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Convergence In The Life Sciences Industry

Wed, 01/16/2008 - 4:30am
Can Partnering Make A Significant Impact?
By
R.T. (Terry) Hisey
Principal
Deloitte Consulting LLP
Vice Chairman and National Leader
Life Sciences Sector
Deloitte & Touche USA LLP
 
John Rhodes
Global Managing Partner - Life Sciences
Deloitte & Touche LLP


Editor's Note: Portions of this article are excerpted from a new report by Deloitte Research, Managing Pathways to Convergence in the Life Sciences Industry, which was written by Mr. Hisey and Mr. Rhodes. A full copy of the report can be found at www.deloitte.com/us/convergence.

Life sciences and health care continues to be a dynamic marketplace shaped by forces from many fronts, with changes that span the spectrum from incremental to market-disrupting. One of the strategies being pursued by many stakeholders to address this evolving marketplace is the idea of new, converged offerings.

Convergence can range from combining provider and payor capabilities and leveraging select products to support disease management, to developing new offerings that combine technologies. Ultimately, the roles or positions pursued by retailers, providers, government, health plans and others will affect how consumers access quality care. For example, we expect to continue to see innovations such as the "minit clinic" concept that places access to care in a retail setting.

To deal with the convergence opportunities that market and technology changes offer, a number of companies will pursue creating combined products that provide a "convergent care solution" for certain medical needs. These convergent care solutions that combine life sciences' core technologies of diagnostics, devices, and drugs in innovative ways are creating new technology platforms and products that offer improved safety, effectiveness, convenience, and value. In 2008 and beyond, these combination products are expected to provide life sciences companies with new avenues for growth and differentiation in markets characterized by increasing competition, questions about R&D productivity, expanding consumer demand, and pressure from payors to reduce health care costs.

Life sciences leaders considering convergence must make strategic decisions when choosing and managing their convergence pathway. Because developing a combination product often requires life sciences companies to look outside their organization for expertise or capabilities they lack, managing cross-sector partnerships and alliance networks is becoming an important component of success.
The Perils of Partnering
Although partnerships are common in the life sciences industry, partnering to create convergent solutions can be especially challenging. Synchronizing the goals, knowledge, capabilities, and expectations of fundamentally different companies can be critical to successful product development and marketing. Also, as companies pursue new convergent opportunities, alliance networks are likely to evolve in scale and scope, further changing the life sciences industry landscape and challenging the partners to identify nimble pathways forward.

Taking advantage of technologies that are already available or under development by others can help life sciences companies reduce product development time as well as access specialized knowledge, resources, and distribution channels. However, establishing, nurturing and growing effective relationships with external organizations, especially those in different industry sectors, presents partnering challenges that should not be underestimated. In fact, while companies may believe they have instituted the key elements of effective partnering, many do not execute these elements with the rigor and intensity needed for success. Developing and commercializing convergent solutions requires that partners synchronize to the extent compatible their goals, knowledge, capabilities, and expectations. Only by doing this can they mitigate delays, dissatisfaction, and the risk of unsatisfactory (or no) returns.

Pharmaceutical, biotech, medical device, and diagnostic companies (or business units) function very differently, in large part because the tasks and timelines needed to develop, manufacture, and market their products are fundamentally very different.1 Product and market variances, as well as company age, size, and scope, give rise to unique business strategies, organizational and management structures, corporate cultures, financing mechanisms, research and development processes, manufacturing processes, regulatory requirements, distribution channels, and commercialization strategies.

Because of their inherent dissimilarities, two companies may have different motivations for entering into a partnership, as well as different - perhaps even conflicting - views and expectations of the processes, timelines, and costs associated with developing and commercializing a combination product. While the companies may share the ultimate goal of developing a converged product, one may be aiming to expand an already well-established product portfolio and filling part of a desired future revenue stream, while the other may be seeking business growth that will be critical to the survival of the company. Such differences can create conflicting views about the importance and urgency of achieving the goal. Planning and implementing the processes required to produce the converged product can also become complicated and prolonged if differences in perspective are not recognized by both partners and addressed early and explicitly.

A big challenge to a partnership's success can arise if the participants differ in their views about the role each plays and the proportion of value each contributes to the converged product. Should the two parties be considered equal collaborators who deserve equal shares of the returns? Should one party be considered a supplier providing a necessary but relatively minor component and, therefore, be entitled to a smaller share of the returns? It is critical to establish early agreement on these points. Moreover, adjustments may be necessary to preserve the partnership over time as competitive pressures shift and new opportunities arise that tempt one or both of the parties to forego the relationship. Oftentimes, these matters are addressed at the outset by establishing and delineating roles in virtual joint committees for the different operating and administrative activities.

As companies collaborate to develop converged products, they must recognize the different contexts from which they come and work together to establish a common set of perspectives and expectations for the initiative. This can be facilitated through a joint planning process that is ongoing, iterative, and cooperative; the establishment of cross-functional teams and promotion of relationship-building at all organizational levels; cross-training that supports knowledge exchange, skills transfer, and appreciation of company differences; co-design and implementation of measurement and monitoring systems; establishment of an effective governance structure that can direct the effort and resolve disputes; and effective use of information technology to support all dimensions of the partnership.2 These activities allow a clearer pathway for discussion and determining the best way to resolve the issues and decisions that inevitably develop.
Emergence of Alliance Networks
As firms pursue innovative product development through convergence, alliance networks (clusters of firms working together through various formal relationships) will likely form, shift, and expand. Partnering with one other firm may not be sufficient for developing a particular combination product; bringing the resources, knowledge, and capabilities of multiple firms together may be both necessary and advantageous (for example, to compete with other networks that have formed).3 Moreover, companies may choose to pursue multiple convergence projects simultaneously.

Creating and managing an alliance network involves various challenges and strategic considerations. Some companies may see more advantage and less risk in becoming an ancillary player in another firm's network, while others will want to establish themselves as the network hub to maintain greater control and access to various specialized capabilities, components, and integrative interfaces from multiple sources.

By holding the central position in the network, a firm may be able to capture a relatively greater share of the value created by the network. Optimizing the value of the alliance network can be achieved by the central firm in various ways: facilitating knowledge exchange within the network; ensuring that each partner captures their fair share of the returns; and building network stability by establishing effective leadership and sustaining multiple ties among network partners.4 In some ways, this is not unlike the university-based models of the past, where collaborative efforts could be broader than party-to-party.

Perhaps most importantly, the central firm can facilitate the processes through which a common set of expectations for the development of the converged product can be created. As firms expand globally, alliance networks will involve partners from different regions of the world, as well as different industry sectors, making the central firm's role in synchronizing expectations across partners all the more challenging and critical.

To fully realize convergence's promise, life sciences companies will need to cross traditional boundaries and learn to operate as part of a network of companies. Partnering organizations are likely to have different business models, product life cycles, organizational structures, and corporate cultures; however, if the participating firms can overcome these challenges, convergence seems certain to lead to innovative health care solutions and new opportunities for business growth.

1 For a discussion of differences between pharmaceutical and biotechnology companies, see Cary G. Pfeffer, "The biotechnology sector - therapeutics," in The Business of Healthcare Innovation, Edited by Lawton Robert Burns (New York, NY: Cambridge University Press, 2005), pp. 137-142

2 John C. Henderson, "Plugging into strategic partnerships: The critical IS connection," Sloan Management Review, 31:3, Spring 1990, pp.7-18. Deloitte Research - Managing Pathways to Convergence in the Life Sciences Industry, p.19

3 Anthony Goerzen, "Managing alliance networks: Emerging practices of multinational corporations," Academy of Management Executive, 19:2, May 2005, pp. 94-107

4 Ibid
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