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Biotechnology, a strategic planning orphan: towards an effective strategy framework for biotechnology firms.

INTRODUCTION

WHILE BIOTECHNOLOGY HAS application in a number of fields, including biofuels, biocrops and industrial applications, drug development is the standard bearer in the business of biotechnology, not only because cures for diseases capture public imagination and have profound societal value, but because the financial rewards for successful drug development are so substantial. Indeed, Pisano ignores all other applications and defines "biotechnology" as all those technologies that could be applied to pharmaceutical drug research and development, including biology, chemistry and computer science. [1] He further defines a biotechnology firm as "any firm founded after 1976 that has the principle purpose of advancing, developing, or commercializing these technologies for drug discovery" (p. 16).

Pisano characterizes these biotechnology firms principally as 'middlemen' in the R&D supply chain that take on projects at an early stage, develop them to some point, and then license them to pharmaceutical partners for final development and commercialization. [1] Figure 1 shows the pharmaceutical R&D value chain, in which biotechnology firms operate. [2]

The drug development process starts with identifying and validating a disease target, typically a protein, which could act as a locus for intervention in a disease pathway. Typically, this is carried out by universities and other public research organizations. The next step is finding lead compounds that will interact with that target, and once these are optimized, they undergo preclinical development in anticipation of entry into human studies. As the drug enters human clinical studies, it is referred to as a 'candidate drug' and proceeds through three phases of clinical evaluation, starting with safety testing (Phase I), dosage, safety and preliminary efficacy testing in a small number of patients (Phase II) and finally, a large scale, pivotal study (Phase III).

If the candidate drug survives all this, the sponsoring pharmaceutical company will apply to the U.S. FDA (Food and Drug Administration), or equivalent authority elsewhere, for approval to market the drug. The entire process may span 10-15 years and at the Phase I stage, a candidate drug has only a 19% chance of gaining approval, on average. [3] Most biotechnology firms focus on the preclinical stage through to Phase II clinical development, with Phase II generally being the optimum point for licensing to a pharmaceutical partner. [2]

In summary, biotechnology firms typically in-license advances in basic science, usually patents or lead compounds from universities, progress them to candidate drugs, (4) take them through early clinical development and push them towards the market, usually via a pharmaceutical partnership. The fact that biotechnology firms are intermediaries in a long and risky development pathway and may not launch products themselves or compete in traditional markets, makes strategic planning for such firms uniquely challenging.

STRATEGIC PLANNING IN BIOTECH

Surprisingly, not much has been written about the specific challenges of strategic planning for biotechnology firms, with most of the planning approaches proposed being no different to other industries. According to one author, (5) the starting point for strategic planning for biotechnology firms is the long-term objectives of management, i.e., the vision, as shown in Figure 2.

That paper asserts that, because the business of biotechnology is so complex and uncertain, a vision is critical to driving the strategic planning process for biotechnology firms. But what if the long term vision of the founder is wrong or unrealistic?

Because of the uncertainties and complexities of the drug development business, along with the turbulence in the regulatory and funding environment, the chances of setting an inappropriate goal upfront are greater than in any other business. Forced to arrive at a vision to seed the strategic planning process as prescribed, a biotechnology firm founder might decide that his/her vision is to build a global, fully-integrated pharmaceutical company (FIPCO), which is an utterly unrealistic goal for a start-up biotechnology firm that may have one or two preclinical-stage candidates, each with a 90% chance of failure before reaching the market.

Even a generic goal or vision, such as "to create value for our investors" offers no insight as to the pathway and is hollow as a strategic guide. A vision aimed at a particular therapeutic area, such as cancer, ignores the reality that many biotechnology firms will grow a portfolio of candidate drugs, perhaps from the same technology platform, which could span multiple therapeutic fields. With the rapid evolution of technology, a vision focused on a specific technology platform may be equally inappropriate, because the technology may become obsolete or the biotechnology firm may in-license or discover alternative or improved technology approaches. To a large extent, therefore, the future evolution of a biotechnology firm may be unknowable and attempting to prescribe early boundaries in the form of a vision is likely to be counter-productive.

According to the same author, once the vision is laid down, the planning process for biotechnology firms follows the same overall steps as for other industries (Figure 2), namely: conduct an internal and external situation analysis using SWOT and an external auditing analysis similar to a PESTLE analysis. This allows the company to establish strategic goals and conduct a gap analysis to assess variance between projected revenues and the strategic goals. This is followed by assessment and selection of strategy alternatives that emerge.

Techniques such as PESTLE and SWOT are internal and external auditing tools rather than strategy forming or directing tools. Without the context of a strategic goal and pathway, they offer little utility. In the case of SWOT, analyzing strengths and weaknesses presupposes a goal for the business, but this is not explicit in most cases and may be unknowable for an early stage biotechnology firm. Analyzing opportunities and threats assumes a market or competitive arena, but this is not defined.

PESTLE analysis is an additional auditing tool that seeks to analyze the environment within which the firm operates, but the lenses offered are not particularly relevant to the business of biotechnology firms and lack strategic context. An environmental audit may help management manage risk and adjust the company's current direction accordingly, but it fails to provide a goal-relevant framework for de novo strategy formation.

Gap analysis comprehensively fails for biotech, because there are no sales, [6] from which to build a revenue trajectory, on which a gap analysis might be constructed, in order to arrive at non-organic strategies for growth; virtually everything to do with the value proposition of the biotechnology business is organic. Similarly, portfolio analysis tools such as the BCG model and similar models do not work, because biotechnology firms, as defined, have no marketed products and do not operate in product markets in the traditional sense. Moreover, most biotechnology firms often do not have a lot of choice about what product markets they may enter or exit, as these are mostly predetermined by the therapeutic indications for the candidate drugs that they have in development.

In summary, none of the traditional strategic planning models or frameworks offers much utility as a strategy formation tool for biotechnology firms. One technique that is not used as frequently as the above approaches, but has strong support in management texts as a strategic planning framework, is Porter's Five Forces Model of strategic analysis. It is also a model that has been applied to the pharmaceutical industry. [7-9]

THE FIVE FORCES MODEL

For several decades, Porter's Five Forces Model (FFM), as shown in Figure 3, has shaped the strategy thinking of managerial academics and to some extent, practicing managers. Indeed, recently, Porter provided an update on the model re-emphasizing its potential to help practicing managers understand strategic implications for their firms. [10]

The FFM asserts that there are five competitive forces that determine the long term profitability of an industry and that should be the drivers of strategy. Basically, the stronger the five forces, the lower the profitability for the existing competitors, because strong forces attract profit in their direction leaving less for other players. Where all the forces are strong, then the profitability for the competitors will be very low.

One way in which the model can be used to shape strategy is to help decide what industries to enter and which to avoid. For players already committed to a specific industry and where the forces are strong, they can use it to find niches where one of the forces may be lower or use tactics to neutralize or diminish one or more of the forces. Porter's overarching premise is that by understanding the structure of the industry in terms of the drivers of profitability, competitors can stake out positions that allow them to achieve sustainable profitability. Porter asserts that despite the apparent superficial differences between industries, the underlying drivers of profitability as identified in the model are the same for all industries.

FFM has been the subject of both praise and criticism in the literature, which has been summarized and reviewed by others. [11-13] From a practitioner's perspective, one notable criticism is that, while prominent in texts and business schools, FFM has not achieved great traction with practising managers. One study [11] estimates that only 15-20% of practising managers are familiar with the model and as few as 5% actually use it, compared with the awareness and usage of SWOT analysis, estimated at 90-95% and 50%, respectively.

Given FFM's lack of use in most markets, and given the poor utility for biotechnology of those approaches that are widely used, the present authors considered that FFM might offer hidden and as yet, unexplored, utility as a strategic planning model for biotechnology firms.

FFM IN BIOTECHNOLOGY: CASE STUDY

FFM has been applied by some consultants, companies and researchers in the pharmaceutical industry. [7,9] It has also been applied in the biotechnology industry by consultants [8] in reports produced and marketed by consulting firms that use FFM as part of a global or country-specific overview of the industry. In these cases, the analyses tend to be descriptive summaries of each of the five forces as they apply to the overall biotechnology sector in a particular country and to the extent that there are any strategic inferences made, they tend to be broad and industry-level. Further, by inference, they are oriented towards larger, revenue-generating firms, rather than biotechnology firms, according to the present definition.

In one case, [14] consultants did apply FFM to a specific biotechnology firm, ostensibly to guide strategy formation. Again in this case, the output of the FFM process was merely a descriptive summary of the forces at play in the industry as a whole, and these summaries did not appear to be connected to the specific strategic recommendations made for the company. The present study sought to explore whether FFM could be applied usefully to a pre-commercial drug development biotechnology firm and whether it had utility in deriving strategy drivers or recommendations for a specific firm, rather than simply at an overall industry level.

To this end, we selected a four year-old, privately-held, US-based biotechnology firm with 17 employees, which was engaged in discovering and developing small molecule cancer drugs. The firm's technology comprised patents it had licensed from three academic institutions, in addition to patents its own scientists had filed on specific candidate drug molecules that they had discovered. The company's compounds were all in the discovery or preclinical stage of development. In many ways, this was a typical, early-stage drug development biotechnology firm.

The FFM application process entailed a half-day planning session, in which the senior managers of the biotechnology firm participated. The FFM framework was briefly described to the management team and then they were asked to review each of the five forces and examine their relevance and impact on the company and its future. For each force, the team was asked to identify important issues that emerged. At the end of the session, the management team was asked to comment on the usefulness of the model as a strategic planning tool for their company.

Overall, the FFM planning exercise was not regarded by the firm's management team as useful in assisting the strategic planning of their business. The reasons are summarized below.

1. PROFIT WAS NOT A RELEVANT DRIVER OF SUCCESS

One of the fundamental problems encountered was that FFM is premised on profitability as the driver of strategy selection. The management team of the firm stated that this had little relevance to their company, since their goal was not to achieve profitability, at least in the foreseeable future, but to build value for investors and secure pharmaceutical partnerships. In order to proceed with further application of the model, it became necessary to substitute 'success' for 'profitability' as the criterion for consideration and analysis of the forces, where success was deemed to be (or include) long-term value creation for investors.

2. GOVERNMENT WAS NOT INCLUDED AS A FORCE

Another important observation by the team was that FFM omitted government as a force. It was felt that the impact of legislation and regulation was a crucially important force in determining the success of a biotechnology firm. Changes in regulations or interpretations by the FDA and other regulatory authorities could change the probability of a company's candidate drugs gaining marketing approval or could increase the costs of drug development by imposing new safety or other hurdles. Changes in patent law or court rulings around patents could also have a significant impact in some cases. New federal legislation could have positive or negative effects. As a recent example, the Biologics Price Competition and Innovation Act of 2009 introduced 12-year market exclusivity for biologic drugs in the US, effectively guaranteeing a pharmaceutical partner a healthy protected commercial life regardless of patent status. This significantly changed the relative attractiveness, in terms of value creation potential, of biologic drugs compared with small molecule drugs for development and partnering.

3. RIVALRY AMONGST EXISTING COMPETITORS

The management felt this force was not meaningful to their business, because it was hard to identify any competition. It was felt that the technology space in which this and other biotechnology firms operate are often relatively uninhabited and most biotechnology firms rarely interact with or encounter rival firms, at least not in the frequent and systematic way envisaged by FFM. One reason is that patents are crucial for a biotechnology firm and it cannot garner initial investor funding without a robust patent position. Therefore, from the outset, each biotechnology firm moves in a slightly different technology stream to other biotechnology firms and there are rarely direct competitors in the sense anticipated by FFM. In the case of their firm, they could not identify any direct or current rivals and to the extent that there were indirect rivals, they did not affect the company's prospects for success. Other factors, such as funding and garnering partnerships, were considered much more important to success.

4. THREAT OF NEW ENTRANTS

The management team saw this force as having no real strategic relevance, either. Again, this is because patents represent solid barriers to entry of any direct technology rivals. If there are new entrants, they rarely become direct competitors in the sense anticipated by FFM, because their genesis requires a clear patent position, which by its nature, means that they operate in different technology streams.

5. THREAT OF SUBSTITUTE PRODUCTS

Similarly, it was difficult to see this force as relevant unless conceived very broadly as substitute technologies, in which case and especially in the cancer field, there were very many potential substitute products and technologies that existed or could emerge. All of these could compete for funding and for pharmaceutical partnerships and thereby constitute substitutes or competitors. However, none of the identifiable substitute technologies was thought to represent an immediate threat that might impinge the success of the biotechnology firm in the medium term.

6. BARGAINING POWER OF BUYERS

This force needed to be interpreted as the bargaining power of pharmaceutical partners with respect to partnerships, for it to be relevant to biotechnology firms. While it was agreed that such 'buyers' had very substantial influence on the success of a biotechnology firm, abstraction of the notion of buyers to include pharmaceutical partnerships seemed fallacious, because pharmaceutical partnerships are not a competitive threat, but rather are cooperative arrangements that provide valuable funding, investor value accretion due to the commercial affirmation that such a deal represents, and a potential pathway to an exit for investors if a trade sale ensues. In any case, the nature of the buyers anticipated by FFM is very different to such partnerships.

7. BARGAINING POWER OF SUPPLIERS

To be relevant to the firm, 'suppliers' needed to be interpreted as technology licensors, which in this case, would be academic institutions. However, the relationships with the company's three licensors had little operational or strategic relevance to the biotechnology firm, because once the license deals were struck, the license terms simply represented a relatively static, long-term obligation to the company and the licensor had little influence on the day-to-day company operations or direction. It was acknowledged that if a poor bargain had been struck with the licensor in the first place, then it could affect the prospects of attracting a pharmaceutical partnership. For example, if the institution had the right to a substantial royalty on sales, then this could impinge the in-market profitability of the pharmaceutical partner and make a partnership with the biotechnology firm less attractive. In fact, this firm had had this experience with one of its institutional technology providers and recently renegotiated the terms of the license, precisely for this reason. Unlike the 'suppliers' in FFM, the institution was receptive to this, because it was in its interest to see a pharmaceutical partnership executed or the technology would never be commercialized.

In terms of output from the exercise, the list of issues or factors generated from the examination of each of the four external forces was short and provided no new insights to strategy formation in the view of the management team. The fifth force, 'internal rivalry', was considered largely irrelevant, but if conceived as factors internal to the company--a conception that seemed more useful to the management team--then it generated a productive list of issues that were relevant to strategy, notably competency gaps, funding issues, investor relations, facilities and location decisions.

DISCUSSION: TOWARDS A NEW MODEL OF STRATEGY PLANNING

Biotechnology firms are not well-served by widely-used strategy tools, such as SWOT, PESTLE and gap analysis. The present case study demonstrates that Porter's Five Forces Model also fails as a strategic planning tool.

An obvious limitation of this study is that it is based on a single case. However, the misfit of FFM was so profound, it is hard to envisage that it would fare any better in a larger sample of drug development biotechnology firms, given the inappropriateness of the traditional marketplace model and the focus on profitability as the goal.

Biotechnology firms are not driven by profitability as a strategic or operational goal. Rather, their goal is to create value, which is achieved by progression of candidate drugs along the development pathway. [15] This value is affirmed and amplified by a pharmaceutical partnership, and ultimately monetized by a trade sale of the firm to a pharmaceutical partner or an IPO [16], either of which provides a potentially valuable investor exit.

On the other hand, Porter's FFM is deeply rooted in traditional, highly-competitive markets and not the world of the R&D intermediary. Porter's FFM is also inescapably tied to profit maximization as its measure of strategic success. As a result, FFM does not have utility as a strategy framing or forming tool for individual biotechnology firms.

However, given the high praise accorded FFM as a theoretical model for strategic insight and strategy formation, the opportunity may exist to borrow the concept of 'forces that drive strategy' while substituting those forces relevant to the business and goals of biotechnology firms. Such a transformation would also require substituting the primary measure of success, from profitability to value creation. This would then provide a model that retains a core idea of FFM, which is that success, however defined, is derived from the interplay of forces and that by consideration of this interplay, strategic alternatives may appear and strategy formation can take place.

In the case of biotechnology firms as defined in this study, success is the maximization of value creation over time. Value is created by moving candidate drugs along the development pathway [15,17] and amplified by value-affirming licensing deals with a pharmaceutical partner. [16,17]

As to the applicable forces that affect a firm's ability to create value, some are identified or implied by this study. They include government regulation, patent position and licenses, technological substitutes, location, availability of funding and the availability of skills to both maximize pipeline progression and optimize partnering outcomes. Further study could refine these forces and reveal other forces that influence value creation for biotechnology firms. Such a model would also need to consider the interplay of these forces as well. For example, location of the firm could affect its access to funding, its available pool of people and skills, and its competitive position in attracting pharmaceutical partners.

Such a model also needs to consider those uncontrollable forces that are external to the firm's strategic decision-making environment, such as: economic fluctuations that can affect funding availability and overall sentiment towards biotechnology firms; government regulation that could impact patent strategy and pipeline decisions; and demographic and social evolutions, such as an aging population, which may affect the attractiveness of the medical needs pursued by the firm's pipeline.

Finally, any effective model needs to be able to conceptualize and measure what constitutes 'value creation' for biotechnology firms. Without an unambiguous and effective measurement of this success goal, the core of the model will be hollow and biotechnology firms will risk remaining strategic planning orphans.

Peter L Molloy is CEO of Race Oncology Ltd and an Adjunct Fellow at Swinburne University of Technology. Previously, he was a senior strategy executive in the international pharmaceutical industry and subsequently CEO of three biotechnology firms. He has also worked as a strategy consultant and board member for several biotechnology businesses.

Lester W Johnson is Professor of Marketing at Swinburne University of Technology. He has a BA from the University of New Hampshire and a MA and PhD from the University of Connecticut. He is a fellow of both the Australia and New Zealand Marketing Academy and the Australian Market and Social Research Society.

Correspondence:

Peter L Molloy, Swinburne University of Technology, Australia. .Email: plmolloy@gmail.com

REFERENCES

[1.] Pisano, G. (2006) Science business: The promise, the reality, and the future of biotech. Boston: Harvard Business School Press.

[2.] Scheer, O., O'Keefe, J. and Wintermantel, T. (2013) Unleashing pharma from the R&D value chain. A.T. Kearney report 2013. (https://www.atkearney.com/documents/10192/1641099/Unleashing+Pharma.pdf), accessed 25 June 2016.

[3.] DiMasi, J., Feldman, L., Seckler, A. and Wilson, A. (2010) Trends in risks associated with new drug development: Success rates for investigational drugs. Clinical Pharmacology & Therapeutics 87(3): 272-277.

[4.] McNamee, L. and Ledley, F. (2013) Translational science by public biotechnology companies in the IPO "class of 2000": The impact of technological maturity. PLoS One 8(12): 1-7.

[5.] Muller, C. (2002) Strategic management: A tool for growth in the biotechnology sector. Journal of Commercial Biotechnology 8(3): 226-234.

[6.] Wu, W., Couch, R., Suharto, Y. and Ahn, M. (2015) Reverse stock splits in the biotechnology industry: An effectuation approach. Journal of Commercial Biotechnology 21(1): 3-18.

[7.] Chavakula, V., Kim, S., Liu, D. and Marathe, R. (2007) Pfizer expanding into biopharmaceuticals. (http://www.mcafee.cc/Classes/BEM106/Papers/2007/Pfizer.pdf), accessed 25 June 2016.

[8.] Freund, M. and Niemann, E. (2009) Healthcare sector report. (http://amcp.org/WorkArea/DownloadAsset. aspx?id=13023), accessed 25 June 2016.

[9.] Kasapi, Z. and Mihiotis, A. (2011) Management as applied to new products penetration in the competitive environment of pharmaceutical industry. Interdisciplinary Journal of Research in Business 1(10): 73-85.

[10.] Porter, M. (2008) The five competitive forces that shape strategy. Harvard Business Review 86(1): 1-18.

[11.] Grundy, T. (2006) Rethinking and reinventing Michael Porter's five forces model. Strategic Change 15(5): 213-229.

[12.] Coyne, K. and Subramaniam, S. (1996) Bringing discipline to strategy. McKinsey Quarterly 4: 14-25.

[13.] Dobbs, M. (2014) Guidelines for applying Porter's five forces framework: A set of industry analysis templates. Competitiveness Review 24(1): 32-45.

[14.] Cha, J., Moyer, M. and Geller, D. (2013) Nektar Therapeutics strategy report. Bridges Consulting Group, (http://economics-files.pomona.edu/jlikens/SeniorSeminars/Likens2013/reports/nektar.pdf), accessed 25 June 2016

[15.] Shimasaki, C. (2014) Understanding biotechnology product sectors. In: Shimasaki, C. ed. Biotechnology Entrepreneurship. Academic Press: Boston, MA, 113-138.

[16.] Toth, G. (2013) The financial ecosystem available to early-stage biotechnology firms and its misalignment with interests of these firms, of the biotechnology industry and with global disease burden. Journal of Commercial Biotechnology 19(2): 17-26.

[17.] Houston, C., Graham J.E. and Schuhmann, P. (2012) Biotechnology valuation and governance: Drug development and board of directors composition. Journal of Commercial Biotechnology 19(1): 7-23.
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Title Annotation:From the Board Room
Author:Molloy, Peter L.; Johnson, Lester W.
Publication:Journal of Commercial Biotechnology
Article Type:Report
Geographic Code:1USA
Date:Jul 1, 2016
Words:4164
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