Seven Principles for Fostering Partnerships
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.
BD projects are invariably complex and it's easy to be overwhelmed by the amount of information that is generated in an investigation, much of which turns out to be "noise" from the standpoint of valuation and risk management. It's essential for BD professionals to identify early on the most important factors that determine a compound's value to their company, and focus most of their efforts on understanding them well.
An example from the dermatology market is instructive: A company acquired a new formulation of an existing chemical entity that had lost patent protection. The company knew generic versions of the original formulation would launch within weeks of this product, but it had expected the new formulation to be sufficiently differentiated to withstand the competition. Indeed, the company was successful in generating prescriptions, but then they quickly discovered that pharmacies were substituting the generic for over half of the scripts. The product was deemed a failure. The risk of substitution should have been recognized as a crucial variable in the original analysis—yet the noise diluted this risk.
4. Access the Right Resources
BD is inherently a cross-functional enterprise. Most companies maintain a small team of BD professionals who must engage experts from other departments to evaluate opportunities. Recruitment of the right individuals from those departments is vital. The most effective individuals are those who offer a specific technical or market expertise, who possess influence in the organization, who are comfortable with the ambiguity and uncertainty inherent in BD projects, and who have a capacity for insightful analysis with an integrated, strategic perspective.
Often these people are among the best and the brightest in their departments, and their services are in high demand. Even though they may find BD projects attractive to work on, getting access to their time requires senior-level support.
5. Support BD Initiatives—Not Projects
BD depends on the power of influence more than almost any other discipline. BD professionals must cultivate champions in other parts of the organization who will provide resources, lend support in decision-making forums, and facilitate integration after the deal is completed. It takes a lot of time and effort to build and maintain this kind of support, and at times, BD professionals can become victims of their own success. It is common to hear complaints about "living dead" projects that they no longer believe in but must continue to work on because of senior-level sponsorship.
The challenge is to generate enthusiasm without creating an emotional commitment that makes it difficult to kill deals if necessary. This is easier to accomplish by building support for the BD initiative as a whole, rather than on a project-by-project basis.
The most powerful tool for building organizational support is to establish a set of BD objectives that are shared by the senior leadership team. These objectives can take two forms. The first, based on metrics and incentives, creates the strongest tie to personal motivation—but it also tends to be imprecise in its operation. Typically, the metrics are quantitative ("We must complete two deals in 2006"), which concentrates minds wonderfully in the last quarter of the year. But companies that use that approach run the risk of falling behind and not meeting their BD objectives, which can negatively affect due diligence activities and negotiation leverage.
Companies can take another approach by developing a strategic framework for BD that outlines a defined set of growth platforms that incorporate therapeutic areas of focus; primary, secondary, and tertiary technology bets in those areas; and perhaps ancillary diagnostic or service capabilities that enhance the total solution set. To the extent that it articulates a compelling and credible future position and charts a robust pathway to achieve it, the framework represents a powerful tool, guiding BD search activities, informing the screening criteria, and effectively "pre-selling" individual projects that fit.
BD professionals at one large biopharma practice both approaches. The commercial side of the company has specific BD metrics that affect management incentives, while the R&D and manufacturing organizations do not. The BD group's ability to access talent and negotiate effective support is relatively easy when department leadership has a BD metric in its bonus formula, and significantly more difficult when they do not. This same BD group has also demonstrated the power of strategy development. In 2005, for the first time, they devoted significant energy in the first quarter to developing BD plans for and with each of the company's major business units. As a result, they perceive their 2005 BD pipeline as much more strategic than in years past, and there has been a dramatic reduction in the time the BD team had to spend selling the merits of individual projects.
6. Combine Agility With Discipline
BD projects often move quickly, and can significantly change direction as new information is discovered. There is a natural tendency to consider each project unique and view standardized processes as restrictive. There is an implicit assumption that discipline can be exercised only at the expense of the agility needed for success. This is a false trade-off.
Discipline refers to a single-minded focus on the ultimate objective—to complete good deals for the company—and results from a combination of mindset and process. Ideally, BD groups should be excited by the potential market opportunity, but also prepared to reject a specific compound when appropriate. This combination of enthusiasm and detachment is one of the most important attributes of an effective BD professional.
BD groups also need to have clearly defined processes, with explicit roles and responsibilities and associated project management and influence skills, to ensure that appropriate decisions occur on a timely basis. The backbone of the BD process is a series of decision gates with agreed-upon decision criteria, clear expectations for the appropriate levels of research and analysis for each stage in the process, and the understanding that participants need to take positions based on the information available to them at the time.
Agility results from quickness in recognizing changes in a dynamic situation, a readiness to be flexible on non-essential factors, and the ability to make rapid decisions. An effective strategic framework aids speedy decision-making. But it is also important to ensure that the process is not over designed, to impose the minimum structure necessary.
7. Manage Risks Intelligently
Every BD project has elements of risk: Successful BD teams have superior insight into the sources of risk and develop strategies for reducing them without forfeiting the deal. This ability to both recognize and manage risk may be the single most important differentiator between the winners and the also-rans. It enables the winners to minimize the number of costly errors. It also enables them to capture the valuable opportunities that may not appear attractive at first sight.
The most common tool for risk management is sharing the risks with the partnering company and providing that company with incentives to manage the risk. Smaller, high-growth companies typically have a greater appetite for risk than their Big Pharma partners, so it is often easy to shift a substantial share of the risk to them, provided they also receive a proportionate share of the upside. But there are other ways to manage risk as well. One is to build the development plan around known risk factors to drive out risk early on. Another is to be ready to capitalize on upside surprises, such as new indications or product differentiators beyond those that were initially contemplated.
Executing effective BD deals is an art and a science. There is no substitute for recruiting and retaining a cadre of experienced and capable professionals. But building a sustainable advantage in BD requires even more in the way of active direction, investment, and support from top management. Basing management's efforts on these seven principles can make the difference between exceptional results and those that are satisfactory.
Rita Numerof is president of Numerof & Associates. Jack Nightingale is a consultant to the company. They can be reached at firstname.lastname@example.org
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