Pharma companies, more and more, are faced with the reality that new molecular entities (NMEs) aren't always going to be uncovered in their own labs. Externally-sourced compounds have accounted for the majority of product launches for NMEs since 2003—a trend that shows no sign of slowing down. Consequently, pressure is mounting on pharma's business development (BD) departments, which are responsible for leading licensing and acquisition (L&A) activity between partnering companies, especially as competition continues to heat up over a limited set of available L&A opportunities.
In this environment, it is remarkable that the BD discipline has remained something of a cottage industry. Only recently have companies begun making the kind of focused investments in BD capabilities necessary to achieve and sustain leadership in this critical area. To some extent, this state of affairs reflects the inherent challenges of BD, which is highly complex and uncertain, and subject to many factors outside a company's control. However, it also reflects the limited attention most pharma companies have paid to thinking systematically about the discipline—and about what it takes to be successful.
Senior executives who are serious about engineering dramatic improvements in the way their companies do BD should consider seven fundamental principles that are vital for success.1. Generate Sufficient Opportunity Flow
Just as deal flow is an important metric for venture capitalists, opportunity flow should be a concern of BD professionals. Because L&A success rates are low, there must be enough quality opportunities entering the pipeline to ensure successful deals at the back end. Generating a robust flow is not a simple task, given the limited number of promising drugs available—especially for companies that are looking primarily for compounds in the late stages of development. But here are some approaches that have proven effective:
2. Manage the Pipeline
Success in loading the pipeline has to be matched with success in moving the best prospects to completion. Without unlimited resources, effective throughput can occur only if the less-promising opportunities are continually screened out. As with the internal development pipeline, the mantra for BD needs to be "fail early."
In practice, many companies find it difficult to apply the fail-early dictum. Because the opportunities are limited and companies face so much pressure to complete deals, there is a natural fear of rejecting compounds prematurely. The BD team at one company translated this fear into a mantra of its own: "no regrettable losses." The team did not want any competitor to successfully acquire a compound that it would have wanted on the same terms. The problem with zero tolerance for error in the screening process is that it creates artificial pressure to keep evaluating deals beyond the point of diminishing returns. To get the best deals done, it is essential to focus resources—this means deciding what not to spend time on.
3. Maximize the "Signal-to-Noise" Ratio
A common analytical tool for evaluating opportunities is the "tornado" diagram—named because its shape is reminiscent of a tornado. The tornado diagram visually ranks the key variables that are expected to affect the ultimate value to the acquiring company. It is typically the output of extensive analysis using sophisticated financial models. But the core insight it provides—that a small number of variables have a disproportionate effect on risk—is one that BD professionals must consider from their very first appraisal of a new opportunity.