By Randall Osborne

Editor

The meat 'n' potatoes of biotechnology is deals.

Some could argue that the real significance of the industry lies in drugs ­ that is, in the pioneering of them, rather than agreements related to their further development with pharmaceutical companies. But would-be marketable compounds, at least as often as not, stall out when they lack the infusion of cash from deep-pocketed partners.

Other than, say, the Phase III blow-up of a lead compound (important largely because it quashes the chance of a deal), or the buyout of one mega-pharmaceutical firm by another (important largely because of its affect on deals), news about alliances moves faster than any other does.

The meanings of deals, though, are much debated. When a biotechnology firm describes a collaboration as "worth up to" or having the "potential value of " a certain amount, analysts hasten to dissect the claim. Reporters who dare to headline the deal's declared prospective worth (even with provisos and disclaimers) are snickered at for accepting pie-in-the-sky figures.

Barstool wisdom has always questioned the lasting worth of so-called marriages made in heaven, but now PricewaterhouseCoopers LLP (PC) has another round of hard data. The news is not good.

A survey by the consulting firm, polling 184 executives at biotechnology and pharmaceutical companies between June and August 2000, found that as much as 50 percent of the potential value of the typical alliance is never realized.

"Less than 10 percent are outright failures, but a lot of value is being left on the table," said Erik Rule, partner at PC responsible for pharmaceutical and life sciences consulting, as well as strategic partnering. The findings are similar to those of 1999's "preferred partnering" survey, Rule said.

Eighty-seven percent of those contacted were at the level of vice president or above, with 75 percent of respondents from North America, mostly the U.S. and Canada, and 20 percent from Europe. The rest were from other countries.

PC asked respondents about their experiences with three types of deal. One is the cooperative alliance, which is often focused developing individually licensed products, co-marketing, or co-promotion, possibly as a "virtual" organization, with minority investment being part of the agreement. The second is the joint venture, with its own distinct identity and separate operating facilities. The third is the consortium, which entails more then two partners in a network that uses one of the other two types.

Not surprisingly, the most failure-prone of the three was the consortium, with its more diffuse responsibility of participants ­ and its correspondingly thinner spread of shared cash. About 90 percent of consortia failed to live up to their promise, the survey found. Cooperative and joint venture deals, on the other hand, failed "only" 59 percent of the time.

In terms of alliance type, the discovery deal was the most disappointing, with 64 percent not fully meeting expectations. In development alliances, 40 percent met or surpassed expectations. In co-marketing/co-promotion deals, 43 percent hit the mark or did better.

"I would have expected much lower success rates in the discovery stage, and a lot higher in co-marketing," Rule said.

Those who responded to the survey blamed five main factors for their alliances' failures: slow or non-existent results; differences in "culture" from partner to partner; changes in senior management; weak commitment to the deal; and poor communication among partners.

A big chunk of the failures (40 percent) was chalked up to slow or non-existent results, but almost as many (34 percent) were attributed to culture clashes. Company size was a major factor in citing this cause. Fifty-two percent of respondents from firms with more than 300 employees blamed cultural disparity, compared to only 30 percent of those from companies with fewer than 300 workers.

The size element also figured into responses regarding communication. Thirty-six percent of respondents from the larger companies named it as a failure cause, compared to 24 percent from the smaller.

PC says alliance can fix these problems by addressing the contrast in business culture among alliance members, reinforcing trust, ensuring a clear strategy, and improving communications.

Sounds good. Sounds obvious, too. But how to do it?

"I'm not denying that a great product and technology are important, but the biotech company has to recruit and pick people who are trustworthy," Rule said. With such people in place, the firm can talk with its pharmaceutical partner to fix whatever comes up in discussions before, or after, the deal is made, he said.

"[Trustworthiness] you can build through reputation," Rule said. "There's no magic there. It's going to come out with the individuals and how they conduct themselves during first contact."

The competition between pharmaceutical companies that PC counsels is fiercer than biotechnology firms might guess, he added.

"Most of our point of view in this area is aimed at telling big pharma how to be a better partner," Rule said. "What I tell big pharma is, 'Look, the great biotechnology deals, with the technology you really want to win, don't come along very often. It's a seller's market. The top 10 or 15 [pharmaceutical firms] are all going to be competing for it, trying to get a leg up."

Rule told BioWorld Financial Watch that he has heard of cases in which 32 companies were in the bidding for a biotechnology drug.

PC asked those polled about their favorite pharmaceutical partners in the three areas (research discovery, clinical development, and co-marketing/co-promotion), and came up with the same winner in each category: Pfizer Inc.

In second place, things got more interesting. Eli Lilly and Co. took the position for research discovery, and Merck & Co. Inc. took it for the other two categories. Placing third: Merck & Co. for research discovery, and Bristol-Myers Squibb Co. for the other two.

Rule said he "wouldn't argue that Pfizer or Merck have what we would call a breakaway position, and have distinguished themselves so much that they are the only game in town," but both have done well.

So have many others. Rule said PC won't help biotechnology firms compare and contrast, but assists in individual deal-making and deal-managing cases.

"I can't share dirty laundry," he said. "We have profiles of each of these companies, but my pledge has been to only share that with the big pharma companies. We can help them with their strategy, deciding who to go after and how to approach them."

A pair of well-known biotechnology names also showed up on the list of "top 10 pharmaceutical partners." Genentech Inc. landed in seventh place for clinical development, and Amgen Inc. ended up in 10th for research discovery, more evidence of the industry's maturity and diversification, Rule said.

"I was a little surprised, but pleasantly," he said. "We're going to see that more often." *