Guiding principles of value creation through collaborative innovation in pharmaceutical research

Liang Schweizer, l.schweizer@hifibio.com and Jeff He

Open innovation has become the main trend in pharmaceutical research. Potential obstacles and pitfalls of collaborations often lead to missed opportunities and/or poorly executed partnerships. This paper aims to provide a framework that facilitates the execution of successful collaborations. We start by mapping out three checkpoints onto early-stage collaborative partnerships: inception, ignition, and implementation. Different value types and value drivers are then laid out for each phase of the partnership. We proceed to propose a ratio-driven approach and a value-adjustment mechanism, enhancing the probability of successes in pharmaceutical research collaborations. These guiding principles combined should help the partners either reach agreement more quickly or move on to the next potential project.

Introduction

The biopharmaceutical industry continues to wrestle with the problem of R&D efficiency: R&D costs are rising even as output of new molecular entities has remained relatively flat. As a consequence, the pharmaceutical community has continued to deepen its commitment to a more collaborative approach toward R&D, with open innovation models ranging from true pre-competitive consortia to more structured arrangements that can address intellectual property (IP) issues. In this paper, we address the latter group, focusing on the specific hurdles that can stand in the way of efficiently starting collaborations between willing parties. Many opportunities for productive collaborations are missed because potential partners often find it difficult to reach an agreement on the values of ideas, methods, and prototypes in the drug discovery process.

Herein, we seek to provide a framework to ease the launch of nascent collaborations, with the goal of reducing the number of missed opportunities for open innovation in pharmaceutical research.

Establishing an innovation-based collaboration is an inherently complex process owing to the dynamic nature, elusive valuation, and intrinsic risk of early-stage pharmaceutical research. To illustrate our approach, we briefly describe a classic example that typifies the challenges and opportunities facing such collaborations.

Company X specializes in antibody hit generation, whereas Company Y bases its business model on proprietary rapid screening technologies for hit identification and lead generation. The initial connection between the parties is made through an industry veteran, and a mutual respect quickly develops. Both teams recognize the crucial need for rapid generation of differentiated leads against novel biological targets and believe that they can create significant synergistic value by combining their proprietary technology platforms. However, the discussion on how to collaborate lasts much longer than expected. Conversations become protracted as the partners debate how valuable their technology platform is and how value should be distributed.

Unfortunately, situations like this hypothetical example occur constantly, whether it is between two small companies, a large pharmaceutical company and a biotechnology company, or a university laboratory and a large pharmaceutical company. Our suggestions are designed to help potential partners pull themselves through this period of uncertainties by addressing key questions systematically:

1. How can we structure the collaboration discussion?
2. How should we recognize the various kinds of values that parties bring to the collaboration?
3. How can we distribute values between two or more partners in an efficient manner?
4. How do we avoid common pitfalls in the collaboration itself?

Based on our previous experience in the field of biopharmaceutical research, we point out the common mistakes and pitfalls that frequently hamper the execution of innovative collaborations.

Four principles to guide collaborative innovation

Principle 1: frame the collaboration in three phases

To provide a clear framework for innovation collaboration, we suggest that the potential collaboration partners frame the collaboration in three phases, each of which is completed with a checkpoint. Each checkpoint can be viewed as a milestone during the collaboration process, normally accompanied by detailed discussions between the parties, including the construction of workplans to ensure the successful progression of a collaboration. By inserting these key checkpoints into the otherwise complex process, one can lower the threshold for starting the collaboration and map out a clearer path for value generation. Below is the detailed characterization of each phase and checkpoint.

Phase 1: inception

The early part of Phase 1 is often marked by a scouting period, during which the two parties meet as part of a random encounter or as the result of a focused search. The potential collaborators come to recognize that they have a project of mutual interest in drug discovery and development. After a confidentiality disclosure agreement (CDA) is put in place, the discussions at inception should focus on material transfer agreements (MTA) and other assessments that might be necessary to increase confidence or provide preliminary proof-of-concept.

Phase 2: ignition

In Phase 2, the main scientific goal for collaborators is to conduct exploratory studies that are necessary to properly develop a joint research plan. At the end of Phase 2, the collaboration should have reached the point of "ignition", at which time a research plan is in place, a collaboration agreement is executed, and the parties are ready to launch into a full collaboration.

Phase 3: implementation

The primary objective of Phase 3 is to implement the research plan and accomplish the collaborative research objectives. Depending on the path and outcome of the collaboration at this phase, parties can reassess and readjust value distribution to better reflect the initial and incremental contributions made.

Principle 2: separate initial contributions from incremental contributions

Once the proposed collaboration is mapped onto three phases and a research plan is at a draft stage, it becomes possible to more readily separate initial contributions from incremental contributions. As parties prepare to move the collaboration from inception to ignition, they can characterize the value that each brings to the project in the form of technical know-how, IP, and resources for further exploration.

Principle 3: assign value to the parties using ratios

With the value contribution framework in place, it is possible to define each party's share using simple ratios of initial value and incremental value. Ratios can be extremely powerful at this stage of partnerships, because the final value will probably only emerge at the point of implementation, when more-efficient capital market players start to be involved.

Principle 4: optimize multifaceted endeavors for improved value creation

To maximize the chances for a successful outcome, it is essential that collaborators recognize that all research is path dependent, and opportunities that present themselves during the collaboration can be unique. We provide practical recommendations regarding how to maximize the opportunities for strong value realization.

Concluding remarks

The four principles to guide value generation and distribution in collaborative innovations can be utilized by all participants involved in the initial stages of open innovation drug discovery. Our approach aims to break down some early barriers and facilitate the start of a productive research collaboration. By framing a complex process into three distinct phases with well-defined checkpoints, one can focus on the most important tasks at each stage and ensure that proper milestones are achieved.

Acknowledgments

Many thanks to Dr. Percy Carter from Bristol Myers Squibb for insightful comments as well as language revision. We also appreciate the critical reading and comments on the manuscript from Professor Bernard Schweizer of Long Island University.