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A strategic framework for partnering |
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![]() Technology-oriented mergers, acquisitions, and alliances play an increasingly important role in the strategies of pharmaceutical and biotech companies. At the same time, managing the complexity, uncertainty, and urgency of technology partnering and acquisition strategies has become increasingly difficult. Here, we describe a framework and process to help pharma and biotech companies develop robust strategies for nurturing and executing a range of technology deals. Influencing factors On the pharma side, rapid growth in deal making has been driven by pharmas need to increase research productivity. A recent McKinsey study says that most pharmaceutical companies will need to at least double R&D productivity (as measured by the number of new chemical entities) to meet Wall Street analysts growth expectations. To meet these expectations, pharmaceutical companies continue to choose external dealsM&A and alliancesas a primary means to grow and innovate. External deals are attractive growth vehicles because they offer fast access to both intellectual property and talent. The latter is particularly important since many of the most talented people prefer smaller organizations that offer IPO potential. On the biotech side, the demand for deals has been driven by a pressing need for funding. Only about half of U.S. biotech firms have sufficient cash to fund more than two additional years of research, and alliances provide a large portion of that funding. In fact, biotech funding from alliances exceeds $5 billion annually and has grown more than 40% each year in recent years. The complexity of technology-oriented deals has also increased. For example, a recent survey indicates that 90% of licensing executives believe that todays deals are more complex than those made five years ago. In addition, more deals have complicated structures with sophisticated financing vehicles (see Modern Drug Discovery, March 2000, p 59). A partnering strategy
The horizontal axis represents the companys ability to identify desirable partners. For instance, if the winners are relatively easy to identify, technologies fall in the high certainty category. Technologies belong in the low certainty category if the winning technology or identity of the leading player is unclear. In the next few sections, we will discuss approaches to external development in each of the quadrants. Goal of superiority, high certainty about winners. For technologies that are a source of competitive advantage and where desirable partners are easily identified (Figure 1, upper right quadrant ), the external development strategy is to acquire or form exclusive relationships with partners. The goal is to control or limit competitors access to key technologies or assets. Transactions in the upper right quadrant create risk for both parties. For the seller, risk comes from closing off alternative options for commercializing the technology. This risk can be mitigated by receiving large up-front payments or from clauses such as fallbacks that enable a company to gain back rights when a deadline has not been met. For the buyer, there is the risk of a technological discontinuity. If superiority is strategically important, buyers should recognize that a single transaction may be insufficient and that continued monitoring is necessary. Goal of parity, high certainty about winners. For technologies where the goal is to keep pace with competitors and where desirable partners are easily identified (Figure 1, lower right quadrant), the external development strategy is to form nonexclusive relationships. The idea is to make sure that your company does not get shut out. For instance, many companies have signed up for semi- or nonexclusive access to DNA chip technology from Affymetrix or for annotated database information from Incyte and Celera. Unlike the high riskhigh reward situation in the upper right quadrant, both risk and reward are relatively low in this case, and companies will not be paying a premium for exclusivity. Competitors sometimes classify technologies differently. Take the example of expressed sequence tags (ESTs). In 1993, SmithKline Beecham formed an alliance with Human Genome Sciences to gain exclusive access to EST gene sequences. In contrast, Merck formed an alliance with researchers at Washington University in 1994 to sequence ESTs and make them publicly available. SmithKline Beechams actions imply a perspective that early and exclusive access to ESTs would be a source of competitive advantage, while Mercks actions seem to imply that ESTs should not be a source of competitive advantage. In a more recent example, the SNP Consortium, funded by 12 top pharmaceutical companies and the Wellcome Trust, has launched an effort to generate a significant set of SNP (single nucleotide polymorphism) data and to place it in the public domain. Other players are taking a proprietary as opposed to a public-domain approach (e.g., Gensets deals with Pharmacia, Upjohn, and Abbott Laboratories to deliver specific SNP markers for drug response). Goal of parity, low certainty about winners. For technologies where the goal is to keep pace with competitors, but the identity of winning partners is unclear (Figure 1, lower left quadrant), the preferred approach is to monitor the situation closely to avoid exclusion and, perhaps, to create options by making multiple small bets. Many emerging technologies fall in this quadrant. For instance, in proteomics, most people believe that it is unclear which technologies and players will ultimately be successful. Close monitoring of the technology area will help companies move quickly to avoid being excluded. Goal of superiority, low certainty about winners. For technologies with high potential impact and low certainty about winners (Figure 1, upper left quadrant), the approach is to buy options for future exclusivity. For instance, in the early days of biotech, many pharma companies bought minority stakes in pioneers like Genentech and Genetics Institute. Years later, as the value of these companies became clear, several pharma companies purchased the remaining portion of the biotech pioneers. A more recent example is the MillenniumBayer deal, which included options to develop multiple targets and transfer valuable genomics technologies. To manage the inherent high stakes and uncertainty, transactions in this quadrant benefit the most from more complex deal structures and creative financing vehicles. Using the framework
First, understand the potential impact of a technology, and whether its value will depend on achieving superiority or parity. It is useful to understand the value created in different scenarios and the future events that would make one or another scenario more probable. For instance, the availability of an inexpensive genetic diagnostic would favor a scenario in which SNP technology is most valuable. The next step is to monitor the external situation and internal strategy to determine whether a technology should be moved from one quadrant to another. Companies should focus the monitoring on the key variables associated with the scenarios developed in step 1 of the process. As uncertainty is resolved, the position of the technology can be changed. A contingency plan for each technology in different scenarios should be developed to enable rapid action. This plan should contain prioritized targets for alliances or acquisitions, preliminary due diligence on the targets, and a high-level action plan for each technology. The last step is rapid and efficient execution of a partnering or acquisition strategy. This can lead to competitive advantage by positioning a company to make the best deals and by helping to attract the best deal-making talent. The analysis and planning documented in the framework lay the foundation for superior execution. Conclusion We believe that rigorous use of the framework and process described in this article will yield multiple benefits, including a higher percentage of robust deals, superior insight into future technologies, and enhanced ability to involve a broad range of company functions (e.g., R&D) in identifying and evaluating winners. |