Risk-sharing in the Pharmaceutical Industry: The Case of Out-licensing (Contributions to Management Science)

The costs of developing a new drug have reached record levels in the pharmaceutical industry. As any failure of a new drug candidate can lead to significant losses, many pharmaceutical companies are looking for new approaches to reduce their exposure to R and D risks. In this context, the book deals with the topic of out-licensing as a novel form of risk-sharing collaborations. The phenomenon of out-licensing is illustrated by three major case studies of Novartis, Schering and Roche as well as several smaller case studies. In addition, the Noble Prize awarded economic theory of Adverse Selection is applied to analyze the topic theoretically. The gained insights allow identifying the critical parameters of out-licensing collaborations and thereby provide R and D managers with recommendations on how to conclude and manage this type of deals more effectively. Physica-Verlag HD Contents 9 Foreword 6 Preface 8 1 Introduction 14 1.1 Motivation and Goal 14 1.1.1 Relevance of research subject 14 1.1.2 Deficits in current research 17 1.1.3 Research objective 30 1.2 Terms and Definitions 31 1.3 Research Concept 35 1.3.1 Research classification 35 1.3.2 Research methodology 37 1.4 Structure of the Book 38 2 Key Issues in Managing Pharmaceutical Innovation 41 2.1 Increase in R&D Risks 41 2.1.1 Risk of growth attainment 41 2.1.2 Risk of increasing complexity 43 2.1.3 Risk of technology investment 46 2.1.4 Risk of high attrition 52 2.1.5 Risk of blockbuster reliance 53 2.1.6 Risk of market timing 56 2.1.7 Risk of product differentiation 58 2.1.8 Risk of regulative force 60 2.2 Increase in R&D Collaborations 61 2.2.1 Relevance of R&D collaborations 63 2.2.2 Evolution of R&D collaborations 64 2.2.3 Classification of R&D collaborations 69 2.2.4 Reasons for R&D collaborations 72 2.3 Summary 74 3 Risk-sharing as New Paradigm in Pharma R&D Collaborations 77 3.1 Traditional Approaches to Risk-sharing 79 3.1.1 Research alliance 79 3.1.2 In-licensing 81 3.1.3 Co-development 84 3.2 Out-licensing as Novel Approach to Risk-sharing 87 3.3 Summary 99 4 Case Studies on Risk-sharing in Pharma R&D Collaborations 101 4.1 Out-licensing at Novartis 102 4.1.1 Company profiles 102 4.1.2 Description of the out-licensing strategy 105 4.1.3 Structure of the out-licensing collaboration 110 4.1.4 Capabilities of the out-licensing partner 111 4.2 Out-licensing at Schering 115 4.2.1 Company profiles 115 4.2.2 Description of the out-licensing strategy 118 4.2.3 Structure of the out-licensing collaboration 122 4.2.4 Capabilities of the out-licensing partner 125 4.3 Out-licensing at Roche 126 4.3.1 Company profiles 127 4.3.2 Description of the out-licensing strategy 130 4.3.3 Structure of the out-licensing collaboration 132 4.3.4 Capabilities of the out-licensing partner 135 4.4 Summary 137 5 Characteristics of Risk-sharing in Pharma R&D Collaborations 142 5.1 Attributes of the Licensor 142 5.1.1 Out-licensing approach 142 5.1.2 Out-licensing organization 147 5.1.3 Out-licensing process 151 5.2 Attributes of the License 156 5.2.1 Appropriability regime 157 5.2.2 Bargaining range 161 5.2.3 Compensation structure 166 5.3 Attributes of the Licensee 173 5.3.1 Business strategy 173 5.3.2 Corporate flexibility 178 5.3.3 Entrepreneurial setting 181 5.4 Summary 188 6 Theoretical Basis for Risk-sharing in Pharma R&D Collaborations 193 6.1 The Theory of Adverse Selection 195 6.2 Adverse Selection Applied to the Case of Out-licensing 196 6.2.1 Demand for licensing contracts 199 6.2.2 Supply of licensing contracts 200 6.2.3 Probability that the licensee cannot execute 201 6.2.4 Definition of an equilibrium in the licensing market 201 6.2.5 Equilibrium with identical licensees 202 6.2.6 Equilibrium with two classes of licensees 204 6.2.7 Discussion of the underlying assumptions 208 6.3 Summary 210 7 Managerial Recommendations for Risk-sharing in Pharma R&D Collaborations 213 7.1 Product Coverage 215 7.1.1 Relevant parameters 215 7.1.2 Impact on risk transferability 219 7.1.3 Managerial implications 220 7.2 Price Setting 225 7.2.1 Relevant parameters 226 7.2.2 Impact on risk transferability 229 7.2.3 Managerial implications 230 7.3 Performance Presumption 236 7.3.1 Relevant parameters 237 7.3.2 Impact on risk transferability 239 7.3.3 Managerial implications 242 7.4 Summary 248 8 Conclusion 255 8.1 Implications for Management Practice 255 8.1.1 Central statements and recommendations 255 8.1.2 Future directions and trends 262 8.2 Implications for Management Theory 266 8.2.1 Contribution to research 266 8.2.2 Open research questions 269 References 273 List of Abbreviations 300 List of Figures 302 List of Tables 306 3790816671,9783790816679 The productivity in pharmaceutical research and development faces intense pres­ sure. R&D expenditures of the major US and European companies have topped US$ 33 billion in 2003 compared to around US$ 13 billion just a decade ago. At the same time, the number of new drug approvals has dropped from 53 in 1996 to only 35 in 2003. Moreover, the protraction of clinical trials has significantly reduced the effective time of patent protection. The consequences are devastating. Monopoly profits have started to decline and the average costs per new drug have reached a re­ cord level of close to US$ 1 billion today. As a result, any failure of a new sub­ stance in the R&D process can lead to considerable losses, and the risks of introduc­ ing a new drug to the market have grown tremendously. Particularly if a company is highly dependent on just a handful of mega-selling blockbuster drugs, the risks can be even greater. For example, Pfizer generated about 90% of its worldwide revenues in 2002 with just 8 products. Any shortfall of a promising late-stage drug candidate would have left Pfizer with a gaping hole in its product portfolio. In order to deal with these risks, many pharmaceutical companies have started to organize their R&D in partnership. In fact, more than 600 alliances in pharmaceutical R&D are signed every year. "The costs of developing a new drug have reached record levels in the pharmaceutical industry. As any failure of a new drug candidate can lead to significant losses, many pharmaceutical companies are looking for new approaches to reduce their exposure to R&D risks. In this context, the book deals with the topic of out-licensing as a novel form of risk-sharing collaborations. The phenomenon of out-licensing is illustrated by three major case studies of Novartis, Schering and Roche as well as several smaller case studies. In addition, the Noble Prize awarded economic theory of Adverse Selection is applied to analyze the topic theoretically. The gained insights allow identifying the critical parameters of out-licensing collaborations and thereby provide R&D managers with recommendations on how to conclude and manage this type of deals more effectively."--BOOK JACKET "The costs of developing a new drug have reached record levels in the pharmaceutical industry. As any failure of a new drug candidate can lead to significant losses, many pharmaceutical companies are looking for new approaches to reduce their exposure to R & D risks. In this context, the book deals with the topic of out-licensing as a novel form of risk-sharing collaborations. The phenomenon of out-licensing is illustrated by three major case studies of Novartis, Schering and Roche as well as several smaller case studies. In addition, the Noble Prize awarded economic theory of Adverse Selection is applied to analyze the topic theoretically. The gained insights allow identifying the critical parameters of out-licensing collaborations and thereby provide R & D managers with recommendations on how to conclude and manage this type of deals more effectively."--Jacket