University of Southern California

'Swimming with Sharks' Can Hinder Drug Development
April 20, 2012

New USC Marshall Study Explores the Problematic Alliances Between Biotech and Big Pharma

New biotech firms and pharmaceutical firms that join forces to try to bring new drugs to market may not be able to exploit that potential because they don't trust each other, according to a new research paper.

That common distrust over stealing medical discoveries may result in less innovation focused on major health issues, according to potential implications from the research.

"Swimming with sharks," as the research and development relationships are often called, doesn't have to necessarily mean the end of such alliances, according to a journal paper by Nandini Rajagopalan, the Captain Henry Simonsen Chair in Strategic Entrepreneurship and a professor of management and organization at USC Marshall.

Swimming with sharks may be unavoidable, but it doesn't have to be fatal, Rajagopalan wrote in a paper titled "Are All Sharks Dangerous? New Biotechnology Ventures and Partner Selection in R&D Alliances," to be published in 2012 in the Strategic Management Journal. Her co-author is Luis Diestre of Instituto de Empresa Business School in Madrid, Spain.

Relationships with these "sharks" are important. Seventy percent of blockbuster drugs sold in the 1990s were from discoveries by biotech startups and their collaborations with deep-pocketed pharmaceuticals (potential "sharks"), she said.

"The fear of appropriation is most definitely affecting innovation, both for the startup and the pharmaceutical firm because this fear prevents a potentially fruitful R&D alliance between the two," Rajagopalan said in an interview.

The paper looks at what factors reduce the likelihood of R&D alliances between biotech startups and big pharma, and what can potentially be done to overcome them and help make an R&D alliance between partners with complementary capabilities more likely. Getting a new drug to market isn't as easy as making a scientific discovery and moving forward, especially when new biotechnology firms, or NBFs, can't trust that their information won't be stolen by a partner, Rajagopalan said.

"The drug discovery process is not just about scientific discovery and advancement," she said.

To transform their basic research on chemical properties into drugs that are commercially viable, NBFs such as Amgen and Genentech in their early days needed the experience and resources of huge pharmaceutical firms such as Merck, Pfizer and Johnson & Johnson, Rajagopalan said.

Her study found that what makes the large pharma companies so attractive is also what hurts them when forming alliances with NBFs. The more therapeutic areas it is involved in, the more opportunities that the pharmaceutical company will have to benefit privately from knowledge taken from the NBF, and the more incentive it may have to appropriate that knowledge. Such companies are more likely to be perceived as putting profit ahead of trust.

The same goes for the breadth of applicability of the active ingredient being studied. For example, cortisone acetate is an active ingredient used to treat allergic reactions, certain types of blood disorders and has other applications. The more applicable the active ingredient is, the more opportunities the partner company has to exploit it outside of the alliance.

For an NBF to have a better chance of success, Rajagopalan suggests keeping their applications narrow and not having a diversified partner, which paradoxically can often lead to more scientific breakthroughs. Smaller is better.

"If you're a one-trick startup pony, you might be better off," she said.

Writing contracts and having patents can help protect NBFs from having proprietary knowledge being stolen by a partner, but most times the patent owner doesn't win a lawsuit against a deep-pocketed pharmaceutical company, Rajagopalan said. To find a trustworthy partner, she suggests working with venture capitalists who know both sides and can offer guidance.

NBFs are clearly worried that pharmaceutical firms are most likely to do what maximizes their profits, the researchers argue, so gaining trust can be a difficult place to get to. But without it, drug improvements might be waiting for someone to find them.

"There are probably many innovative discoveries lying there not being discovered because of lack of trust," Rajagopalan said.