Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
MANAGEMENT AT WORK
The Science of the Deal
Over a decade ago, OSI Pharmaceuticals, a small bio-
technology company based on Long Island, New York,
was looking for a partner to share in the development
of a newly invented drug for the treatment of lung and
pancreatic cancer. The drug was extremely promising,
and with 42 companies bidding on a piece of the
action, the OSI deal was the year’s most competitive
in the pharmaceuticals industry. The winner was San
Francisco–based Genentech, a highly successful pioneer
in the biotech field. In order to lock up the deal, both
Genentech and its largest shareholder (and eventual
parent), the Swiss pharmaceuticals company Roche
Group, purchased $35 million in OSI stock and offered
up-front fees totaling another $117 million.
It was certainly an attractive offer, but it wasn’t
actually the highest bid. OSI went with Genentech
because it had more than money to offer. Joe
McCracken, who negotiated the deal for Genentech,
argues that OSI accepted his bid because his company
paid attention to what OSI wanted (in addition to a
healthy infusion of capital): “They wanted to build a
company,” he recalls, “and you were not going to
help them build a company by giving them a whole
bunch of cash. … What we proposed … was a partner-
ship where we would really work together and share
the science and be partners in development.” The
agreement called for Genentech and OSI to share
development costs and profits from U.S. sales and
Roche to pay royalties on sales in all other markets.
According to McCracken (who was vice president of
business development at the time), deals like the one
with OSI are mostly about the science and the organi-
zational processes that transform scientific resources
into profitable products: At Genentech, he says, “we
emphasize scientific rationale and probability of
approval much more than we emphasize market size.
A strong underlying scientific rationale or a probability
of approval will trump market size any time.”
For example, McCracken negotiated a deal with a
biotech firm called Seattle Genetics Inc. to partner in
the commercialization of a cancer drug known as
SGN-40. Under the terms of the arrangement, Genen-
tech made an up-front payment of $60 million and
agreed to pay for future research, development, and
manufacturing through “milestone” payments of more
than $800 million based on Seattle Genetics’ clinical
and regulatory progress in developing the drug. It was
an expensive deal, but McCracken had good reason to
make it: “[F]or us to do these larger deals,” he explains,
“… we have to believe we have synergies we can exploit
in maximizing the development of [the products]. In
this case, we really believe we have some good insights
and expertise in basic research and in development and
manufacturing that we can leverage. … This product,”
he adds, “has the opportunity to address an important
disease that we don’t have anything else in our pipeline
to address. We put a big premium on that.” As of 2012,
SGN-40 was performing well in clinical trials on
patients with a form of blood cancer known as non-
Hodgkin lymphoma.
In the pharmaceuticals industry, in addition to the
usual run of joint ventures and mergers and acquisi-
tions (M&As), deals come in a variety of forms. In-
licensing ventures, for example, are partnerships
between firms with shared goals, strategies, or fields
of interest; like Genentech’s deals with OSI and Seattle
Genetics, they’re often created to share the costs of
developing products from which both partners can
profit. Out-licensing refers to ventures in which a firm
seeks a partner to continue the development of a prod-
uct that’s previously been developed internally. For
instance, Genentech once took a drug called Raptiva
through
preclinical
and
midstage
clinical
trials
but didn’t have the financial wherewithal to take it
any further. So it out-licensed the drug to a small
biotech com
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
[biotech] business is by leveraging the resources of
partners in manufacturing and development.” It is
interesting to note that McCracken’s approach leaves
little room for acquisition as a deal-making option; in
fact, Genentech has only made one acquisition in its
entire history. “We haven’t had to do them to drive
growth,” he explains. “We’ve been able to sustain
growth with our internal pipeline. We’ve been able to
get access to the technologies and products that we
needed through licensing activities.”
As part of a major reorganization of Genentech’s
development, commercial, and manufacturing activi-
ties, McCracken was given additional responsibilities
as head of a new unit called Strategic Pipeline Develop-
ment. Among the goals of the reorganization was
focusing the efforts of top managers on product inno-
vation and the firm’s product pipeline—the flow of
new-product concepts through the process that trans-
forms them into products available to end users.
McCracken’s new responsibilities included heading up
a team to advise the president of the Product Develop-
ment unit on the expansion of the company’s product
pipeline.
Following the reorganization, McCracken’s team
would negotiate anywhere from 40 to 50 deals annu-
ally, but hooking up with partners soon became a sec-
ondary aspect of his job. Following the reorganization,
he spent most of his time with what he called “my
customers”—the people inside Genentech who conduct
the research necessary to develop products already in
the pipeline. The shift in his job description, according
to McCracken, was important “because business devel-
opment [at Genentech] is so integrated with our inter-
nal customers in research [and] development.” For the
record, it wasn’t long before McCracken was back at
the job of making partnership deals, first as Roche’s
head of Pharma Partnering Asia and, currently, as its
global head of business development.
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