Is Big Always Best?

Many research-stage biotechs and other small to medium-sized enterprises (SMEs) prioritize partnerships with Big Partners or in Big Disease Indications without sufficient consideration of other options. But SMEs need to consider other factors when deciding who to partner their assets with and how. As do large pharmas partnering with SMEs

An earlier version of this article was published in the June 2016 issue of PharmaTimes magazine.

Benefits and Challenges for SMEs With Big Partners

The benefits of collaborating with Big Partners are obvious and substantial—they provide the depth of resources and market reach that you as an SME simply do not have. In comparison to smaller collaborators, you have greater leeway to negotiate higher up-front and milestone payments with Big Partners while gaining access to a much larger pool of scientific, regulatory and commercial know-how. Your media footprint is also substantially enhanced, validating your company and your technology with investors, the medical community and future partners.

However, you have to interact with your Big Partner’s complex matrix organisation. Your project is one of hundreds in its portfolio, constantly at risk of being deprioritized or put on hold owing to changes in corporate priorities, reorganizations, mergers and competing internal projects. If unlucky, your project could contract “orphan project syndrome”, losing visibility in your partner’s organization as one biotech CEO put it: “Your project just sits there, neither dead nor alive, starved of the best resources, attracting little management attention.” Whereas by collaborating with a smaller or more focused company, your project might have a better chance of being a major cog in your partner’s strategy—they could be more determined and more flexible to ensure your joint project succeeds.

Some Big Partners seek to fit your project into their way of working. But their standard approach may not fit your project’s specific needs. And projects with Big Partners can quickly become bloated by well-intentioned risk management, as noted by one pharma executive: “When we internalize partners’ projects too early, our people can spend much time addressing perceived risk while coming up the learning curve, adding extra work and costs without necessarily adding a lot of extra value.”

Despite their scale, your Big Partner may lack specific expertise in the nature of the precise technical, clinical or regulatory challenges your asset faces. In one case, although the Big Partner had a strong commercial franchise for the indication, it lacked the know-how to resolve a challenging CMC issue thrown up by the unusual chemistry of the SME’s compound. Both sides had assumed the Big Partner’s resources could fix the problem: “They’ve been making drugs a long time, this shouldn’t be an issue”. But as it turned out, the project was delayed several years and the SME faced financial difficulties owing to delayed milestone payments.

Although the benefits of Big Partners are substantial, the potential downsides need to be factored in when considering each specific partnership. There will be some situations where a smaller, highly-committed partner with specialist capabilities and closer cultural fit might be better.

Benefits and Challenges With Big Indications

The benefits Big Indications are also obvious and substantial. They are high profile and generate very substantial contingent payments if the product reaches the market. But the probability of success is at best unrelated to market size, and at worst negatively correlated if all the low-hanging fruit has already been picked. A small indication which your product conquers is always better than a big one where it does not work.

Big Indications often require long extensive clinical programmes, limiting the breadth of potential partners and lengthening time-to-market. They may require a large primary care sales force, again limiting the range of partners while requiring you to share more of the pie. It can sometimes make more sense to focus initially on smaller indications with faster and cheaper clinical validation, or indications that could eventually support your own specialty salesforce if that is an ambition.

Big Indications attract more competitors. Even if your project shows clinical efficacy, it may be commercially uncompetitive. And Big Indications tend to worry payers more—it may be difficult to agree reimbursement and pricing as such a large chunk of their budget is at stake.

Additional Partnering Considerations for SMEs

Partner size, indication size and deal size are all important considerations when SMEs design and negotiate partnerships. But SMEs can stack the odds against their partnerships if they do not consider other factors that impact execution.

As an SME, you should also conduct diligence on the potential partner downsides mentioned earlier:

  • Is your project fundamental to your prospective partner’s corporate strategy? How unique will your project be compared to others in their portfolio?
  • Is there a good operational and cultural fit in the proposed day-to-day working arrangements?
  • Can you access the specific expertise needed for the distinctive challenges your project will face?

Secondly, given the low industry success rates in earlier-stage R&D, you should anticipate failure. Unlike a large pharma with a big portfolio, you must nurture the few assets you have and work tirelessly to find their best applications. In pre-deal discussions, you could ascertain whether your prospective partner is interested in a very specific indication to fulfil a particular business requirement; in which case you could negotiate termination provisions that let you get your asset back quickly and cleanly if that original indication fails. Alternatively, if your partner is betting on the overall scientific premise, you could negotiate a partnership that enables exploration of multiple indications or even diagnostic applications.

Thirdly, you need to carefully negotiate milestone payment definitions. Very precise definitions in theory simplify monitoring and contract management. But in some cases, this has discouraged the project team from looking at other possibilities when the original scientific premise did not pan out. And in other cases, overly-tight definitions triggered arguments about whether a milestone payment was actually earned—the corporate checks and balances in the large partner delayed payment for many months as the precise contractual criteria had not been met, although the project team on both sides knew they had, on balance, a better prospective drug than had been anticipated.

Epilogue—Advice for Pharmas Partnering with SMEs

Besides the financials, the science and the application, pharmas need to consider several other factors when setting up partnerships with SMEs in order to improve the odds of significant benefits emerging.
The behavioral impact of the financial structures should be fully thought-through. For example, high back-end loading—the practice of paying most of the money in the later stages of the collaboration—in theory incentives rapid progress by the SME partner. However in some cases, it has had the opposite effect when initial scientific progress was slow or the readouts ambiguous, leading the SME to prioritize efforts on other partnerships with higher prospects of earlier cash flow.

Secondly, pharmas need to be sympathetic to their SME partners’ underlying business aims. For example, SMEs often need frequent news flow. Or SMEs may want their people closely involved in certain day-to-day project decisions owing to their strategic goals of building know-how in certain areas. Failure to recognize these needs early can lead to energy-sapping misunderstandings later on.

Thirdly, pharmas need to work with their SME partners to establish synergistic day-to-day working arrangements that exploit the relative strengths of both sides and reduce potential for conflict. For example, many partnerships involve shared leadership, each side appointing parallel responsible persons for each functional area in the joint project team and governance committee. If these pairings are misaligned or incompatible, the resulting tension retards progress and generates suboptimal decisions.

In conclusion, pharmas need to invest time and resources to ensure that cultural and business model differences do not work against their SME partnerships. This implies not just allocating a dedicated alliance manager but also proactive relationship building activities and careful selection of who will be involved.