guiding principles lsjh - hifibio therapeutics

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Please cite this article in press as: Schweizer, L., He, J. Guiding principles of value creation through collaborative innovation in pharmaceutical research, Drug Discov Today (2017), http://dx.doi.org/10.1016/j.drudis.2017.09.003

featureGuiding principles of value creationthrough collaborative innovation inpharmaceutical research

Liang Schweizer, [email protected] and Jeff He

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

IntroductionThe biopharmaceutical industry continues towrestle with the problem of R&D efficiency: R&Dcosts [1] are rising even as output [2,3] of newmolecular entities has remained relatively flat[4,5]. As a consequence, the pharmaceuticalcommunity has continued to deepen its com-mitment to a more collaborative approach to-ward R&D, with open innovation [6] modelsranging from true pre-competitive consortia[7,8] to more-structured arrangements [9,10]that can address intellectual property (IP) issues.In this paper, we address the latter group, fo-cusing on the specific hurdles that can stand inthe way of efficiently starting collaborationsbetween willing parties. Many opportunities forproductive collaborations are missed becausepotential partners often find it difficult to reach

an agreement on the values of ideas, methodsand prototypes in the drug discovery process.Sometimes, a lack of clarity on key short-to-mid-term metrics or key performance indicators [11]can exacerbate the problem. Finally, disagree-ment can arise regarding the status of potentialtherapeutic molecules ! one company’s hit isoften another company’s preclinical candidate.Herein, we seek to provide a framework to easethe launch of nascent collaborations, with thegoal of reducing the number of missed oppor-tunities for open innovation in pharmaceuticalresearch.

Establishing an innovation-based collabora-tion is an inherently complex process owing tothe dynamic nature, elusive valuation and in-trinsic risk of early-stage pharmaceutical re-search. To illustrate our approach, we briefly

describe a classic example that typifies thechallenges and opportunities facing such col-laborations." Company X specializes in antibody hit

generation, whereas Company Y bases itsbusiness model on proprietary rapid screen-ing technologies for hit identification andlead generation. The initial connection be-tween the parties is made through anindustry veteran, and a mutual respectquickly develops. Both teams recognize thecrucial need for rapid generation of differen-tiated leads against novel biological targetsand believe that they can create significantsynergistic value by combining their proprie-tary technology platforms. They also recog-nize that they can more effectively provideservices to third parties using the combined

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platforms. However, the discussion on how tocollaborate lasts much longer than expected.Conversations become protracted as thepartners debate how valuable their technol-ogy platform is and how value should bedistributed, which party should take the leadin integrating the inputs and how manyresources each should contribute. What onceseemed like a straightforward partnershipnow appears like it might not be brought tofruition.

Unfortunately, situations like this hypotheticalexample occur constantly, whether it is betweentwo small companies, a large pharmaceuticalcompany and a biotechnology company or auniversity laboratory and a large pharmaceuticalcompany. Our suggestions are designed to helppotential partners pull themselves through thisperiod of uncertainties by addressing keyquestions systematically:" How can we structure the collaboration

discussion?" How should we recognize the various kinds of

values that parties bring to the collaboration?" How can we distribute values between two or

more partners in an efficient manner?" How do we avoid common pitfalls in the

collaboration itself?

Based on our previous experience in the fieldof biopharmaceutical research, we point out thecommon mistakes and pitfalls that frequentlyhamper the execution of innovative

collaborations. Quantitatively evaluating andattributing the values generated by partners inan innovative collaboration setting can be acomplex process and often constitutes thebiggest obstacle for such a collaboration tomove forward. Although the respective colla-borator’s contributed values should ultimatelybe defined in quantitative terms, in the contextof early-stage collaboration involving cutting-edge science or technology we recommendpostponing the quantification of value contri-butions made by parties. This paper outlinesguiding principles for value assessment andproposes a ratio-driven approach to circumventthe often-dragged-out discussions of value as-signment among parties. We encourage part-ners to think in terms of ratios and only considerthe final value ! the exit value ! when thecollaboration is carried out successfully. The exitvalue at the point of implementation will betypically determined by more sophisticatedcapital market players than the initial scientificcollaborators.

Four principles to guide collaborativeinnovationPrinciple 1: frame the collaboration inthree phasesTo provide a clear framework for innovationcollaboration, we suggest that the potentialcollaboration partners frame the collaborationin three phases, each of which is completed with

a checkpoint (Fig. 1). Each checkpoint can beviewed as a milestone during the collaborationprocess, normally accompanied by detaileddiscussions between the parties, including theconstruction of workplans to ensure the suc-cessful progression of a collaboration. Byinserting these key checkpoints into the other-wise complex process, one can lower thethreshold for starting the collaboration and mapout a clearer path for value generation. Below isthe detailed characterization of each phase andcheckpoint." Phase 1 ! inception. The early part of Phase

1 is often marked by a scouting period, duringwhich the two parties meet as part of arandom encounter or as the result of afocused search. The potential collaboratorscome to recognize that they have a project ofmutual interest in drug discovery anddevelopment. A positive tone often charac-terizes these early conversations, because thescientists begin to realize that a collaborationcould augment the value of their ideas,methods or prototypes, and perhaps evenaccelerate their R&D. After a confidentialitydisclosure agreement (CDA) is put in place,the discussions at inception should focus onmaterial transfer agreements (MTA), pilotexperiments and other assessments thatmight be necessary to increase confidenceor provide preliminary proof-of-concept.Some collaborations fail to reach the point

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FIGURE 1

Frame the collaboration in three phases with distinct characteristics and three checkpoints. Phase 1: inception. This phase is often marked by a scouting period,during which potential collaborative parties meet as part of a random encounter or as the result of a focused search. The involved parties focus their energies onassessing potential synergies and on the design of crucial experiments. Phase 2: ignition. The main scientific goal for collaborators is to conduct whateverexploratory studies are necessary to properly develop a joint research plan. In parallel, the discussion of value distribution among parties will reach an initialagreement. 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 collaborationagreement is executed and the parties are ready to launch into a full collaboration. Phase 3: implementation. The primary objective is to implement the researchplan and accomplish the collaborative research objectives. Depending on the path and the outcome of the collaboration at this phase, parties can reassess andreadjust value distribution to better reflect the initial and incremental contributions made.

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of inception because the parties involvedcannot agree on the value distribution of thehypothetical collaborative project in Phase 1.We recommend that the parties instead focustheir energies on assessing potential syner-gies and on the design of crucial experiments.The discussion about value distribution isbetter suited for Phase 2.

" Phase 2 ! ignition. In Phase 2 the mainscientific goal for collaborators is to conductwhatever exploratory studies are necessary toproperly develop a joint research plan. Inparallel, the discussion of value distributionamong parties will inevitably take place.Often the discussions about the financialarrangements are cumbersome; in the worstcase, they can become contentious. We referto Principles 2 and 3 (see below) for ourperspectives on how to simplify this processand achieve the productive outcome neces-sary to move the project forward. At the endof Phase 2, the collaboration should havereached the point of ‘ignition’, at which time aresearch plan is in place, a contract is signedand the parties are ready to launch into a fullcollaboration.

" Phase 3 ! implementation. The primaryobjective of Phase 3 is to implement theresearch plan and accomplish the collabora-tive research objectives. Depending on theoutcome of the collaboration at this phase(Principle 4), it might prove necessary toreassess aspects of the financial or fundingarrangements. If the research objectives havebeen achieved and the initial conceptvalidated, the collaborators will reach thepoint of implementation. Afterwards, theproject should be ready to be implementedin a full industrial setting. Often, only one ofthe parties takes the leading role after thisstage, and it could even be a different partythan the one that was leading the collabora-tion itself.

By dissecting the collaboration efforts intothree distinct phases, the discussion isstreamlined and can focus the individualparticipants on the most relevant topics.Importantly, this framework emphasizes get-ting into a collaborative mode very early on(inception), rather than working through everylast detail of the research plan or the com-mercial terms too early. In our hypotheticalexample with two biotech startups, the partieswent back and forth on the collaborationmodel and value distribution, thus slowingdown negotiations and diminishing thechances of a successful outcome of the col-laboration. By breaking the collaboration down

into three phases, the discussion will becomemore productive, because it would be clearwhat the focus and expectations should be inthe next phase (Fig. 1).

Finally, we note that the simplicity of theframework is meant to be enabling and notlimiting. For instance, many complicated pro-jects might involve multiple research phases,conducted either before implementation oreven in parallel with it (e.g., as an extension ofthe original work while the lead project is ad-vancing). Even for these more involved projects,the overall framework should still be useful inavoiding missed opportunities. In fact, the needfor a streamlined approach based on a clearmodel with explicit milestones is particularlypronounced in dealing with highly complexpartnerships. In such situations, the negotiationscan be disentangled and clarified by invokingthe current stages and corresponding check-point as a reference point.

Principle 2: separate initial contributionsfrom incremental contributionsOnce the proposed collaboration is mappedonto three phases and a research plan is at adraft stage, it becomes possible to more readilyseparate initial contributions from incrementalcontributions. Figure 2 outlines a hypotheticalcollaboration between two parties: X and Y. Asparties prepare to move the collaboration frominception to ignition, they can characterize thevalue (VX and VY) that each of them has broughtto the project in the form of technical knowhow,IP, novel processes or some drug related assetsand resources in any format for further explo-ration. It might even be possible to define aninitial synergistic value (DVS1) that arises byvirtue of bringing this collection of assets to-gether in a collaborative project [12]. With thisevaluation completed, a research plan should befinalized before ignition, one purpose of which isto define what incremental value (DVX and DVY)each party intends to contribute during thecollaboration. The incremental value generatedhere can be novel IP, scientific and technicalknowledge generated from the research plansor the progression of the projects ensuring valueenhancement, among other things. Again, if theparties are well-matched, it would be possible todefine a shared synergistic value (DVS2) gener-ated by working together under the researchplans.

In the hypothetical example, one of the initialobstacles is that partners are unable to sepa-rate the initial contributions from potentialincremental contributions. Indeed, this kind ofproblem is common, because parties often seek

to undertake the task of value distribution tooearly. If the two parties: X and Y, agree upon theinitial value each brings to the table and canproject the incremental values that they cancontribute going forward, the focus would begenerating joint research plans instead of en-gaging in the lengthy discussion of howquantitative values should be distributed in theend. The shift of focus at the early collaborativestage would ensure greater chances of movingthe collaboration forward as well as savingprecious time to speed up the real researchwork, which is often the name of the game inthe dynamic pharmaceutical research world.The successful collaboration between Amgenand Kirin on EPO is a revealing example of this.Gordon Binder elaborated on this deal and itsunderlying philosophy in his book ScienceLessons (Page 126). According to Binder, thecontract specified that ‘The division of the costof the advertising program will be negotiatedlater’, an approach that is a great validation toPrinciple 2 here.

By separating initial contributions from in-cremental contributions, we believe that partieswill be able to proceed efficiently to assign thevalue distribution. The early use of an MTA at theend of Phase 1 can help the parties better assessinitial value contributions and potentialsynergistic value before having to commit to acontract (Principle 1); likewise, this practice of‘pre-collaborative experimentation’ (Phase 2 inFig. 1) can also help the parties define how theywill each generate incremental value in thecollaboration itself.

Principle 3: assign value to the partiesusing ratiosWith the value contribution framework in place,it is possible to define each party’s share usingsimple ratios of initial value and incrementalvalue (Fig. 2). Ratios can be extremely powerfulat this stage of partnerships, because the finalvalue VA will most probably only emerge at thepoint of implementation, when more-efficientcapital market players start to be involved. Werecommend that collaborators start the valuedistribution by applying an even 50:50 split atthe start and adjusting in coarse increments.There are three key ratios that need to beconsidered:" Ratio of initial value contributions (VX vs VY)." Ratio of incremental contributions by each

party (DVX vs DVY)." Ratio of initial value (VX + VY + DVS1) to

incremental value (DVX + DVY + DVS2).

To the extent that these ratios are approxi-mately 1, the 50:50 split will provide an efficient




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solution and eliminate months of negotiation. Incase the ratios deviate substantially from 1, thencoarse adjustments can be introduced if thedifferences between the contributions fromboth parties are clear. A similar logic can beapplied to the division of terms around control,such as licensing of IP, manufacturing respon-sibilities and marketing obligations [12]. Thefinal adjustment of value distribution will takeplace at the implementation stage where thecapital market players are involved and incre-mental values and synergies are better defined.

In our hypothetical example, the potentialcollaborators would have benefitted from takinga simpler approach to capturing value by, forinstance, splitting the potential service incomeobtained from their combined platforms. Like-wise, to the extent that drug candidates arediscovered in their own use of the platform, theycould agree to split the value of the milestonesand potential sales royalties from any licensingdeal. Most parties involved in collaborationdiscussions think of value in dollar terms.However, in any early-stage collaboration, con-tributions are made in various forms. Some aretangible and some are intangible. Some are

easily quantifiable, whereas others are not. Forinstance, market prices for running a standard,well validated assay are typically tangible valuecontributions that parties involved can easilydiscover and agree on. However, the cost ofdeveloping a proprietary assay is not that easilyquantifiable. It is even more challenging to putprice tags on IP and domain knowledge involvedin the collaboration, without going throughmajor undertakings involving legal, IP andfinancial professionals. Forcing the quantifica-tion of each type of contributions at an earlystage kills many promising collaborations. Ourproposed ratio-driven approach will significantlyimprove the chance of moving the collaborationalong to fruition. The authors know of twostartup companies that recently adopted thisapproach. They agreed to a 50:50 split at thecompletion of lead optimization, with contri-butions from both sides being roughly equal.Then, one party chaperoned the molecule andcompleted an investigational new drug (IND)filing package with assistance from the otherparty. The two parties also agreed that at theIND filing stage that the value split would beadjusted to 70:30.

Principle 4: optimize multifacetedendeavors for improved value creationMany collaborative innovations involve prom-ising but exploratory science and technologies.Consequently, there is no guarantee that theparties will arrive at the implementationcheckpoint with a viable path forward. Tomaximize the chances for a successful outcome,it is essential that collaborators recognize thatall research is path dependent, and opportu-nities that present themselves during the col-laboration can be unique and might need to beseized in that moment. We provide somepractical recommendations regarding how tomaximize the opportunities for strong valuerealization." In Phases 1 and 2 of the relationship, it is

important to make sure that the parties areclear on their own strategies and on how theproposed research collaboration (Phase 3)will help them meet their goals [13]. Thinkingabout synergistic value is one way to reachthat clarity.

" The initial stage of Phase 3 can have adisproportionate impact on the project’ssuccess. It is essential to make progress early




FIGURE 2

The definition of various values and distribution ratio considerations. The relationship of values and ratios can be best illustrated by a hypothetical collaborationbetween two parties: X and Y. VX and VYare individual values that have each been brought to the project in the form of technical knowhow, intellectual property(IP), novel processes or some drug-related assets and resources in any format for further exploration. An initial synergistic value (DVS1) is generated by virtue ofbringing this collection of assets together in a collaborative context. Incremental values (DVX and DVY) are values from new contributions of each party, whichcould arise from novel IP, scientific and technical knowledge generated from the research plans and the progression of the projects to ensure valueenhancement, etc., during the collaboration process. A second synergistic value (DVS2) will also be generated during the collaboration phase. The final value VAwill most probably only emerge at the point of implementation, when more-sophisticated capital market players start to be involved. Parties involved should justfocus on three key ratios: 1. ratio of initial value contributions (VX vs VY); 2. ratio of incremental contributions by each party (DVX vs DVY); 3. ratio of initial value(VX + VY + DVS1) to incremental value (DVX + DVY + DVS2). The ratio-driven valuation approach, as we recommend in this paper, can be extremely powerful forpartners to reach agreement fair and quickly.


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and achieve some validation ! the often-cited ‘quick wins’ ! to build trust in therelationship and confidence in the ideas.

" A high-quality research plan can enable fasterexecution in the collaboration stage (Phase3). Furthermore, by considering the contin-gencies in advance, the parties can be betterprepared to take advantage of chanceobservations.

" Even though key scientific decisions willprobably be made jointly in Phase 3, mostcollaborations are likely to benefit if one partyis clearly the driver. This party can becompensated with incentives that are eithertangible (e.g., financial) or intangible (e.g.,first presentation of the work).

Ultimately, the optimal path in an R&Dproject is one that maximizes speed [14] andquality [15]. If the project is severely deficientin either of these parameters the collaborationwill probably achieve only suboptimal valuerealization, which results in a value trap de-spite the potential for value realization (Fig. 3).By contrast, if the collaborators execute well,achieve some ‘quick wins’, perform high-qualityresearch and fully capitalize on the synergies intheir approaches, they can achieve dispro-portionately high-value realization, which canlead to value breakthrough where the collab-oration will be viewed as exceptionallysuccessful (Fig. 3).

Concluding remarksThe four principles to guide value generationand distribution in collaborative innovations canbe utilized by all participants involved in theinitial stages of open innovation drug discovery.Our approach aims to break down some earlybarriers and facilitate the start of a productiveresearch collaboration. By framing a complexprocess into three distinct phases with well-defined checkpoints, one can focus on the mostimportant tasks at each stage and ensure thatproper milestones are achieved. By mapping outdifferent value components to overall valuegeneration and by establishing some rules ofthumb for the valuation mechanism, the col-laborating partners can simplify what is oftenone of the more contentious parts of the processand think about assigning value from a positionof mutual understanding. Finally, by consideringthe path dependency of the collaboration, theparties can avoid common pitfalls and takespecific actions that will increase their chancesof success.

AcknowledgmentsMany thanks to Dr. Percy Carter from BristolMyers Squibb for many hours of discussion,insightful comments as well as languagerevision. We also appreciate the critical readingand comments on the manuscript from

Professor Bernard Schweizer of Long IslandUniversity.

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FIGURE 3

Path-dependent value realization and different outcomes. The optimal path in an R&D project is one that maximizes speed and quality. If the project is severelydeficient in either of these parameters, the collaboration will end up in a value trap, which means suboptimal value realization. By contrast, if the collaboratorsfully commit, achieve some ‘quick wins’ early, perform high-quality research and capitalize on the synergies in their approaches, they will probably be able tobreakthrough value realization. The outcome between those two situations is considered normal value realization.

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Liang Schweizer*Jeff He

HiFiBiO Inc., 700 Main Street, Cambridge, MA02139, USA

*Corresponding author.





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