Critical Ingredients at the Outset of Collaboration

A number of critical ingredients need to be in place at the outset of R&D collaborations between smaller biotech/medtech companies or academic research groups (‘David’) with much larger multinational corporations (‘Goliath’). In this second instalment of our three-part series, we discuss how these ingredients greatly improve the chances of success in such collaborations.

This article follows on from my previous article which characterised the hidden reasons for the failure of many David-and-Goliath collaborations. It outlines some of the key conclusions emerging so far from my ongoing research (see the sidebar) into improving the execution of such collaborations. We will start by discussing some common pitfalls in the technical and commercial due diligence prior to the deal being signed – these can greatly affect how the collaboration is set up and executed. The remainder of this article then concentrates on what can be done at the outset to alleviate or reduce the hidden execution and collaboration risks described in the previous article.

Pitfalls in the technical and commercial due diligence

A compelling scientific and commercial rationale is needed to initiate any collaboration. Normally this is validated by a thorough due diligence before the deal is consummated. Nevertheless, there are four not infrequent pitfalls that need to be borne in mind, the first two of which are mindset traps and the latter two being flaws in analytical logic.

1. Beware of scientific fashion. There are always certain scientific approaches that are in vogue at the time, with many papers being published and many big players investing. While getting a deal signed in a “hot” area can have a positive impact on the financial valuation of both David and Goliath, this can be very short-sighted. Many of the today’s hot areas are also tomorrow’s dead ends. You should go back to basics and ask, “Does the science make sense for the intended application?”.

2. Beware of blockbuster bias when assessing the commercial aspects. For Goliath, there will often be organisational pressure to find a successor to one of its top-sellers, or to regain a market that had been taken by a rival’s blockbuster. Of course you should exploit areas where you have strong commercial expertise. But nevertheless be careful of favouring a deal with comparatively weaker scientific rationale just because of the commercial fit. This is also a pitfall for David, especially those biotech/medtech companies whose investors seek focus on currently large markets. Today’s high margin growth market could well be tomorrow’s commoditised generic market. Again you should go back to basics and ask: (a) “Does the science make sense for the intended application?” and (b) “Will the market dynamics and health economics at the prospective time of launch be favourable?”.

3. Beware of under-valuing a future application owing to lack of market data or vice versa. It is comfortable to forecast high growth rates on existing revenues by projecting forward historical performance. While it takes courage and out-of-the-box thinking to argue for significant revenues in unformed markets without track records. Furthermore, when conducting net present value (‘NPV’) assessments, it is easy to assign overly low probabilities for revenue streams from new markets and conversely for well-established markets. The combination of both creates a “double whammy” effect that over-values established markets and under-values new markets.

4. Beware of valuing only a narrowly-focused application and ignoring the option value. As mentioned in the previous article, there are usually wider application areas for the underlying science, supporting data for which could well emerge in the collaboration. Something with multiple possible places in therapy/diagnosis for one disease, or with application in multiple diseases, is always worth much more. Whatever is the intended primary focus of the collaboration, you need to bake into your assessment some estimate of the extent to which the initial focus could be broadened, or the range of alternatives that could be pursued, if the primary focus turns out to be less viable than initially expected.

Anticipating execution and collaboration risks before closing the deal

Before most collaboration deals are signed, the focus is initially to conduct diligence on the scientific, intellectual property and commercial aspects, and subsequently to negotiate the financial terms and legal contract. There are also a number of other crucial elements which are often not done well or ignored entirely at the deal stage – these elements can make or break the collaboration during execution. Not all of the elements that we will discuss below need to be handled in the formal contract. Some of them could appear in a separate informal expectations addendum which can be written without complex legal language. And/or alternatively written into the governance process mandate or project team charter. The important thing is to get these elements into the open and discussed before closing the deal.

Let us first look at the need for an adaptable definition of project goals. In a project within a single company, it is not too hard to adjust project goals sensibly when new information arises. But in a David-and-Goliath collaboration with an inherent culture and power gap, it can be quite difficult to change project goals once the collaboration is kicked off without getting drawn into a long contractual discussion.

The legal and conventional project management standpoints would argue for very specific, tightly-defined project goals to facilitate waterproof contracts and unambiguous project monitoring. As was discussed in the previous article however, this approach raises the execution risk and can hasten the chances of the project not producing anything of value since the project team has little leeway to then:

• Manoeuvre around the inevitable volatile scientific findings and operational timelines, both negative and positive.
• Take advantage of other potential applications that could emerge, whether closely-related or in another area entirely.

Consider this artificial example[1] of a project to find inflammation drug candidates in a collaboration where Goliath has a strong commercial franchise in inhaled respiratory drugs, and its top product has superior efficacy but an inferior side effect profile compared to its competitors. Here are three alternative ways to define the project goals:

Option A is clean/simple and easy to monitor of course. However option B is more representative of practical realities since the DMPK and formulation characteristics of inhaled, dermatology and some inflammatory bowel therapies are similar and in any case all these diseases are mediated by related inflammation pathways. While Option C might make sense if the mechanism of action being investigated is unprecedented since the team might well find the mechanism more suited to intervention in some forms of arthritis or perhaps systemic lupus.

The broader the project goal set up at the outset, the greater is the onus on the governance process to dynamically focus the efforts of the team on specific intermediate goals (which could be quite narrowly defined over short time periods) as the project progresses and new information emerges. And of course there will be business situations that mitigate against having too broad a goal, such as the opportunity for David to collaborate with two different partners for different application areas.

To go with the more adaptable way for formulating project goals, a compatible approach to handling intellectual property issues is needed[2].

Related to defining the project goals, but nevertheless distinct, is the alignment of strategic aims. Each side of the collaboration will have some business strategies or higher-level goals that the project could have a significant impact on if successful i.e. the strategic context for the collaboration. While the project goals must be common and shared by both sides, the strategic aims need not, and probably cannot, be common. What is important however is:

• The strategic aims of the two parties are not incompatible.
• Each side recognises, understands and respects the other’s strategic aims.
• The expectations that each side has of what the other can contribute to the collaboration are not unrealistic as regards its own strategic aims.

Here are some hypothesised strategic contexts that could be relevant for the inflammation project example earlier, with quite different strategic aims for the two different David types:

A thoughtful definition of financial structure and payment milestones is needed, taking behavioural implications carefully into account. Consider for example the effect of an excessive back-end loading i.e. the practice of paying as little as possible in the early stages. This reduces the financial risk for Goliath, who thinks this incentivises David to give its best efforts and deliver as quickly as possible. In practice however, a situation can arise, particularly when David has several collaborations running with different Goliaths, that this has the opposite effect. If the project is having trouble making scientific headway, there can be a tendency for David to concentrate its attention and best resources on other projects with more promising results – the extreme back-end loading means David needs frequent cash injections to stay afloat and it will prioritise efforts on those activities with the higher likelihood of near-term cash flow. This of course has a disastrous effect on the de-prioritised project, which falls even further behind, pretty soon everyone in David has given up on it, and the project is eventually cancelled by Goliath for lack of compelling scientific results.

Or consider another example where the milestones are very tightly-defined at the outset in the contract. This simplifies the legal and project monitoring aspects. But in a similar vein to overly-narrow project goals as discussed earlier, can prevent the project team creating value when the original premise inevitably does not pan out exactly as anticipated at the outset. Even worse, a situation can arise where David, to ensure receipt of its milestone payments, continues working to generate outputs that satisfy the tightly-defined milestones even when it does not make scientific sense anymore, taking the project away from the path of optimal value creation. Such a phenomenon is not dissimilar to the old practice a decade ago of incentivising in-house Discovery groups on volume targets for molecules ready to start GLP toxicology testing – you just ended up with lots of placebos.

As was the case for project goals, it makes sense to lay out broad milestones in the contract and let the governance process dynamically determine more specific definitions for completion of each stage at the commencement of that stage[3].

Mutual expectations for news flow, communication and publication need to be agreed in advance. For most Davids, this is key aspect of their existence. Goliaths need to recognise this and agree specific expectations in advance with their Davids for what can be published, by whom, at which points in the timeline and the procedures for sign-off if required. Not doing so can contribute stress and distrust between the parties – it is not something to be worked out dynamically via “case law”.

A potentially thorny issue concerns the contractual provisions for declaring a collaboration terminated. Most contracts have hand-back provisions for returning the asset, relevant data and other intellectual property in the event that the collaboration is terminated. Sometimes however, a “limbo-like” situation can arise where the project, in the words of one of my interviewees, “just sits there, neither dead nor alive, with one side not admitting that it is dead”. To anticipate how to deal with this situation, it might make sense in some cases to incorporate contractual clauses that automatically deem the collaboration to be cancelled (and hence triggering the hand-back provisions) if the project has not made it to certain stages by certain timelines, unless both parties agree it is still active.

Last but not least, the key principles of the project model need to be put on the table in advance i.e. the main elements of the operating and governance processes. The project model will be discussed in much more detail in the next article of this series. At this stage before the deal is signed, the important thing is to agree some mutual high-level ground rules of how it will work, including the expectation that time and resource need to be set aside at the beginning of the collaboration to establish the day-to-day processes, build the working relationships and increase the project team’s capacity for joint problem-solving.

Summary and What’s Next

We started by looking at four typical mindset and logic traps in the technical and commercial due diligence process. We then discussed a number of critical ingredients that need to be in place before the deal is signed in order to avoid or reduce the impact of future execution and collaboration problems.

Coming up next, in the third instalment of this series, we look at the key success factors during the execution of David-and-Goliath collaborations.

Notes and References