Partnerships reduce risks, cut rewards

There is one way companies can avoid the crunch that comes with trying to meet more stringent customer demands amid intensified competition:

Focus on processes that create differentiation and leave other work to partners.

Biotechnology provides a prime example because the industry's manufacturing and regulatory requirements can be costly to fulfill internally.

Ralph Kauten, a Capital Region biotech serial entrepreneur, has considerable partnership experience. He helped establish Promega, co-founded two biotech firms (PanVera, now part of Invitrogen Inc. and Mirus Corp.), and is currently chairman of the board and CEO of Quintessence Bioscience Inc. (QBI). The latter — another UW-Madison technology spinoff — develops novel protein-based cancer therapeutics.

"Partner" is a vague word, Kauten acknowledges, running the gamut from merely symbiotic to highly strategic relationships. "The depth of the relationship depends fundamentally on the weight the partner's contribution plays in your organization's success," he explains.

Two partnership drivers

According to Kauten, there are two drivers for biotechnology's strategic partnerships:

• The first is to gain access to important material, infrastructure and/or expertise. QBI, for example, has strategic partners for manufacturing, drug testing, cancer clinical practice knowledge, and legal and accounting work.
• The second is risk reduction. "Drug development is fundamentally a risk-reward proposition. Successful drug development is highly profitable, but also very risky because so few drugs under development will be approved for human use," Kauten explains.

How does QBI use partnership strategy to manage its risk-reward ratio? "At every stage of drug development, we're essentially playing poker. Do we continue to go forward alone, maximizing shareholder value, but at some risk? Or, do we reduce risk by partnering with a pharmaceutical company to complete development and take the drug to market, in exchange for sharing the reward?"

Using two strategies

QBI is pursuing distinctly different strategies for two of its drugs. For one, they are partnering in the development of the drug in order to take advantage of their partner's proprietary drug delivery technology.

For the second drug, QBI is raising money to conduct Phase One clinical trials independently. While QBI may still license this drug to a pharmaceutical company to complete clinical trials and go to market, management maintains the mindset that they'll be the ones to see the new drug all the way through to the market. This approach, Kauten explains, leads to decisions that maximize shareholder value, whatever partnering strategy is pursued at subsequent decision points.

Partnerships can also reduce risk when there are many highly uncertain choices at any one point in time. A client, a specialty paper-products company, partnered with multiple medical supplies companies, each a leader in a clinical specialty market (for example, obstetrics or cardiac surgery), because the paper products company was unsure which clinical specialty would be the most attractive market for its medical procedure-specific products.

Study partner's abilities

The more strategic the partnership, the more time and attention you should place on both selection and relationship building. "It pays to learn as much as you can about potential partners' capabilities and cultures; consider all issues and don't make decisions too quickly. Partnerships fail when you overestimate what a partner can do for you."

Kauten also recommends "building trust through open and honest communications and not being greedy. Relationships must work both ways to be a long term success."

Where do you rely on strategic partners? Where don't you and why not?

Partnering strategies decided in the past may not be the best going forward.

Kay Plantes is a Madison economist, strategy consultant and executive educator.