arrangements in the Pharma and Biotech Industry
In the last ten years, alliances among biotech and pharma companies doubled to around 700 per year per sector (pharma / biotech sectors), although most of this increase came in the early years. So why are alliances becoming so common ? The answer lies partly in another question: how can the industry sustain the necessary growth to provide good shareholder value ? Let's take a fictional, but rather characteristic example; a large pharmaceutical company with a turnover of $5 billion has target sales growth of 10% for the next 10 years; on first impression this sounds like a reasonable target and certainly a 10% growth would not be at the high end of analysts' and investors' expectations. However, such a growth would take this company in 10 years' time to the current size of the very top players; perhaps an ambitious objective bearing in kind that most of its peers would also have similar goals.
If we correlate such a growth with NCEs the company launches, it becomes apparent that it will be necessary to have 4 NCEs with the current industry average of $300m peak sales each (unfortunately not many products reach sales of $1 billion !). Moreover, these should be launched in the next 3-4 years, in time to peak at the incremental $1,200m at year 10.
Even the largest pharmaceutical companies have certain limitations in their own Research although usually they have enough capacity in Development to bring new compounds to the market very effectively. However, on a number of occasions, the in-house development capacity may get prioritised in favour of other products within the company's portfolio.
A product may also be facing competition internally from other projects, not necessarily similar compounds, but perhaps programs better aligned to the overall R&D activities. In extreme cases, where a company has one major product in the same area, competition law may force the company to out-license the other candidate. A clear case exists therefore for big pharma alliances with biotech and start-up companies on collaborating both &qout in &qout and "out" as in some cases a small partner may be the best option. The "Licensing" deals we used to see 5 years ago are becoming a lot more like collaborations between true partners and perhaps even the term "licensing-in/out" should be modified in the future to reflect more accurately the partnering trend in the industry.
While shareholder value is the ultimate driver for most partnerships, access to new compounds, novel technologies, or IP rights not the only reason; sharing risk in product development can be just as important a reason for partnering. In addition, even though all big pharma companies have a good selling and marketing capacity (and can always increase it as needed) many alliances are created to optimise the commercialisation of products through, for example, detailing to different audiences, marketing with synergistic products or in particular territories where a partner is stronger than the originator.
All big pharma and biotech companies have in fact become quite dependent on products deriving from collaborations and the top 20 companies have on average 15-20% of their sales coming from licensed products, while around 40% of their pipelines is due to compounds externally sourced.
The World of PartnershipsIn a partnership, some things are really important and some things are just nice to have, but you can live without them. It is important to capitalise on the core competencies of the parties and in particular, those that are important to the success of the asset and the deal. The deal should be considered as a whole; the up-front payment is, oddly enough, not as important as many companies think and focusing on the money up-front may lead to choosing a partner who may not be the right one for the future. A partner may find it difficult (despite its size) to agree on large up-front payments because of risk involved and the internal approval process but can agree to a rewarding deal in the future. Focusing on the immediate benefits only, is short-termism that often has disastrous results.
The needs are different from each side. Biotechs are often small, with cash in the bank enough for only 2-3 years of survival and little (if any) revenue stream from product sales. A biotech would also have relatively few compounds to license out and the primary need is to develop them not only as quickly as possible, but also using a development program which will support the optimal labeling and the best indications. Launching for a niche indication is not necessarily the best option because it would result in a small market potential. Assuming successful development and registration, the success of the compound would depend on commercialisation. However, even though the strongest company in a field is sometimes the best, this is not always the case. The right partner would be the partner that will the best for the asset; the one that would care and nurture it and also the one that would be fair and pleasant to deal with.
If two partners enter into a deal and the "chemistry" is not right (signs like this tend to be evident from the early days), when something changes and issues arise, the deal often breaks down and in termination, no party wins. It is therefore crucial to focus on what are the top objectives and expectations from the alliance and be willing to give way to some important issues that are not the top priority. You cannot win everything.
From the big pharma side, the needs are different but also tend to focus on one or two major objectives. Big pharmas and big biotechs are not under the same financial pressure as the small companies are. However, even though R&D budgets appear astronomical by biotech standards, they cater for thousand of R&D employees and thousands of research projects. The money is always committed to specific projects and a newcomer compound to-be-licensed from a biotech has to compete with other projects already committed. Whilst big (or mid-size) pharmas' primary objective is to launch new products, the risk and cost are major obstacles in internal approvals necessary for the deal terms to be approved. Another difference between a biotech and a pharma is that biotechs focus on development speed and minimum requirements, while pharmas by nature, being large organizations, focus on delivering the optimal profile for a product that can then lead to commercial success. Therefore there are often "discrepancies" while a deal is negotiated, with the biotech feeling that the compound is more advanced in development than in the pharma's view and also with the pharma probably pushing for a development program which seems lengthier in time than what the biotech feels it should be. For the alliance to be successful, both parties have to see the other's side.
Assessing Potential Partners
The choice of partner will depend upon the needs of each specific project. Marketing power as top priority will probably make a large pharmaceutical company look attractive as a partner, whereas a specialised biotech company may be best to bring forward a high-risk, early-stage project requiring skills in molecular biology, especially when a broader research collaboration may prove valuable. Medium, small or even start-up pharmaceutical companies will also be potential partners.
Finding the "Right" Partner
Very early commercial due diligence, including for example the "word in the street" about a partner's performance track record in partnerships, can weed out unsuccessful partnerships, or unsuccessful attempts to partner. Being optimistic and persevering for a "marriage" that will not happen, or if it does happen, it will end up in divorce, is a waist of time and money.
The knowledge development of potential partners is an on-going process that takes years and has to be constantly updated.
There are many sources of information for identifying new partners. Various market intelligence publications exist in the pharmaceutical industry, providing numerous data on companies. Meetings and conferences can also provide information, as well as generate new and maintain old contacts. Other sources include consultants, brokers, analysts and investment banks. However, personal contacts between companies are probably the driving force in identifying and choosing a partner, all the way to negotiations and deal closure.
