Continued industry-wide decline in R&D productivity has led to the tremendous growth of R&D externalisation in bioscience and health technology over the past decade. In particular, there has been a dramatic proliferation of “David-and-Goliath” collaborations between small companies or academic research groups (‘David’) with much larger multinational corporations (‘Goliath’). But can this ultimately reverse the productivity decline? In this article, the first of a three-part series, we describe (in addition to the usual scientific and marketplace challenges) some hidden reasons for R&D project failures in this sector. Unless the industry gets better at managing these less visible risk factors, the productivity gains from increased R&D externalisation could be rapidly eroded.
A trend that’s here to stay
The large multinational pharmaceutical and medical device corporations have dramatically transformed their R&D models to embrace externalisation as a major contributor to their new product pipelines. By one recent estimate, external innovation accounts for an average 64% of the late-stage pipeline value of the biggest companies – this figure breaks down as 28% from co-development/joint venture, 13% from in-licensing and 22% from acquisitions. While licensing and co-development/joint venture are obviously different collaboration structures, it should also be noted that many acquisitions of small biotechs by pharmas are the consequence of successful initial collaborations between the two parties.
Although the big multinational players have always partnered with their peers to some extent, the pressures they now face combined with the opportunities that are now available have led them to collaborate intensively with smaller firms and academia. They are betting that by working externally with a large number of smaller R&D-based companies and academic research groups, their odds of generating successful innovations will be improved significantly by both having better ideas and “more shots on goal”.
Reasons for Failure – more than meets the eye
The historical success rates in bioscience new product discovery and development are notoriously low, in the single digit percentages if one starts measuring from the discovery stages. A lot of promising science at the in vitro level does not translate into the clinic. And increasing regulatory hurdles, evolving medical practice and intensifying reimbursement/pricing pressures make marketplace requirements a moving target. So before any David-and-Goliath collaboration deal is signed, Goliath always conducts a thorough due diligence to assess the traditional scientific, regulatory and commercial (including payer) risk factors. And when the project is set up to be executed, both sides try to put into the collaboration the relevant resources to address these traditional risk factors.
But does the high observed failure rate result solely from these traditional risk factors? The “official” reasons for project failure are typically either “the science didn’t work” or “the regulatory and commercial requirements couldn’t be met”. But if you informally ask pretty much anyone who has been involved in R&D projects for some years, they will often reflect on some projects where the manner in which the team operated or was governed was far from optimal. And the sheer number of repurposing successes is evidence that certain projects are myopic and fail to see the wider opportunities.
My research (see the sidebar) has illuminated two additional risk factors, the first of which being execution risk. There is always a certain proportion of projects, albeit not easily quantifiable, that fail owing to how these projects are managed and executed:
Execution risk = The risk arising from being unable to resolve unanticipated problems or exploit unexpected opportunities over the course of the project’s execution.
Secondly, in addition to the execution risk that could potentially afflict any project, David-and-Goliath collaborations are also very prone to a high degree of collaboration risk owing to the significant asymmetries between the two parties:
Collaboration risk = The incremental risk (compared to working solely in-house) arising from the added complications of working with one or more external collaborators, over and above the other types of risk already discussed.
While greater R&D externalisation increases the odds of a better showing against the traditional risk factors, the impact of hidden execution and collaboration risks could serve to erode these gains or make matters even worse, unless steps are consciously taken to systematically ameliorate them. We shall concentrate in the remainder of this article on characterising these execution and collaboration risks.
Characterising execution risk
Good execution in bioscience and health technology projects is not simply a case of carrying out the project plan on time and to budget. Unlike R&D in say aerospace or informatics, the underlying science is much less precisely understood while the operating environment (i.e. the human body) is hugely more complex. Furthermore, owing to the long new product cycle times mandated by regulatory testing, the precise economic and performance characteristics of the final product are hard to pin down at the outset – the relative priorities placed by healthcare payers in 5 to 15 years’ time on different diseases, and the level of intervention for each disease expected by physicians, cannot be accurately gauged today.
Project activities and timelines thus continually need to evolve as new information emerges – the project needs to operate in a nimble and adaptive way. And so any deficiencies in communication, problem-solving and decision-making of the project team and/or its governance committee are an obvious driver of execution risk.
In many companies, execution risk is increased by an inflexible project management approach. The conventional project management paradigm of adhering strictly to pre-set deliverables, timelines and activity budgets can cause more harm than good. I have observed too many projects get stalled or even cancelled, because the team were unable or not allowed to adopt a more nimble, adaptive project path. What matters is getting to the end-goal, rather than how to get there.
In a similar vein, setting overly narrow project goals reduces the chances of significant new value emerging from the project. Because the biological systems in the human body are both complex and intertwined, many projects generate scientific findings which have much broader applicability than the original scope. But these insights are not noticed by the project team nor the governance process if everyone is fixated on the original narrowly-defined goals. There are many stories of cancelled drug projects that were subsequently rescued through reformulation or repurposing by other companies. And what about the many rejected early-stage compounds that were never tested for other applications? Or the possibility of discovering innovative biomarkers as an additional benefit from a research programme into a new disease mechanism?
Execution risk is a feature of the inherently windy road of the project journey in bioscience and health technology R&D, where unexpected challenges as well as opportunities await around every blind corner – not just from the science, but also from the changing commercial, regulatory and organisational climates. This phenomenon affects all R&D projects in this sector, not just collaborative projects, but as we will discuss in the next section, execution risk is greatly exacerbated in a collaboration environment.
Characterising collaboration risk
There are fundamental differences in organisational missions, processes and culture between David and Goliath. For example, most academic research teams have a fundamental need to publish their research to further their academic careers. And in a similar vein, most small biotech companies need a stream of frequent “news flow” to grow their enterprise valuation and support investor fund-raising. Whereas a large global multinational might prefer its proprietary research and early development results to be kept under wraps until the resulting new products are closer to the marketplace. Furthermore, there is a stark difference in decision-making process and speed between David and Goliath.
There is also a huge gap in power and risk perception. Goliath provides most/all of the funding, and maintains a large portfolio of both internal and external projects where over time it will prioritise some while closing the others. Whereas in David’s case as say a small biotech, it needs the collaboration to provide cash flow and maintain investor credibility. The very real risk to David of its collaboration being terminated, put on hold or delayed by Goliath’s portfolio management process could be a threat to its very existence. Whereas for Goliath, this is just “daily business”.
Unlike a project within a single company, a collaboration has the dilemma of simultaneous role separation and duplication. Within the project team, governance process and other project structures, there needs of course to be a division of labour between David and Goliath. But there also needs to be some “doubling up”, so that each side can understand what the other is doing and learning in different functional areas e.g. clinical development people from both sides.
Many collaborations are the consummation of a mating process that may have taken many months and sapped the energy of key individuals from both sides. Once the deal is done, many of those involved move on to find and eventually close other deals. The day-to-day project team that then comes in for the execution is often bereft of anyone heavily involved in crafting the deal; more often than not, the only continuity being some individuals in the project governance process. This hand-off at commencement of the collaboration makes it difficult for the project team to get up to speed. The project team will lack some tacit insights that the deal team were unable to transfer. They often struggle to internalise the “spirit” of the collaboration i.e. the broader underlying aims and rationale, relying instead on the formal project plan and deliverables. There is also a psychological hand-off as well. In both David and Goliath, the immediate recognition and organisational bragging rights come from finding and doing the deal. From a cultural standpoint, the challenge of execution is often under-valued and not given sufficient top management attention until something goes badly wrong, by which time it is too late anyway.
All the above factors combined create a high potential for misunderstanding and miscommunication on both the technical and procedural aspects. How can any David-and-Goliath collaboration even have a chance of succeeding if it is constantly mired in arguments over a string of different issues? So as mentioned earlier, the collaboration environment magnifies the execution risk. It is hard enough to instil a more nimble, adaptive project management approach with a team drawn from many different functions in the same company. The bar is raised an order of magnitude higher when the project team and its governance process includes cross-functional participants from two different companies with asymmetrical missions and culture, operating in an environment conducive to misunderstanding and miscommunication.
Last but not least, there is a risk the project activities are disconnected from each side’s wider organisation, in which case the most appropriate skills of each side are not brought into play, nor are the outputs of the collaboration exploited by Goliath. In a recent study of over 100 corporate-sponsored academic research projects, 50% generated major outcomes (i.e. produced new ideas or solutions to problems, developed new methods of analysis or generated new intellectual property of potential benefit for the sponsor) but only 40% of these projects with major outcomes achieved major impact (i.e. an observable and generally agreed-upon positive effect on the sponsor’s competitiveness or productivity). Thus only 20% of all the collaborations were successful from a business perspective.
The above finding seems to indicate that good science done by the project team is not enough – the work also needs to be connected into the sponsoring organisation in order for it to be exploited. As one of my interviewees commented:
“Having worked with this large pharma on several projects, we definitely prefer some of their project leaders rather than others – the best ones are those that network into their own organisation to get help and to sell what the project is doing, while the worst ones are those whom their own organisation ignore”.
To recap, collaboration risk arises in large part from the very high potential for misunderstanding and miscommunication inherent in a collaboration, and also to some extent from the collaboration’s activities not being sufficiently connected into the collaborators’ wider organisations.
Summary and What’s Next
To fully reap the benefits of David-and-Goliath collaborations, both sides need to proactively manage execution and collaboration risks over the entire course of the collaboration. It is not sufficient to just manage the traditional scientific, regulatory and commercial risk factors. Otherwise the gains from externalisation are likely to be eroded away by the additional challenges inherent in David-and-Goliath collaborations.
Coming up next, in the second instalment of this series, we look at the critical ingredients that need to be in place at the outset to greatly improve the collaboration’s chances of success. Following on, the third instalment discusses the key success factors during the execution of such collaborations.
Notes and References
See figure 9 on page 11 of: “Measuring the return from pharmaceutical innovation 2013: Weathering the storm?”, Deloitte UK Centre for Health Solutions (2013). ↩
This is eloquently articulated in: “Does Pharma’s Emphasis On External Sourcing Of Drugs Represent A Strategic Shift Away From Internal Research?”, John LaMattina, Forbes blog March 2014, http://www.forbes.com/sites/johnlamattina/2014/03/11/does-pharmas-emphasis-on-external-sourcing-of-drugs-represent-a-strategic-shift-away-from-internal-research/ retrieved August 2014. ↩
“Best Practices for Industry-University Collaboration”, Pertuzé, J.A., Calder, E.S., Greitzer, E.M., and Lucas, W.A. (2010), MIT Sloan Management Review Summer 2010. ↩