based relationship management consulting firm. They can be reached at 

Alliance Management

He potential for frustration, time-wasting, and bad feelings between pharma and biotech partners is enormous. That some successful decisions are made under these circumstances is something of a miracle.

The Human Side of Partnerships

 accounted for more than $70 billion in revenues for the top 20 global pharma companies. And according to research by Wood Mackenzie, that figure will top $100 billion by 2008 and will represent nearly a third of the industry's total projected revenue. By these measures, licensing is and will continue to be big business for Big Pharma. In fact, some companies embrace it as their core business development strategy. This article highlights some of the findings of a 2004 study that reviews the evolution of Big Pharma's R&D licensing strategies during the last 15 years. (See "Study Methodology,".)  			

Following steady growth from 1989 to 1998, the number of deals has declined, even as the value of those deals' revenues has grown. In particular, preclinical deals dramatically declined after 2001 but have begun to level off at approximately 25 percent of all deals. The total of clinical-stage deals (Phases I and II) has continued to decline from a high point in 2001. However, for advanced clinical licensing arrangements (Phase III through registration), deal making appears to be on the rebound. (See "Total Annual Deals by Development Phase,".)  

What accounts for this apparent slowdown in what otherwise appears to be a white-hot market? It's possible that licensing has become so competitive that late-stage deals and even pre-clinical agreements are simply too costly. Rather, the largest of the Big Pharma companies are increasingly licensing Phase I and II compounds—cheaper but riskier investments. (See "Total Company Deals by Development Phase.") 			

GlaxoSmithKline leads in total volume, with almost 90 deals secured since 1989. Next is Pfizer, followed by Sanofi-Aventis and Bristol-Myers Squibb. GSK currently manages more licensed products through development than any other large pharma company.  

Interestingly, the greatest number of deals is not the same as the greatest degree of financial success. Pfizer has the most revenues from licensed products, although it has fewer deals than GSK. Pfizer's revenues from licensed products, including Lipitor and Celebrex, topped $15 billion in 2003. Bristol-Myers Squibb pulls in the most money in terms of pure sales from licensed products. 			

The United States continues to be the most active region for licensing activity, with 55 percent of the deals struck by large pharma companies taking place with US-based companies. Europe accounts for 28 percent of the total, Japan contributes 15 percent, and the remainder is spread throughout the world. 			

An interesting cultural difference is playing out on the global stage. European and US companies collaborate with US, European, and Japanese companies in similar proportions, reflecting the global nature of pharma R&D on both sides of the Atlantic. In contrast, Japanese companies strike the greatest proportion of deals locally. Takeda, for example, positions itself as the partner of choice for smaller firms in Japan, but also for Japanese companies seeking to extend their international presence. 			

A few companies exhibit geographic preferences—80 percent of Pfizer's deals are with US companies, for example, while 70 percent of BMS's agreements are with non-US companies. 

Analyzed by phase of development, the licensing field shows important differences among players. Amgen banks on early-stage deals—more than 80 percent of its agreements are in preclinical. Similarly, Merck's "back to the science" strategy places more than 70 percent of its licensed portfolio in early-stage development. In contrast, Schering Plough, Boehringer Ingelheim, and Schering AG remain focused on late-stage deals. (See "Percentage of Company Deals by Development Phase,".) 

Percentage of Company Deals by Development Phase						

Deal-making activity varies widely from one therapeutic area to another, but the oncology sector has seen the greatest proportion of licensing deals over the last 15 years, reflecting the specialist nature of the oncology market, the diverse array of specific indications, and the large number of biotechs focusing on this area. (See "Deals by Therapeutic Area.") Genentech and Roche's Rituxan (rituximab)—even with its narrow indication profile—exemplifies the commercial potential for targeted oncology products. In contrast, the cardiovascular segment has not experienced licensing activity proportional to its size—probably because companies have historically approached it with internal R&D resources. But promising candidates can produce high value on the licensing front (Lipitor is a prime example), and biologics are beginning to make inroads into the cardiovascular and metabolism areas.

The growth in combination treatments—hypertension and diabetes, to name two—might necessitate the emergence of licensed product "combo platters."  			

Licensing deals, along with most other alliances, have a relatively high failure rate—an average 37 percent are successful.  Therapeutic focus, strategic fit, development phase, and even uniqueness of technology determine the success or failure rate and return on investment. More than 60 percent of products licensed in Phase III or pre-regulatory stages actually reach the market. This drops to 20 percent for Phase I and II compounds. In spite of that, licensing will likely continue to be the key development strategy for many large pharma companies. Facing this reality, major players will have to consider their strategies: 					

 Will Lilly continue to be the most widely extended partner, or will it focus on its key therapeutic areas (CNS and metabolism)?

  GSK manages the most deals, but with less success than its peer group. Can GSK's Centers of Excellence for Drug Discovery strategy gain momentum in licensing?

 Merck has entered the fray this year with a dramatic increase in licensing deals. Does 2004 mark a change in long-term strategy?

  Can Pfizer remain the leader in generating revenue from licensed products? With a goal of 50 percent in-licensed product revenue and 50 percent internally developed product revenue, will Pfizer's R&D program be able to do as well as its licensing group?

 As the newest top 20 pharma company, should Amgen keep pace on the licensing front? While Big Pharma licenses biologics, Amgen has licensed and developed a small molecule—Sensipar (cinacalcet). Will it be the in-licenser of choice for companies unable to develop their own small molecules?  

Individual strategies are still evolving, but the market will grow as long as deals deliver revenues. Successful companies will need to focus not only on their own approach to deal making but also that of their competitors. Keeping deals close may  help keep business enemies further away.

 is president of the life sciences practice of the consulting firm Wood Mackenzie’s Boston office. He can be reached at 

Trends

More than half the deals made by pharma are with companies based in the US, 28 percent in Europe, and 15 percent Japan.

A Decade (and 1/2) of Deals

get together, the conversation quickly turns to "working with Big Pharma." Few topics are discussed as passionately as surviving the due diligence process. Due diligence occurs when a large firm seeks to license a biotech company's compound. The process allows the licensor to verify the biotech's claims, assess the technology's value, understand third-party rights, and gain an accurate understanding of key issues that affect Big Pharma's ability to commercialize the compound. The biotech must conduct due diligence of its own to assess the commercialization resources of the large firm and choose the best possible partner.  

If the process goes poorly, it can be a train wreck. Teams of large pharma managers collect irrelevant information, failing to ask important questions. Small firms send managers to potential partners and only hear what they already know. The longer the process drags on, the worse things get. The goal of both sides is to conduct due diligence in the most efficient way possible while collecting the information needed to make a "go or no-go" decision. 

This article describes the "due diligence framework," a rigorous, structured approach for planning and implementing a successful due diligence process. The framework includes tools, metrics, and management techniques that help focus both companies' attention on technology development, competitive risks, and commercialization potential. 

Building a long-term relationship between a pharmaceutical company and a biotech firm is an explicit part of the framework. A limited number of "best-in-class" biotech companies engage in innovative programs directly related to a large pharma's areas of therapeutic interest. These programs will produce a continuing flow of innovation, not just one compound. Big Pharma needs preferential access to this flow of compounds, not just the immediate target molecule.   

With this in mind, the due diligence framework has four goals:   

				Prepare both firms for the process by accurately communicating events, timelines, resource requirements, and outcomes. 

				Accurately evaluate the immediate opportunity. 

				Make the process as valuable to the licensor as it is to the licensee. 

				Allow the pharma company to gain preferential access to the biotech's portfolio of compounds by allowing it to build a strong relationship with the target company. 

The due diligence framework is an efficient process, but efficient does not mean quick and easy. There are no shortcuts. Efficiency takes the form of minimizing resource commitments and disruptions to ongoing programs while learning what each side needs to know. In other words, the framework converts normal due diligence root canal into a painless filling. The process has six steps:  

 preparing the partner for the due diligence process 

 conducting due diligence on intellectual assets 

 using the collected information to create value for both firms. 

Everything begins with an accurate understanding of what you need to know. Before starting the formal due diligence process, managers at Roche, for example, evaluate the opportunity along the entire commercialization pathway, from research to sales and marketing. In particular, they assess four dimensions:  							

—the compound's technical merit and the appropriateness of the small firm's scientific approach to technical challenges

—the compound's fit with Roche's strategy and its R&D and commercial portfolios

—including technical, manufacturing, regulatory, data package, and other elements

—the opportunity's net present value and strategies for sharing the risks and rewards between firms. 

The bulk of this work is done before starting the formal due diligence process using the biotech's confidential information. Open questions are collected into a questionnaire and sent to the biotech firm in preparation for the due diligence team's visit.  

The due diligence questionnaire informs the team selection process. Subject matter experts are drawn from internal and external sources. Although resource constraints affect large pharma's ability to field a team, these same constraints can quickly overwhelm the biotech firm. The challenge for both firms is to balance team members' due diligence responsibilities with their normal job demands. Senior management's role is to ensure that the due diligence team is staffed with highly qualified members who understand their roles and responsibilities and have adequate authority to carry out the task. Utilizing outside experts can help solve the resource problem.  

The team selection process is directly related to building strong relationships between firms. Successful companies utilize as many firm managers as possible who will have ongoing alliance responsibilities if the agreement is signed. The due diligence process is a time of close interaction, giving team members from both sides the opportunity to build the interpersonal relationships that are so important to ongoing alliance success. 

Once the team is in place, each side is informed of the focus and expectations of the due diligence process, the rules of engagement, and each member's legal responsibilities as a participant.  

An early responsibility of the large pharma team leader is to prepare the other side to participate in the process. This includes providing details such as defining data requirements and agreeing on how data will be collected and handled, where it will be kept, who will have access, and other related issues. Early preparation minimizes confusion and prevents misunderstandings. 			

This stage is another opportunity for relationship building. In recent years, companies such as Eli Lilly, Roche, and GlaxoSmithKline created specialized groups to facilitate alliance implementation when agreements were signed. Depending on the opportunity, large pharma management may introduce these implementation experts during the due diligence process to assess cultural fit, decision making style, and communication preferences. By actively participating in the due diligence process, these managers prepare key groups inside the large company to work with the smaller partner. 

The most sensitive stage in the due diligence process is assessing each company's proprietary intellectual assets. These exchanges are carried out under carefully crafted nondisclosure agreements and material transfer agreements. Although the content of these documents is outside the scope of this article, at a minimum they must describe each company's responsibilities to protect the other's proprietary information as well as each one's rights to use disclosed information.  							

In addition to these legal documents, each side must have a thorough understanding of key contact personnel on each side, including their roles and responsibilities. Each side must also agree to a common vision of the process, including actions for each stage and likely outputs. Gaining a complete understanding of the management process for the data room (a designated location where all due diligence input is maintained and monitored by both sides) is critical. Even when legal agreements and process understandings are in place, there are risks to sharing proprietary information, particularly as each side must disclose its proprietary assets to the other before signing the licensing agreement. This point is crucial. If the licensing agreement never occurs, each side possesses knowledge of the other's proprietary intellectual assets. Even more important, both companies are intent on commercializing this type of technology. It is easy to see how disputes can arise when a licensing agreement does not take place and one company sees the other bring a similar technology to market. With this in mind, both sides must balance the need to share proprietary information with the knowledge that the deal may not occur. 

One preferred methodology is to begin with a clear understanding of what each side needs to know, then engage the other in a series of targeted discussions with very clear agendas. A goal of each meeting is to rapidly reach a go/no-go decision while minimizing the amount of proprietary information disclosed. This goal encourages each side to identify its deal breakers and share them with the other side. For example, when a large pharma company is assessing a small biotech's technology, the two companies' due diligence teams will create an agenda based on the following questions:  

			What information about the biotech's technology must the pharma company learn to move to the next decision making stage? 

				What complementary information about the pharma's technology must be shared with the biotech? 

				Who is the responsible manager from each company? 

			Which scientists and business managers from each company will attend the meeting? 

After the session, both companies reassess their interest. If warranted, another session is held to reveal the next level of information. This technique may not match the claim of firms that allegedly have 24-hour due diligence programs, but it is a superior way of controlling the release of proprietary information and minimizing overexposure if a deal falls through. 

Conducting Due Diligence on Intellectual Assets

The "due diligence framework" is an efficient process. But efficient is not the same as quick and easy. There are no shortcuts. The framework minimizes resource commitments and disruptions to ongoing programs and helps each side learn what it needs to know. In six steps, it converts the typical due diligence root canal into a painless filling.