Strategic Alliances in Biotechnology and Pharmaceuticals

183 Pages·2010·1.66 MB·English

by  Frank Columbus

BIOTECHNOLOGY IN AGRICULTURE, INDUSTRY AND MEDICINE

S A B
TRATEGIC LLIANCES IN IOTECHNOLOGY
P
AND HARMACEUTICALS

HANS GOTTINGER,
CELIA UMALI,

AND
FRANK FLOETHER
B A , I
IOTECHNOLOGY IN  GRICULTURE   NDUSTRY 
M  
AND  EDICINE

Additional books in this series can be found on Nova’s website at:

https://www.novapublishers.com/catalog/index.php?cPath=23_29&seriesp=
Biotechnology+in+Agriculture%2C+Industry+and+Medicine

Additional e-books in this series can be found on Nova’s website at:

https://www.novapublishers.com/catalog/index.php?cPath=23_29&seriespe=
Biotechnology+in+Agriculture%2C+Industry+and+Medicine
BIOTECHNOLOGY IN AGRICULTURE, INDUSTRY AND MEDICINE 

S A B
TRATEGIC LLIANCES IN IOTECHNOLOGY
P
AND HARMACEUTICALS
Copyright © 2010 by Nova Science Publishers, Inc.

All rights reserved. No part of this book may be reproduced, stored in a retrieval system or
transmitted in any form or by any means: electronic, electrostatic, magnetic, tape, mechanical
photocopying, recording or otherwise without the written permission of the Publisher.
For permission to use material from this book please contact us:
Telephone [phone]; Fax [phone]
Web Site: http://www.novapublishers.com

NOTICE TO THE READER
The Publisher has taken reasonable care in the preparation of this book, but makes no expressed
or implied warranty of any kind and assumes no responsibility for any errors or omissions. No
liability is assumed for incidental or consequential damages in connection with or arising out of
information contained in this book. The Publisher shall not be liable for any special,
consequential, or exemplary damages resulting, in whole or in part, from the readers’ use of, or 
reliance upon, this material. Any parts of this book based on government reports are so indicated
and copyright is claimed for those parts to the extent applicable to compilations of such works.

Independent verification should be sought for any data, advice or recommendations contained in
this book. In addition, no responsibility is assumed by the publisher for any injury and/or damage
to persons or property arising from any methods, products, instructions, ideas or otherwise
contained in this publication.

This publication is designed to provide accurate and authoritative information with regard to the
subject matter covered herein. It is sold with the clear understanding that the Publisher is not
engaged in rendering legal or any other professional services. If legal or any other expert
assistance is required, the services of a competent person should be sought. FROM A
DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A COMMITTEE OF THE
AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS.

LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA
Gottinger, Hans-Werner.
Strategic alliances in biotechnology and pharmaceuticals / authors, Hans
Gottinger, Celia Umali.
p. ; cm.
Includes bibliographical references.
ISBN 978-1-60876-997-1 (hardcover)
1. Biotechnology industries. 2. Pharmaceutical industry. 3. Strategic
alliances (Business) I. Umali, Celia. II. Title.
[DNLM: 1. Drug Industry--economics. 2. Interinstitutional Relations. 3.
Biotechnology--economics. 4. Biotechnology--organization & administration.
5. Drug Industry--organization & administration. QV 736 G686s 2010]
HD9999.B442G668 2010
615.1068--dc22
2010001177

Published by Nova Science Publishers, Inc. New York
CONTENTS

Foreword    vii 
Alfredo Del Monte
Preface    xi 
Chapter 1  Essentials for Alliance Formation 1 
Hans Gottinger 
Chapter 2  Science-Technology Entrepreneurship and the New  
Biotechnology Firms 15 
Hans Gottinger 
Chapter 3  Alliances in the Biotech Industry: An Industry Study of  
Network Economies 29 
Hans Gottinger and Celia L. Umali 
Chapter 4  Alliance Propensity of Biotech-Pharma: An Empirical
Perspective 55 
Hans Gottinger and Celia L. Umali 
Chapter 5  European Biotech-Pharma Industry Development 73 
Hans Gottinger 
Chapter 6  Emerging Asian Biotech-Pharma Industry - Analysis and Trends 89 
Celia L. Umali 
Chapter 7  Emerging Asian Biotech-Pharma Industry - Comparative
Perspectives 107 
Frank U. Floether 
Chapter 8  Strategic Alliances: Post-Analysis and Projection 137 
Hans Gottinger and Celia L. Umali
Contents
Supplement  Strategic Alliances, Mergers and Acquisitions  145 
Hans Gottinger 
Subject Index    167
FOREWORD

The book explores several aspects of the biotechnology industry. Why the U.S.
biotechnology industry is now dominating the market and why European pharmaceuticals
firms, once top leaders in their markets, now lag well behind in innovation capabilities? Why
bio-pharmaceutical companies in Asia remained lagging in the last decades, relatively to their
Western counterparts? The book focuses on the alliances between between small
biotechnology start-up and established firms from the downstream sectors as a crucial
element of the success of the U.S. industry. Other aspects explored in the book are: What
factors affect the incidence of collaborative innovation relative to alternative modes? What
are the common structural characteristics of these collaborations? What role do network
economies play in such collaborations? How the evolution of technological progress in the
biotech industry affected the structure the pharmaceutical industry.
Chapter 1 analyses the effect of strategic alliances from the point of view of antitrust
concerns.The chapter stress that traditional antitrust policies have focused more on the
anticompetitive effects of joint ventures on market power of the firms than on anticompetitive
strategic behaviour of such alliances. In high tech and network industries such
anticompetitive strategic behaviour could be caused by exclusionary practices, as exclusive
dealing, tying, cross-licensing, etc. The chapter analyses for each anticompetitive practice the
current antitrust literature and then focus on strategic alliances.
Chapter 2 covers the recent literature on the determinants of firms’ boundaries and on
strategic issues to understand essential factors of alliance formation. The chapter reviews
transaction cost theory and shows, as already investigated in the literature, that transaction
costs alone are not a prime rational for strategic alliances. One important topic discussed in
this chapter is a definition of strategic alliances that could be used to understand when
network arrangements allow competitive advantages relative to other forms of organization.
The chapter provides the motivation for forming alliances. It considers three categories that
explain why firms become involved in network relations (network economics,
innovation/competencies, market structure).
Chapter 3 analyses the evolution of the biotechnology industry from a scientific and
institutional point of view and the institutional factors (science technology entrepreneurship,
biotechnology industry. university industrial relationship, venture capital etc.) that allowed
the success of the U.S. biotechnology industry. The chapter analyses why in the U.S.,
differently from Europe, biotech is dominated by small and medium sized firms.
Alfredo Del Monte viii
Chapter 4 reviews several aspects of collaborative innovation and alliances in
biotechnology. It applies network economics to the formation of alliances in the
biotechnology industry.
Chapter 5 analyses the relationship between alliance activity of pharmaceutical firms and
economic performance.
Chapter 6 examines biotech-Pharma industries in Europe. Europe has a very strong
tradition in the pharmaceutical industry with a large number of firms in the top twenty but
none of these firms played much part in the first decade of the new biotechnology. In Europe,
on the other hand biotech firms have not grown in the same way as in the U.S., partly because
favourable institutional frameworks (high funding/leading edge research in the life science,
active venture capital market) did not exist. Strategies of large pharmaceutical firms in
Europe till the late 1980s were more concentrated on vertical integration and were concerned
with building up in-house competence. In the same period in the U.S. an effective division of
labour was developed between new, small companies, large corporations and other research
institutions, which have different comparative advantages in  the  “exploration”  and 
“exploitation” of new innovation opportunities.  It was only in the last few years that in
Europe  “vertical  collaboration”  between  large  companies  and  biotech  companies  have 
become more common.
Chapters 7 and 8 analyse the biotech-pharmaceutical industry in Asia. Though the
biotech sector in the more advanced countries of Asia started decades ago it has remained
lagging relative to their Western counterparts. Most R&D in biotech is still done in public
laboratories and national universities. Also science/technology entrepreneurship is not at all
developed. The collaboration between small biotech firms and large pharmaceuticals firms is
quite weak. The small biotech firms in Japan have to work on their own with their limited
capital since, unlike in the U.S. and Europe, pharmaceutical companies would rather do in
house R&D than form alliances. So, Asian governments are involved to develop the biotech
sector. Large funds go to universities and public laboratories, and some small biotech
companies spin off from these public and university laboratories.
In recent years, also, in Asia bio-pharmaceutical companies have built strategic alliances
to reduce R&D cost and increase the number of new products. But bio-pharmaceutical
Japanese firms are consolidating and rationalizing their operations through mergers to
compete with well-established foreign firms. Vertical integration strategy is still the dominant
organization mode in pharmaceutical companies. Therefore the biotech-pharmaceutical
industry in Asia seems characterized by 1) Strong government support 2) High vertical
integration of biotech-pharmaceutical firms and 3) limited number of small biotech firms.
We believe that the issue is an impressive informative contribution to understand biotech
industry.A key feature of the authors’  research  approach  is  the  application of network
economics to study alternative forms of organization in the biotechnology industry. Its
hypothesis is that alliances are best organizational form in the bio-pharmaceutical industry.
The study of motivations of collaboration in biotechnology has been analysed in the
literature several times. One the first works on this subject was that of Pisano, Shan, Teece
(1988). They showed that motivations of collaboration in biotechnology are linked to the
distinctive competencies of the three types of organizations involved in biotechnology
innovation:
1) universities and other non profit institutions, 2) new biotechnology firms 3) established
firms in the pharmaceutical industry interested in the application of the new technologies.
Forward ix
The Pisano, Shan, Teece work concludes that “pressure seems to be the driving the R&D
commercialization linkages away from collaborative arrangements and toward vertical
integration”. This forecast has not been realized as it is shown in Chapters 3 and 4. Alliances
between biotechnology firms and large pharmaceutical firms are still the predominant
organization of biotechnology industry. This phenomenon reflects the pattern of distinctive
competencies of the different organizations involved in the production process. Gottinger
recognizes this aspect: “The preponderance of biotech alliances pertain most directly to the
competencies category, where firms ally to leverage complementary competencies, such as
small firm’s new drug discovery platform and an established  pharmaceutical  company’s trial
competency.” But, he goes on to suggest that technological progress in biotech, with the
introduction of genomics and proteomics by the end of the 1990s, has added a new
dimension in the explanation of alliances in biotech, demand side economies of scale or
network economics. This hypothesis creates some conceptual problems .The sharing of
information between partners in the alliances reduces drastically the number of experiments
that are required in a given target domain, and therefore reduce costs and time to take a
product to the market .As new firms are added to a network the pool of information
available to the partners of alliance increases and therefore increases the utility of each firm
to belong to the alliance. But as Arrow (1975) argued in a seminal article vertical integration
might also be motivated by a desire to acquire information. Therefore network economics
motivates not only alliances but also vertical integration. Why cooperation between firms for
a common benefit (alliances) is a more efficient form of organization than vertical
integration? Both reduce the conflict between proprietary ownership of knowledge and the
benefit of the sharing of information. Therefore, it is the diversity of research and technology
platform, inducing network economies, that encourages the use of alliances as a preferred
organization over vertical integration. On the other hand appropriability and transactions cost
problems suggest that arms-length markets are not an alternative efficient organizational
solution in the biotechnology industry. The book concentrates on the alternative of vertical
integration versus alliances.
Some conceptual problems arise in the empirical investigation of Chapter 4. This chapter
analyses the relationship between alliance activity of pharmaceutical firms and economic
performance. If alliance is the most efficient organizational form in the pharmaceutical
industry, one must find a positive correlation between the intensity of collaborative
arrangements by pharmaceutical firms and an index of their economic performance. Two are
indices of economic performance: total return and price-to-earnings ratio. The collaboration
rate of each pharmaceutical firm is defined as the number of collaborative agreements into
which a firm entered during a given period. The first test examines whether a correlation
exists between collaborative activity and total return over the period from 2000 to 2005. The
nine largest US pharmaceutical firms by revenues were considered. In this case the statistical
analysis is run on nine observations.
The second test examines the relationship between the collaboration rate of each firm and
their Price-to-Earnings ratio during the five-year period 2001 to 2005. In this case the
statistical analysis is run on 45 observations. The conclusion of the author is that a strong,
statistically significant, positive correlation exists between the collaboration rate of large
firms and their performance in term of market valuation and total return over the long term.
The book is interesting and stimulating. The audience that will benefit most from the
book include policy makers, journalists and students beginning the study of the biotechnology
Alfredo Del Monte x
industry. Probably an effort to eliminate duplications and to give a methodological unity to
all chapters will make the reading of the book more easy for such audience.

Alfredo Del Monte
Prof. of Industrial Organization
Department of Economics
University of Naples Federico II – Italy
[email protected]