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LAPPEENRANTA UNIVERSITY OF TECHNOLOGY Department of Business Administration International Marketing JUHA LEMMETYINEN COMMERCIALIZATION OF BIOPHARMACEUTICALS Master’s thesis submitted in partial fulfilment of the requirements for the degree of Master of Science in Economics Helsinki, 14.12.2000 Juha Lemmetyinen Address: Esikoisentie 8 P, 00430 Helsinki Mobile: 050-514 8607 Supervisor: Professor Mika Gabrielsson ABSTRACT Author: Title: Department: Year: Juha Lemmetyinen Commercialization of Biopharmaceuticals Department of Business Administration 2001 Master’s Thesis. Lappeenranta University of Technology 100 pages, 3 appendices, 15 figures, 4 tables Supervisor: Professor Mika Gabrielsson Key words: Biopharmaceuticals, commercialization, marketing, partner selection Abstract: Biotechnology is regarded as one of the most promising and interesting technologies currently available to the humankind. Especially the development of novel biopharmaceuticals has attracted considerable public interest. The world-wide number of biopharmaceutical drug development companies has grown rapidly in the last decade, but the results gained thus far indicate that the firms could benefit from the further improvement of their risk management and commercialization processes. This thesis focuses on the commercialization phase of biopharmaceuticals, specifically from the perspective of new Finnish biopharmaceutical firms. The thesis is divided to two parts: first part examines the concept of commercialization and identifies the special nature of the biopharmaceutical business. Second part is dedicated to an empirical research of commercialization which is conducted as a multiple-case study. The multiplecase study consists of five Finnish new biopharmaceutical firms. The objective was to identify the means of organising a successful commercialization process for a drug that is presumed to pass through the risks of the product development phase. The results centred on four critical success factors that facilitate the successful commercialization process of the Finnish biopharmaceutical firm. These are 1) product, 2) promotion, 3) credibility, and 4) partner selection. Firstly, the product should be unique and address a disease with a major socio-economic impact. Secondly, the product must be promoted to the potential partners who will distribute it globally. Thirdly, the Finnish biopharmaceutical firm requires credibility to attract multinational pharmaceutical companies as partners. Fourthly, before the actual selection, the capabilities and goals of potential partner must be assessed with the possible means available. Finally, the virtual nature of today’s biopharmaceutical firms requires good relationship marketing skills from the part of the management of the biopharmaceutical firm. TIIVISTELMÄ Tekijä: Otsikko: Osasto: Vuosi: Juha Lemmetyinen Biolääkkeiden kaupallistaminen Kauppatieteiden osasto 2001 Pro gradu -tutkielma. Lappeenrannan teknillinen korkeakoulu 100 sivua, 3 liitettä, 15 kuvaa, 4 taulukkoa Tarkastaja: Professori Mika Gabrielsson Avainsanat: Biolääkkeet, kaupallistaminen, markkinointi, yhteistyökumppanin valinta Tiivistelmä: Biotekniikkaa pidetään yhtenä lupaavimmista nykyään tunnetuista teknologioista. Biotekniikan alalta erityisesti uusien lääkeaineiden kehittely on saavuttanut huomiota julkisuudessa. Biotekniikkaa lääkeaineiden kehittämiseen soveltavien yritysten määrä on kasvanut nopeasti viimeisen vuosikymmenen aikana, mutta tämänhetkiset tulokset osoittavat, että yritykset voisivat hyötyä riskien hallintaan ja kaupallistamiseen liittyvien prosessien kehittämisestä. Tutkielma keskittyy biolääkkeiden kaupallistamiseen, erityisesti suomalaisten uusien biolääkeyritysten kannalta. Tutkielma jakaantuu kahteen osaan: ensimmäinen osa tutkii kaupallistamista käsitteenä ja biolääkeliiketoiminnan erityispiirteitä. Toinen osa keskittyy kaupallistamisen empiiriseen tutkimukseen, joka kattaa viisi suomalaista uutta biolääkeyritystä. Empiirisen osan tavoitteena oli tunnistaa ne keinot, jotka auttavat menestyksekkään kaupallistamisprosessin luomisessa tuotekehitysvaiheen läpäisseelle lääkeaineelle. Saavutetut tulokset voidaan tiivistää neljän kriittisen menestystekijän ympärille, jotka ovat 1) tuote, 2) viestintä, 3) uskottavuus ja 4) yhteistyökumppanin valinta. Ensimmäinen menestystekijä on ainutlaatuinen biolääke, joka parantaa kansantaloudellisesti merkittäviä tauteja. Toisen menestystekijän avulla yritys viestittää uudesta ainutlaatuisesta tuotteestaan mahdollisille yhteistyökumppaneilleen. Kolmas menestystekijä kohdistuu yrityksen uskottavuuteen uutena korkean teknologian biolääkeaineiden kehittäjänä. Uskottavuustekijä on erityisen tärkeä suhteiden luomisessa kansainvälisiin lääkeyrityksiin. Neljäs tekijä keskittyy yhteistyökumppanin valintaan, joka alan erityisluonteesta johtuen on tärkeä uudelle biolääkeyritykselle. Viimeiseksi havaittiin, että uusi biolääkeyritys virtuaalisen rakenteensa vuoksi tarvitsee hyvät johdon suhdemarkkinointikyvyt. FOREWORD I would like to thank my cousin Janne Gustafsson for offering me the possibility to conduct this thesis on the subject of biopharmaceuticals. I am also grateful to Professor Ahti Salo of Helsinki University of Technology for allowing me to participate in this project. In addition, I am indebted to Janne for giving invaluable advice and support during the research and writing process of this thesis. He provided me more analytical view to the writing and helped me to see new perspectives concerning the subject of the thesis. I would like to express my sincere gratitude to my supervisor Professor Mika Gabrielsson for his most helpful comments on the manuscript of the thesis. I am also grateful to the interviewees who had both time and interest in our research. Finally, I would like to offer my greetings to my parents and closest friends for their continuous support during the making of this thesis. Without them all this would have been more complicated. Helsinki, 31.1.2001 Juha Lemmetyinen Contents 1 INTRODUCTION................................................................................................................ 1 1.1 BACKGROUND AND CONTEXT OF THESIS ...............................................................................1 1.2 SUBJECT OF RESEARCH.........................................................................................................2 1.3 RESEARCH PROBLEM............................................................................................................3 1.4 THEORETICAL FRAMEWORK .................................................................................................3 1.5 COMMERCIALIZATION IN BIOPHARMACEUTICAL FIRMS – A RESEARCH GAP...........................5 1.6 SCOPE OF THESIS .................................................................................................................7 1.7 DEFINITIONS ........................................................................................................................8 1.8 STRUCTURE OF THESIS ....................................................................................................... 10 2 BIOPHARMACEUTICALS.............................................................................................. 11 2.1 HISTORY OF BIOTECHNOLOGY ............................................................................................ 11 2.2 APPLICATION AREAS OF BIOTECHNOLOGY .......................................................................... 12 2.3 PHARMACEUTICALS ........................................................................................................... 13 2.4 DRUG INNOVATION AND DEVELOPMENT PROCESS ............................................................... 14 2.5 CHARACTERISTICS OF PHARMACEUTICAL INDUSTRY ........................................................... 16 2.6 GLOBAL DEVELOPMENT OF BIOPHARMACEUTICAL SECTOR ................................................. 17 2.7 BIOPHARMACEUTICAL SECTOR IN FINLAND......................................................................... 18 3 PRINCIPLES OF COMMERCIALIZATION.................................................................. 20 3.1 CONCEPT OF COMMERCIALIZATION .................................................................................... 21 3.2 MAIN PHASES OF COMMERCIALIZATION PROCESS ............................................................... 23 3.3 PLANNING OF COMMERCIALIZATION ................................................................................... 25 3.3.1 Market Analysis ........................................................................................................... 25 3.3.2 Competitor Analysis..................................................................................................... 26 3.3.3 Company Analysis........................................................................................................ 27 3.3.4 Environmental Analysis................................................................................................ 27 3.4 STRATEGIC DECISIONS OF COMMERCIALIZATION ................................................................ 28 3.5 COMMERCIALIZATION IN BIOPHARMACEUTICALS ................................................................ 30 3.6 BIOPHARMACEUTICAL PRODUCT DEVELOPMENT AND COMMERCIALIZATION ....................... 30 3.7 DEVELOPMENT OF NBF COMPLEMENTARY CAPABILITIES ................................................... 33 3.8 CRITICAL SUCCESS FACTORS OF BIOPHARMACEUTICAL COMMERCIALIZATION..................... 34 4 MARKETING IN BIOPHARMACEUTICAL BUSINESS............................................... 36 4.1 INTRODUCTION TO MARKETING MIX................................................................................... 37 4.2 CREDIBILITY ...................................................................................................................... 39 4.3 PRODUCT ........................................................................................................................... 40 4.4 PRICE ................................................................................................................................ 42 4.5 PLACE ............................................................................................................................... 44 4.6 PROMOTION ....................................................................................................................... 46 4.7 MANAGEMENT OF RELATIONSHIPS...................................................................................... 48 4.8 PARTNER SELECTION IN BIOPHARMACEUTICAL BUSINESS.................................................... 50 4.9 PARTNERSHIPS IN BIOPHARMACEUTICAL BUSINESS ............................................................. 52 4.10 PARTNER SELECTION PROCESS ........................................................................................... 56 5 EMPIRICAL RESEARCH METHODOLOGY................................................................ 59 5.1 RESEARCH STRATEGY ........................................................................................................ 59 5.1.1 Choosing between Qualitative and Quantitative Analyses ............................................. 59 5.1.2 Multiple-Case Study ..................................................................................................... 60 5.2 DATA COLLECTION AND SELECTION OF CASE FIRMS ........................................................... 62 5.3 QUALITY ASPECTS OF EMPIRICAL PART .............................................................................. 63 5.3.1 Validity of Empirical Part ............................................................................................ 63 5.3.2 Reliability of Empirical Part ........................................................................................ 65 6 COMMERCIALIZATION IN BIOPHARMACEUTICAL FIRMS – MULTIPLE-CASE STUDY ............................................................................................................................... 66 6.1 OVERVIEW OF FINNISH BIOPHARMACEUTICAL BUSINESS ..................................................... 67 6.1.1 Background of Case Firms ........................................................................................... 68 6.1.2 Summary of Case Firms ............................................................................................... 69 6.2 CASE HORMOS MEDICAL OY LTD....................................................................................... 69 6.2.1 Description .................................................................................................................. 70 6.2.2 Commercialization Activities........................................................................................ 70 6.2.3 Observations................................................................................................................ 71 6.3 CASE JUVANTIA PHARMA OY LTD. ..................................................................................... 72 6.3.1 Description .................................................................................................................. 72 6.3.2 Commercialization Activities........................................................................................ 73 6.3.3 Observations................................................................................................................ 73 6.4 CASE BIOTIE THERAPIES OY LTD. ...................................................................................... 74 6.4.1 Description .................................................................................................................. 74 6.4.2 Commercialization Activities........................................................................................ 75 6.4.3 Observations................................................................................................................ 76 6.5 CASE CONTRAL PHARMA OY LTD....................................................................................... 76 6.5.1 Description .................................................................................................................. 76 6.5.2 Commercialization Activities........................................................................................ 77 6.5.3 Observations................................................................................................................ 77 6.6 CASE FINNISH IMMUNOTECHNOLOGY OY LTD..................................................................... 78 6.6.1 Description .................................................................................................................. 78 6.6.2 Commercialization Activities........................................................................................ 79 ii 6.6.3 Observations................................................................................................................ 80 6.7 CROSS-CASE ANALYSIS...................................................................................................... 80 6.8 DISCUSSION ....................................................................................................................... 84 7 CONCLUSIONS ................................................................................................................ 88 7.1 SUMMARY OF FINDINGS ..................................................................................................... 88 7.2 THEORETICAL IMPLICATIONS OF THESIS.............................................................................. 90 7.3 MANAGERIAL IMPLICATIONS OF THESIS .............................................................................. 91 7.4 SUGGESTIONS FOR FUTURE WORK ...................................................................................... 92 REFERENCES........................................................................................................................... 93 LITERATURE .............................................................................................................................. 93 INTERVIEWS ............................................................................................................................... 99 INTERNET SOURCES.................................................................................................................. 100 APPENDICES I ACRONYMS II GLOSSARY OF TERMS III TEMPLATE OF QUESTIONNAIRE iii Figures 1-1. THE THEORETICAL FRAMEWORK OF THE THESIS .....................................................................4 2-2. NEW DRUG DEVELOPMENT PROCESS.................................................................................... 15 3-1. MAIN PHASES OF COMMERCIALIZATION PROCESS................................................................. 24 3-2. THE TYPES OF FUNDAMENTAL ANALYSES ............................................................................ 25 3-3. MACROENVIRONMENTAL INFLUENCES FACED BY THE BUSINESS ORGANISATION ................... 28 3-4. NEW PRODUCT DEVELOPMENT IN A BIOPHARMACEUTICAL FIRM ........................................... 31 3-5. COMMERCIALIZATION PROCESS IN A BIOPHARMACEUTICAL FIRM ......................................... 32 3-6. STRATEGIC CHOICES THE MANAGEMENT OF NBF FACES EVOLVE OVER TIME .......................... 34 4-1. THE MARKETING MIX OF A TYPICAL BIOPHARMACEUTICAL FIRM .......................................... 36 4-2. THE PHARMACEUTICAL VALUE CHAIN FOR NEW INNOVATIONS ............................................. 42 4-3. PROMOTIONAL TOOLS OF A BIOPHARMACEUTICAL FIRM ....................................................... 48 4-4. THE RELATIONSHIP NETWORK OF A TYPICAL FINNISH BIOPHARMACEUTICAL FIRM ................. 50 4-5. THE PARTNER SELECTION PROCESS IN THE BIOPHARMACEUTICAL BUSINESS AS INITIATED BY THE NBF/DBF .............................................................................................................................. 57 6-1. STRUCTURE OF THE EMPIRICAL PART OF THE THESIS ............................................................ 66 6-2. MEMBER COMPANIES PIPELINE IN SPRING 2000..................................................................... 82 iv Tables 3-1. THE DECISION FACTORS OF COMMERCIALIZATION................................................................ 23 3-2. EXAMPLES OF QUESTIONS USED TO ASSESS COMPETITOR(S) ................................................. 27 4-1. THE DEFINITIONS OF DIFFERENT STRATEGIC ALLIANCES ....................................................... 51 6-1. SUMMARY OF CASE FIRMS .................................................................................................. 69 v 1 1.1 INTRODUCTION Background and Context of Thesis Biotechnology is regarded as one of the most promising and interesting technologies currently available to the humankind. While biological processes were used already in the ancient times in the form of brewing, cheese making and baking, only in the recent past the developments in the field of biotechnology and its application by industry has raised the expectations for the birth of new business opportunities (Daly 1985). In the area of modern biotechnology especially the development of novel pharmaceuticals or biopharmaceuticals has attracted considerable public interest. There is a widely held belief that the biopharmaceuticals can make it possible to cure several incurable diseases such as Parkinson’s disease, Alzheimer’s disease or even AIDS (Davis 2000). The possibility of finding a cure to these types of diseases provides hugely profitable business opportunities, but the commercial success stories of biopharmaceuticals (or modern biotechnology) have been quite few when compared, for example, to the continuous stream of commercially profitable innovations from the information technology (IT) and microelectronics. The fewer number of commercial biopharmaceutical applications can be attributed to two main elements that characterise the biopharmaceutical business. The first element is the high-risk nature of the drug development process, which derives from the uncertainty over the efficacy and safety of a developed compound. For this reason, the pharmaceutical industry in general has to abide by the rules of strict international regulations that govern the drug development, manufacture and marketing. As a result, the drug development is a long and arduous process, which can easily take 9 to 12 years without any guarantee of commercial success. For a more detailed description of biopharmaceutical risks, the reader is encouraged to refer to Gustafsson (2000). The second element in the biopharmaceutical business is the commercialization of the product. Even though the drug had been developed successfully, the 1 research efforts can be still lost in the commercialization phase. According to our interviews with representatives of the case firms and industry experts, successful commercialization depends mainly on 1) credibility of the firm and 2) skills of the personnel of the company. The credibility consists of four subfactors: i) pharmaceutical standards, ii) world-class research reports published by the scientists associated with the firm, iii) quality of firm’s relationship networks, and iv) pharmaceutical drug development and business traditions of the country. The first three factors can be affected by the management of the biopharmaceutical firm whereas the tradition aspect is beyond the firm’s sphere of influence. In addition, the commercialization phase in biopharmaceuticals requires a special combination of talent and experience from the employees. Thus, the personal skills of the management team are vitally important for the establishment of successful commercialization practices. The people in charge of commercialization should possess a unique blend of competence to understand the intricacies of drug development but also own a strong expertise in the field of business administration. 1.2 Subject of Research This thesis examines the commercialization process of small Finnish bio- pharmaceutical firms. The new biopharmaceutical firms (NBF) in Finland are typically entrepreneurial start-ups formed in the 1990s with the assistance of venture capital. The dominating feature in these companies is the R&D department, which uses significant portions of capital or turnover to research and development of new products. While R&D is definitely the most important part of the business of a typical NBF, the commercialization of a new product after development process presents a critical moment in the future of an emerging company. The successful commercialization of new product enables a small firm to generate an important source of revenue and allows it to establish its position in the market. On the other hand, failure could lead to an end of business. Therefore, it is important for the man- 2 agement of any NBF, which is engaging in a new product development process to optimise the commercialization process. 1.3 Research Problem By taking into consideration the importance of the commercialization proc- ess the focus of the thesis is on exploring: How to successfully manage commercialization in small Finnish biopharmaceutical firms? In order to answer the primary question the following theoretical and empirical research questions needed clarifying. Theoretical: 1) What are the specific characteristics of a biopharmaceutical product that contribute to the formulation of a successful commercialization strategy? 2) What are the capabilities that a small biopharmaceutical firm needs to be in order to carry out a successful commercialization process? 3) What methods can be used in the selection of commercialization partners? Empirical: 4) What are the critical success factors that facilitate the commercialization process of a Finnish biopharmaceutical product? 5) What are the organisational structures and resources required for a small Finnish biopharmaceutical firm to commercialize its products successfully? 6) How small Finnish biopharmaceutical firm selects its commercialization partners? 1.4 Theoretical Framework On the theoretical side, the focus of this thesis is on the marketing and commercialization activities relevant to biopharmaceutical firms. Specifically, this thesis analyses possible forms of relationships between new Finnish biopharmaceutical firms and established multinational pharmaceutical enterprises. Due to the nature of the biopharmaceutical business, business-to-business marketing is in a central role in the theoretical part of this thesis. However, it is noteworthy that marketing activities in biopharmaceuticals are concentrated on finding a licensing partner rather than identifying a purchasing decision group as it is commonplace in traditional business-to-business marketing. Hence, the thesis 3 provides an extensive coverage of partnerships and alliances while purchasing processes are left for lesser attention. In addition to the business-to-business marketing aspect of biopharmaceuticals, the commercialization of biopharmaceutical products is characterised by the high technology context in which new drugs are researched and developed. In the commercialization process of high technology products, the marketer needs to broaden his/her view over the traditional 4 P thinking. The complexity of the high technology product usually requires that the biopharmaceutical firm has an intimate understanding of the customer needs and familiarity with the R&D process, because customers are seldom consumers and the management of risks involved in R&D demand understanding of the field. Figure 1-1 illustrates the theoretical framework of the thesis in three temporally parallel columns that depict the participation of stakeholders and product development and marketing processes of the biopharmaceutical firm. The first Stakeholders Investors - seed financing - growth financing - product development - advice - relationships Product Development Marketing Basic R & D Process Commercialization Process New Drug Development Process Time Clinical Trials phases I-III Personnel - R&D work contribution - commercialization Exit? Partners Licensing payments + royalties Milestone payments - manufacturing - marketing - distribution - R&D alliances Relationship marketing Marketing mix Launch End product End-Users in a Global Scale Figure 1-1. The theoretical framework of the thesis. 4 End-user needs column from left represents stakeholders’ contributions to the firm, which can be either direct (e.g. board members) or indirect (e.g. provision of capital). In addition, the participation varies on time as indicated by three coloured bars on the right side of the column. The next two columns depict the most important processes of the biopharmaceutical firm, R&D and marketing. Rectangle below the columns illustrates the end-users globally. The partner of NBF usually handles the distribution and marketing to end-users but the biopharmaceutical firm has to maintain the customer orientation approach in its way of doing business (Kohli & Jaworski 1990). In practice this means that the management of NBF has to interpret correctly the signals received from market to ensure the proper R&D. 1.5 Commercialization in Biopharmaceutical Firms – A Research Gap Marketing is an extensive subject covering a wide area of managerial func- tions and tasks, some of which overlap with other functions such as R&D and human resource management (HRM). In the marketing, however, one of the basic processes for any profit-pursuing organisation can be considered to be the act of commercialization. Commercialization can be shortly defined as being the process which organisations use to introduce a variety of products into the market in hopes of achieving commercial success. Despite the obvious importance of the commercialization process, the basic marketing textbooks made by numerous authors (e.g. Kotler 1994, Brierty, Eckles & Reeder 1998, Jobber 1998, Czinkota & Ronkainen 1998) have only short sections for commercialization or it has been left out altogether. Naturally the basic marketing textbooks have been designed to cover superficially almost every aspect of marketing, and are not suited to highlight various processes in a detailed presentation. On the other hand, there exists a wide variety of dedicated marketing literature comprising subjects from, e.g., product (McGrath 1995), high technology (Davidow 1986), concurrent (Cespedes 1995), and relationship marketing (Ford et al. 1998) but even in the dedicated marketing literature a gap seems to exist in the case of commercialization. Controversially the topic of commercialization is very common in the business life as it is in many cases quite directly connected to the earnings principle of most companies. One author (Rope 1999) to write about the commercialization 5 has suggested that the lack of specific literature in the form of dedicated textbooks is related to the scope of the subject. Furthermore, Rope points out that in most instances the commercialization is a unique process which is hard to generalise to match other cases. The relatively small number of written evidence about commercialization in the form of dedicated textbooks is somewhat amended by academic articles. In these articles the subject of commercialization is often addressed in parallel with product or technology development in a certain field of business. While it can be argued that a well-executed product (or technology) development process is crucial for the organisation’s future profit-making capability, the lack of specific product commercialization articles is still perplexing. The reason for this might be that to understand commercialization issues one is required to include the preceding R&D phase in the study of commercialization process. Studies conducted by several authors seem to support this argument (q.v. Nevens, Summe & Uttal 1990; Cooper 1993; Cooper & Kleinschmidt 1996). Accordingly, it would seem to be appropriate that the chosen field of study requires both theoretical and empirical evidence for accumulation of commercialization specific knowledge. Moreover, the biopharmaceutical R&D phase should be depicted to some extent in order to achieve a complete picture of factors influencing commercialization. This deduction is based on the fact that customer/market orientated R&D is a prerequisite for successful commercialization (see Appiah-Adu & Ranchhod 1998). Although the biopharmaceutical research is characterised by a high level of technological know-how, the 1990s have seen an increasing number of new entrants in European biotechnology business environment, in particular (see Senker et al. 1998). This has accelerated the competition between companies as a result of which a number of firms is required to focus on to carefully selected niches in hopes of ensuring success in the long-term. Despite the positive forecasts made about the demand for biopharmaceuticals in the Western hemisphere (wealthy aging population), even potentially successful biopharmaceutical products will require intensive marketing efforts to win market share in the highly competitive high technology business environment. Therefore it is important to scrutinise the biopharmaceutical business in such a way that all the pertinent aspects of market- 6 ing are included. Consequently, for the collection of sufficient theoretical evidence the literature can be roughly divided into three categories: i) general marketing textbooks, ii) dedicated marketing textbooks and articles, and iii) field specific literature. The general marketing textbooks consist, e.g., of the classic Kotler (1994), and somewhat newer Jobber (1998) and Kotler, Armstrong, Saunders and Wong (1999). The dedicated marketing books are an essential source of references alongside the academic articles. The most important sources in this category are high technology and commercialization specific marketing textbooks and academic articles. The field specific literature includes biotechnology, biopharmaceutical and pharmaceutical publications, which are used to examine business activities in the industry. 1.6 Scope of Thesis The focus of this thesis is on the emerging Finnish biopharmaceutical sec- tor. The purpose is to analyse the commercialization strategies of new Finnish biopharmaceutical firms. The biopharmaceutical product development as a process is not under analysis in this thesis. However, the basic pharmaceutical product development process is outlined as a clarification to give a reader an understanding of the costs and risks associated with the process. Normally a small biopharmaceutical firm cannot complete alone all the required obligatory clinical tests because the testing usually becomes prohibitively expensive in the last phases. This means that a small firm requires partners to conclude the remaining phases and approval trials. The partner selection is an integral part of the modern biopharmaceutical business and is for that reason included in this thesis. However, since the selection process of partners is an extensive subject, it is scrutinised only from the perspective of small biopharmaceutical firms. The analysis of goals and strategies of the multinational pharmaceutical enterprises, the other side of biopharmaceutical business, is beyond the scope of this thesis. 7 1.7 Definitions The definition part explains the key terms used in this thesis. This thesis contains numerous (bio)pharmaceutical terms, and the majority of these terms are explained in Appendices I-II. Biopharmaceuticals – biopharmaceuticals can be defined as drugs manufactured by using biotechnological means. Most biopharmaceuticals are based on large and heavy molecules, often proteins or glycoproteins. The methods used in identification, development, production, and delivery of biopharmaceuticals differ often from methods used in traditional pharmacology (Lievonen 1999). Biotechnology – “Biotechnology is not a single technology but a group of technologies including existing bioprocessing technology and new technologies such as recombinant DNA and hybridoma technology. Its applications are multisectoral” (Daly 1985, 2). Commercialization – Kotler (1994) defines the process of commercialization as being the last part of eight stages of the new-product-development process model. In this model the new product idea goes through stages as it is examined by the company whether the idea should be further developed or dropped. In the commercialization stage the product is ready to enter market. This is where the management of the company must decide when, where, to whom and how the product will be introduced. Commercialization in this thesis is defined to be a process where company (Finnish biopharmaceutical firm) is introducing either a new or substantially renewed product into the market (market is defined as all potential and actual customers with enough ability and interest to purchase the product) in hopes of pursuing commercial success. Dedicated biopharmaceutical company (DBC) or firm (DBF) – The dedicated biopharmaceutical companies in this thesis refer to the companies that have existed over ten years and concentrate on the research and development of biopharmaceutical products. These companies can also market and manufacture of their own products. High technology – the definition ‘high technology’ is often controversial. There seems to be no clear understanding which organisations (commercial or otherwise) deserve to be called high technology users or manufacturers. On the 8 commercial side one rule is that companies which invest in R&D over 10% of turnover are high technology organisations. Licensing process – the process of licensing has been defined in various ways by different authors. One good definition is the one used by Luostarinen and Welch (1993, 31-32). They define licensing as “Licensing is a contractual transaction in which the owner of certain knowledge assets – so called ‘intellectual’ or ‘industrial’ property – sells to another organisation or individual the right to use these assets for a defined purpose. Under the licensing arrangements the licensor does not give up ownership”. Marketing – according to Kotler (1994, 6) the concept of marketing can be defined as “Marketing is a social and managerial process by which individuals and groups obtain what they need and want through creating, offering, and exchanging products of value with others”. New biopharmaceutical company (NBC) or firm (NBF) – In this thesis the abbreviation of NBC is for a company that researches and develops pharmaceutical products using biotechnological techniques. In addition, the term new refers to the age of the company, meaning that the company in question is either a start-up or very young. In either event the company has not existed over ten fiscal periods. The abbreviation NBC can be replaced with abbreviation NBF to present that the company is a New Finnish Biopharmaceutical Firm. Typically these companies do not manufacture or participate actively to the marketing of products. New Product Development Process – The process of developing original products, product improvements, product modifications and new brands through the firm’s own R&D efforts (Kotler et al. 1999). Outsourcing – Refers to buying of products, components, materials, and services from various manufacturers and producers as opposed to in-house production (Albaum, Duerr & Strandskov 1998). Partner – In this thesis the term partner usually refers to a recipient of a licensing deal but can be expanded to include entities that co-operate, e.g., in R&D projects. Pharmaceuticals – traditional pharmaceuticals are chemically derived products. Many synthetic drugs are low molecular weight products (Lievonen 1999). 9 Stakeholders – Individuals or groups having a stake in the organisation’s well being, e.g., shareholders and employees (Jobber 1998). 1.8 Structure of Thesis The thesis comprises seven chapters. After the first chapter, the remainder of this thesis is structured as follows. Chapter two starts from the historical development of biotechnology, general biotechnological applications are presented to clarify the diversity of the biotechnology, continues to biopharmaceuticals, covers the pharmaceutical business in general, and is followed by application examples of modern biopharmaceuticals. By drawing upon the relevant literature Chapter three defines first the concept and introduces the principles of commercialization and then continues to the commercialization in biopharmaceuticals. Fourth chapter starts by exploring the marketing practices in biopharmaceuticals and continues to the partner selection. Several alternatives of co-operative arrangements most often used in the pharmaceutical business are also identified in Chapter four. Chapter five outlines the methodological choices used in the empirical part of the thesis. Chapter six comprises the case part of the thesis where the empirical study and its results are presented. Finally, the results are analysed in Chapter seven and suggestions for future research will be presented. 10 2 BIOPHARMACEUTICALS This chapter outlines the history of biotechnology to the modern day bio- pharmaceuticals. Before entering directly into the details of biopharmaceutical business some applications of biotechnology are presented for the reader to highlight the varied possibilities of biotechnology. The chapter covers also the field of traditional pharmaceuticals. The cross section of traditional pharmaceutical functions as a sort of ‘springboard’ to the biopharmaceuticals. The subchapters include also the characteristics of a modern day pharmaceutical business and an overview of drug development process. 2.1 History of Biotechnology The roots of biotechnology can be traced back into antiquity when brewing, cheese making and baking were discovered. An important step for the humanity and to the science of biology was the creation of microscope in the 1670s. Antonie Van Leeuwenhoek was the first person to see microbes with his invention. Other important persons are Edward Jenner who invented smallpox vaccination, and Louis Pasteur who created the process of controlled heating for the milk, beer etc. The pasteurization process made possible to destroy bacteria and arrest spoilage without affecting flavour. The advances in the science of biology in the 18th and 19th centuries allowed the development of microbial bases for the brewing and baking processes. Several biotechnology based industries became established after the Second World War. These industries produced antibiotics, amino acids and enzymes. The post Second World War period saw the application of pharmaceutical biotechnology and fast increase of knowledge in the molecular basis of biological systems. This accumulation of knowledge led to the development of new techniques with industrial applications (Daly 1985). Two of the most important discoveries were made in the 1970s. These were recombinant DNA technology (genetic engineering) and hybridoma technology. The recombinant DNA (rDNA) was discovered in the year of 1970 in the United States whereas the invention of hybridoma technology which enables the produc- 11 tion of monoclonal antibodies was reported by two British scientists in 1975. The full commercial potential was first understood in the United States and it has since become the foremost developer of commercial applications based on these technologies. Later other major industrial countries began to invest into their own biotechnology projects but United States has retained the leadership in commercialization of new products and in absolute numbers of companies applying biotechnology as their main part of business operations (Ono et al. 1991). 2.2 Application Areas of Biotechnology The field of biotechnology covers a wide variety of different applications and processes. The companies that apply biotechnology use modern biotechnological techniques to develop commercially viable products for the human health care, agriculture, food processing, and for the improvement of environmental conditions. The applications in agriculture fall under two areas. First area is connected with animal health care and reproduction. The recombinant DNA (rDNA) and hybridoma technologies enable to create new specialised animal health care products. Examples in this field are more efficient vaccines to combat animal diseases. The other area of biotechnological application to the agriculture consists of plant protection and production. In this field the micropropagation technology with genetic manipulation of plants makes possible to create plants with ability to resist herbicides, pests and drought. The food-processing sector has used the biotechnological techniques for some time. Industries like baking, dairy and meat producers use enzyme and microbial technology in the manufacturing process. The use of rDNA technology in these industries will improve the existing processes. In some cases the use of biotechnology will result entirely new food ingredients and foods (Daly 1985, 1415). Recently, however, the application of biotechnology in the field of agriculture has met some resistance particularly in EU. Several environmentalist pressure groups have worked to prevent the marketing of genetically engineered or manipulated products. The public campaigns of these activists have successfully aroused European citizens’ concern about the safety and ethical implications of 12 genetically altered products. The future development of this issue remains to be seen but for example, in the United States the genetically altered food has been the part of everyday life for sometime. The applications of biotechnology in specialty chemicals consists of genetic engineering to the fermentation production of existing chemicals. Other application area is the use of protein and molecular engineering to the modification of existing specialty or development of new chemicals with enhanced functional characteristics (Daly 1985, 12-13). 2.3 Pharmaceuticals Medicine is one of the most important application areas of modern biotech- nology. The applications of rDNA and hybridoma techniques combined with greatly increased understanding of the molecular causes of disease will lead to a transformation of medicine. The earliest scientific drug discovery methods focused on evaluating natural ingredients for pharmaceuticals and the emphasis was on the extracting beneficial bio-originated ingredients from plants and other sources. Sometime during the first half of the 20th century, systematic pharmacological evaluations were carried out. The evaluations concentrated on to both synthetic and natural compounds, and after the usefulness of the candidate compound was determined, a synthetic process was developed for its production (Lievonen 1999). Advances in antibody biology and gene technology placed the drug discovery process on a more rational level in the 1980s. It became possible to design drugs for specific purpose. In addition, the development of computerised methods has further increased the opportunities for rational drug design (ibid.). Increased understanding in biotechnological processes enables scientists to create more efficient pharmaceuticals, and current ‘traditional’ or synthetic drugs can be mass produced and new diagnostic tests can be devised. Incurable diseases, such as various cancers, neural and mental disorders, and parasitic infections will become more susceptible to therapeutics with biotechnological components. The applications of biotechnology to the pharmaceutical sector can be divided under several headings: 1) drugs using rDNA technology, 2) lymphokines (including 13 interferons), 3) drug targeting, vaccines, applications to conventional drug design, and 4) new diagnostic technologies (Daly 1985). 2.4 Drug Innovation and Development Process The development of a new pharmaceutical product follows usually stan- dardised process. This process has been designed mainly by the regulatory authorities. The process can be divided into steps, where at each step candidate compounds are tested and screened for particular properties or characteristics. In the process of finding a new medicine, usually hundreds or thousands of molecules have to be tested, and only a fraction of these are viable enough to be transferred to the next stage (Gambardella 1995). New drugs have been developed either from organic chemical synthesis or from the separation of compounds produced by natural micro-organisms. Nowadays biotechnology is rapidly changing these processes. The change is based on new information on the originating mechanisms of diseases revealed by molecular medicine, on the potential effects of pharmaceuticals as disclosed by molecular and cell biology, on new methods of discovering biologically active entities, on new models for testing and on new dosage technology (Scheinin 1999). The prerequisite for commercialization and marketing pharmaceutical products is systematic documentation based on the effectiveness and safety of a new medicine. The development process of a new pharmaceutical is divided into phases consisting of preclinical research and phases I-III. Preclinical studies consists of laboratory screening of molecules (bioassays and animal tests) to evaluate their therapeutic potential and toxicity. The intention of these tests is to study the pharmacological effects of a medicine, to document its desired and undesired actions, and to conduct a safety assessment before it is tested with human beings. The actual clinical trials comprise three (sometimes four) phases. Going from phase I to III, a new compound is administered to an increasing number of patients. The first phase includes a few human test subjects, and the aim is to gather sufficient information about the tolerability of the medicine and about its pharmacological effects on a human being. Phases II-III focus on the medicine’s effectiveness. Normally, phase II and phase III involve a large number of patients, and the tests take place over a long period. This is needed to prepare an accurate 14 profile of the drug, define its dosage, and evaluate possible side effects. Clinical studies that are carried out after the medicine enters the market are called phase IV studies. These can be, for example, multi-centre studies with the aim of clarifying the appearance of rarer adverse reactions. This phase ensures that exact knowledge of the medicine becomes available. The medicine is kept under surveillance throughout its entire life cycle (Gambardella 1995; Scheinin 1999). Because of its long-term nature, the pharmaceutical R&D is a costly and risky venture, but the economic rewards from a successful project usually more than offset these costs. In the United States, the Office of Technology Assessment (OTA) estimated in 1993 that for drugs that first entered human testing in the period of 1970-1982 the fully capitalised cost of developing a new pharmaceutical was $359 million in 1990 dollars. For drugs made available in 1990, the cost was $500 million. Figure 2-1 shows a new drug development process. ,1' 3UHFOLQLFDO UHYLHZ 5 ' GD\V ,QLWLDO V\QWKHVLV 1'$ UHYLHZ &OLQLFDO 5 ' 3RVWPDUNHWLQJ VXUYHLOODQFH $GYHUVH UHDFWLRQ UHSRUWLQJ 3KDVH , 3KDVH ,, 3KDVH ,,, $QLPDO WHVWLQJ 6XUYH\ VDPSOLQJ WHVWLQJ 6KRUW WHUP /RQJ WHUP $YHUDJH PRQWKV 5DQJH \HDUV $YHUDJH \HDUV 5DQJH PRQWKV \HDUV $YHUDJH \HDUV 5DQJH \HDUV Figure 2-1. New drug development process. The Food and Drug Administration (FDA) stages are shown in colour. Average time from initial synthesis to NDA approval is approximately 100 months (modified from Gambardella 1995). 15 2.5 Characteristics of Pharmaceutical Industry The leading enterprises in modern day pharmaceutical industry are the American and European multinationals. The industry is characterised by a globally integrated structure of manufacture, R&D, planning and distribution. The main target markets for the global pharmaceutical business are the North America, EU, and Japan. Together these countries are sometimes referred as Triad to symbolise their importance to the world economy. In these countries, the competition is based on an oligopolistic structure and the commercial success of an individual company depends on having a few successful products in some market segments. Competition is on the basis of product differentiation, which in turn depends on the quality and efficiency of R&D. Price competition is not used in the field of pharmaceuticals unless it is between drugs coming off patent protection and generic substitutes (Daly 1985). Effective patent protection is an important factor in the pharmaceutical business and it ensures that companies receive adequate returns from the massive R&D investments involved in developing and commercializing a new drug. The special feature of the pharmaceutical industry is that the patents have to be applied at the early phases of the drug development process, and because the development process is a very lengthy procedure, the actual effective patent life from the marketing approval day to the expiration of the patent may be only several years before the drug compound faces generic competition. The end of the effective patent life does not always mean the end of exclusive marketing for the drug compound, and according to the study of OTA (1993) some compounds may not have generic competitors for several years after the patent expires. This could be due to the delays in the approval process for the generic versions or that the potential market is too small for the competitors to enter. Occasionally the original manufacturer of the drug is able to gain a process patent after the original patent that will protect the product for some time (OTA 1993). Nowadays the pharmaceutical industry is going through structural changes. The costs of drug development have soared and the global competition has intensified. To maintain the level of growth, the global pharmaceutical enterprises are merging together in hopes of gaining large-scale advantages and achieve savings in R&D and marketing. Throughout the 90s many famous traditional pharmaceu- 16 tical companies have merged together to form truly giant enterprises. The net result of this merging mania is that the global pharmaceutical enterprises are concentrating more on to the distribution and marketing aspects of pharmaceutical business. The important pharmaceutical research is being transferred to smaller dedicated pharmaceutical research companies, which then out-license their products to the established pharmaceutical companies. 2.6 Global Development of Biopharmaceutical Sector The first wave of biopharmaceuticals began from the United States. This did happen already in the late 1970s, when several companies started to exploit the new rDNA and hybridoma technology. The availability of venture capital in the United States was one of the major elements that so many of the first wave biopharmaceutical companies survived. This combined with several successful initial public offerings (IPO) helped to get sufficient media coverage, which in turn aroused the public interest. The inflow of risk-capital made it possible that an entirely new branch of industry began to form in the United States. The availability of patient risk money in combination with the fact that the United States has often been referred as an entrepreneurial heaven when compared to other western countries has allowed the biopharmaceutical industry to flourish when comparisons are made, for example, with Europe. The strategy of most NBFs in the United States was to transform from research intensive company into fully integrated manufacturing and marketing companies. This transformation, which is referred as a forward integration, involved the commercialization of R&D, heavy investments in production capability and the financing of entry into product markets (Daly 1985, 17). After almost two decades it is evident that one of the most important factors in the evolution of the U.S. biopharmaceutical industry has been the existence of NBFs. At the beginning these companies had the major role as being the explorers of new technological opportunities and in generating new innovation. The NBFs also have been the important bridge-makers between business and university research (Senker et al. 1998). The United States has been the de facto technological leader in the biotechnology industry and continues to be so in the foreseeable future. Europe has found 17 itself to be a latecomer into the biotechnology market and continues to lag behind in absolute terms. While Europe is still lagging behind the U.S., in recent years there have been improvements in several European countries. Particularly United Kingdom and the Netherlands have had several success stories in the area of biopharmaceuticals. The late 1990s have seen the second coming of biotechnology at least in Europe, where the investments have multiplied, and the expectations have been rising after several new and successful IPOs. However, biotechnology is a science-based technology, where technological uncertainty and proprietary technology are factors which benefit the first-mover significantly and where the latecomers could have problems of catching up. Of course, it does not mean that being a late means being out, so European NBF can be a successful if the market is selected carefully and all the other aspects of business are properly managed. According to Ernst & Young (1998) report the biotechnology has succeeded in creating real value. The biopharmaceutical industry has provided over 65 biotechnology-based drugs on the market, and the industry is significantly improving the quality of life for many. Moreover, the estimations place that several hundred drugs, vaccines and diagnostics are in human clinical trials and in preclinical development. The accelerating pace of discovery, and the rapidly aging population with its associated healthcare requirements, will ensure that biotechnology will be a leading industry in the next century. Based on this information even small countries such as Finland can benefit from the founding and supporting of their own biotechnology industry. 2.7 Biopharmaceutical Sector in Finland The biopharmaceutical sector of Finland has developed strongly only in the 1990s. Several new pharmaceutical research companies have been formed with the help of venture capital. These pharmaceutical R&D start-up firms are usually situated in the various Biocentres in the cities of Helsinki, Oulu and Turku. In addition, several other Finnish cities such as Kuopio have provided office and laboratory space with easy terms for the start-up pharmaceutical research companies. 18 The recent mega-class mergers among agricultural, pharmaceutical, and chemical enterprises to take advantage of common research and to contain the rising costs of R&D provide opportunities for the existing and emerging biotechnology companies. It has been estimated that approximately one half of new pharmaceutical compounds originate from relatively small companies specialising in pharmaceutical R&D. These companies are usually either spin-offs or new ventures formed to exploit new pharmaceutical inventions. In Finland the number of small Finnish companies participating in pharmaceutical R&D has been steadily increasing and was in 1999 fifteen. It remains to be seen how the Finnish pharmaceutical companies fare on the long run against international competition but the future of these companies looks promising. Finland has only two large established traditional manufacturers of pharmaceuticals, which are Orion and Leiras-Schering. Orion is a Finnish owned pharmaceutical manufacturer with long traditions. Leiras, which originally started as a part of Huhtamäki Corporation, is today an affiliate of Germany-based multinational pharmaceutical company Schering AG. However, both Orion and LeirasSchering are small local players from the viewpoint of the biopharmaceutical research company intending to out-license its products (Ahola & Kuisma 1998; Lievonen 1999). Further description of small Finnish biopharmaceutical firms is given in Chapter 6 in conjunction with multiple-case study. 19 3 PRINCIPLES OF COMMERCIALIZATION The purpose of this chapter is to define the concept and process of commer- cialization. The commercialization process is examined from the start of new product development to the launch of product. The commercialization process can be divided in two phases which are: 1) planning and 2) implementation. Before actually entering into the new product development process, every company should prepare a strategic plan. In new companies, this could be included in the business plan, which is often requested by the investors and venture capitalists. In many new companies, managers are sometimes too occupied for planning, the strategic plan, however, is an important tool that should not be bypassed. It encourages systematic thinking and sets the stage for the eventual marketing plan. Many managers might see the planning process too slow for the fast changing marketplace, but according to Wong and Saunders (1993) some of the best performing companies plan without losing their entrepreneurial style. The strategic plan, after mission statement, is divided into the analysis of external and internal environment. The auditing of company’s value chain, its competitors, its market, and the general business environment leads to a SWOT analysis. SWOT draws a summary of the strengths and weaknesses of the company with the opportunities and threats it faces. The SWOT analysis shows the critical factors from the internal and external audit that the management must take into account when making important decisions (Kotler et al. 1999). In the smaller companies, and in particular with start-ups, the results of the SWOT can be used when determining decisions concerning the product development and marketing. While the needs of customers play a key role in the majority of businesses and the aim of marketing is to satisfy these needs, in the biopharmaceutical business the small research intensive firms prefer to place the product development and commercialization at the heart of their business. The objective of a small biopharmaceutical firm, for example, could be the finding of a cure to an incurable disease but because of the nature of business the end-user of the product will not be the main concern of the firm. Instead, the biopharmaceutical 20 firm has to focus its marketing strategies towards established pharmaceutical companies. In the long run this does not mean that the biopharmaceutical firm forgets the end-user, rather the management of the biopharmaceutical firm has to aim in satisfying the needs of both target markets. The subject of commercialization in biopharmaceutical business is addressed in more detail in the latter part of this Chapter, beginning from section 3.5 whereas Chapter 4 is dedicated to the examination of specific marketing practices which should facilitate the commercialization process of a biopharmaceutical firm. 3.1 Concept of Commercialization Commercialization can be defined as a process of introducing a new or re- newed product into the business or consumer markets with the interest of pursuing commercial success. The object of commercialization, the product, can be marketed to customers. The product can be tangible or intangible, service, ideology etc., and it can be completely new or it might have been only superficially renewed. In addition, an old product can be commercialized into new markets (Rope 1999). Basically the commercialization is used by the companies in two different situations and these are: 1) start-up commercialization and 2) commercialization as a part of business operation. 1. Start-up commercialization. It is a situation, where a new company is founded around the commercialization of new product or service. The success in commercialization process is especially important if the company is not part of some larger enterprise, and cannot expect financial backing in time of crisis. 2. Commercialization as a part of business. This is a commercialization process which is done as part of business operation. The companies have usually a stabilised customer base in the chosen market segment in a selected market area (ibid.). In the marketing textbooks, the commercialization process is often depicted being as the last part of the product development process, and according to Kotler (1994) the commercialization process comes after market testing of the product. Market testing is used to evaluate the product in a realistic market setting. It is 21 regarded as a stage of new-product-development process and it supposedly gives enough information for the management to approve the launch of the product. Market testing is widely used in the consumer goods market, although it benefits business goods as well. If the market testing results look promising the company usually begins the commercialization in full-scale. At the beginning of commercialization, the management of a company has to decide: 1) when, 2) where, 3) to whom, and 4) how the product will be commercialized (Kotler 1994). 1. When. In the commercialization process the management has to decide a timing for the entry. In the case of competition the correct timing of entry can be a critical issue. 2. Where. Next phase for the management is the selection of geographical strategy. The company must determine whether the marketing strategy for the product includes regional, national or international market. 3. To Whom. The company must select the best target market prospects according to its line of business. 4. How. This factor presents the development of the action plan phase for introducing the product into the markets. Today the new communication and information technology combined with the availability of efficient means of conveyance have effectively shrunk the world by reducing the time delay needed to reach distant places. This allows firms to commercialize their products world-wide almost simultaneously. Although the logistical costs have decreased, only a select few companies are able or have the confidence to commercialize new products globally solely on their own. More likely option is to partner with other companies sharing similar interests. This means that in addition to the four mentioned factors the management must pay attention to a fifth question, which is with whom the commercialization process is organised. This is especially important for many high technology firms which face shorter product life cycles and greater technological uncertainties than businesses normally. The partnering and various co-operative arrangements can also be used to maintain the inventiveness and novelty of the small high technology firms. Table 3-1 presents the four basic and one optional decision factors of commercialization that the firms face. 22 Table 3-1. The decision factors of commercialization (modified from Kotler 1994). WHEN (Timing) WHERE (Geographical strategy) TO WHOM (Target-market prospects) First entry Parallel entry Late entry Regional strategy National strategy International strategy Consumer market HOW (Introductory market strategy) WITH WHOM (Optional strategy) Business to business market Marketing mix Partnering and co-operative arrangements However, the commercialization as a last part of new-product-development process presents too narrow view on the issue. This kind of thinking means that the commercialization is basically considered to be a natural extension of the R&D process and which always culminates to the market launch. The problem in this approach is the fact that it lacks comprehensiveness. For this reason the commercialization should be examined in a broader perspective. The following sections describe the commercialization as an ongoing process with R&D process. 3.2 Main Phases of Commercialization Process The commercialization process determines the product’s market-entry suc- cess. Although the product could fulfil the technical expectations, there can be a failure in the commercialization process. Systematic planning of the commercialization process and professionalism in the execution phase are prerequisites for a successful commercialization. While the commercialization phase is a separate process from the new product development process, these two processes are not mutually exclusive. It is highly recommended that the planning of commercialization should be started already in the innovation phase of the product. Depending on the nature of the product, preliminary marketing plans can be made when either a prototype of the product or sufficient documentation exists. The commercialization process itself starts after the development phase and when the product is market tested. Commercialization typically ends when the product reaches a growth stage. 23 Rope (1999, 19-20) argues that the duration of commercialization can differ considerably between various products, and it depends on, for instance, 1) the line of business, 2) the nature of product and the degree of newness, 3) the customer group, 4) the market situation, 5) the resources of the company, and 6) the strategy of commercialization. The commercialization is often viewed as a linear process, which is not surprising given the fact that during new product development and subsequent commercialization many people from different company functions (depending on the size of company) participate in the planning and execution of both processes. In the companies where the commercialization is perceived as a linear process, the R&D function frequently dominates the planning of business. These companies have been said to be strong in developing new technology but are often weak in commercialization. This is a serious deficiency in a company, if it cannot develop marketable products its position in the market will be compromised sooner or later. On the other hand, the companies with strong commercialization capabilities see the process of new product development as a series of overlapping phases that involve many business functions simultaneously. These companies use the R&D as a core competence, and make the commercialization process as a priority, and set hard but attainable goals (see Davidow 1986; Nevens et al. 1990). Figure 3-1 shows the main phases of commercialization process, and how the process culminates to the tracking of actual launch. ONGOING R&D PROCESS Start of commercialization process When?, Where?, To Whom?, and How? External and internal audit Strategic decisions of commercialization Marketing fundamentals Market, Company, Competitor, and Environmental analysis The competitive strategy and strategic goals and objectives The development of marketing mix LAUNCH DECISION Objectives of launch Launch plan Implementation of launch Figure 3-1. Main phases of commercialization process. 24 Tracking the launch 3.3 Planning of Commercialization Today’s competitive world forces companies to analyse both the external and internal fundamentals affecting their activities. While the monitoring should be performed continuously to some degree at all times, the new product development process and the subsequent commercialization require even more meticulous analysis of the external and internal factors. The fundamentals that are analysed are shown in Figure 3-2, and consist of the company, competitors, business environment, and of the market situation. The company planning to do the commercialization process must analyse all the four factors to some extent because this will generate information which the management uses to create an all-inclusive plan for commercialization. Company Analysis Competitor Analysis Market Analysis Environment Analysis Figure 3-2. The types of fundamental analyses (modified from Rope 1999). 3.3.1 Market Analysis Market analysis defines the potential market for the new product. It is also used to estimate the development of market structure in the future. An important aspect of market analysis is the examination of customer base. The company’s line of business specifies the focus of market analysis. If the company operates in the consumer goods business, it has to clarify numerous details that affect the buying behaviour of the potential customers. The customers 25 are typically grouped with the use of geographic (countries, regions, cities), demographic (sex, age, income, education), psychographic (social classes, lifestyles) and behavioural (purchase occasions, usage rates) factors. These factors give basic knowledge for the management to analyse the differences between target customer groups. In addition, this information is used for the segmentation of the markets (Solomon, Bamossy & Askegaard 1998). The business markets have some similarities to consumer markets. There are always people who do the buying and make the decisions to satisfy the needs. On the other hand, the differences of the business markets are in market structure and demand, in the nature of the buying unit, and in the types of decision process involved (Kotler et al. 1999). In the business-to-business markets, where the customer is either a company or an organisation, it is important to understand the customer’s buying process. The marketing company has to know the customer’s key decision making unit in the buying process. The knowledge of key decision makers allows the company to focus its marketing mix on the right personnel in the customer’s organisation. 3.3.2 Competitor Analysis Today the companies have to understand both customers and competitors. The planning of effective marketing strategies requires, of course, deep understanding of firm’s internal functions but also of the competition situation currently in the target market. The competition can vary in intensity: it may be strong, mild or even nonexistent. Any form of competition can be harmful to the company, but the lack of competition in the long run could lead to the same kind of results as if the company was facing intense competition. There are many examples of past companies who based their competitive advantage solely onto the proprietary base of technology and found out that after the expiration of patent protection, the seemingly sudden appearance of competition made them extinct. 26 After the identification of the primary competitors, the company needs to assess the competitors’ strengths and weaknesses and collect information about their general strategies and objectives. Table 3-2 presents an assortment of questions regarding the competitor(s). The companies should strive to develop personalised questions that help them in the assessment of competitors. Table 3-2. Examples of questions used to assess competitor(s) (modified from Kotler 1999). Goals and Objectives What are the goals and objectives of the competitors? How important to the competitor is profitability, growth of market share, or technological leadership. Strategies What is the strategy of the competitor? Is the strategy based on cost-leadership, differentiation, or is there some combination of strategy. Strengths and weaknesses Does the competitor possess any incomparable strengths? Are there any important weaknesses that can be used against the competitor? Reactions What are the reactions of the competitor, if prices are lowered or raised? What are the reactions of the competitor, if sales promotion budget is raised or if the number of sales persons is raised? 3.3.3 Company Analysis Commercialization of a new product affects always company’s long and short-term cost-effectiveness. There will be a drain of resources until the new product achieves a break-even point and begins generating cash-flow. In the company analysis the key points to be clarified are: 1) resources of company (finance, personnel, production capacity etc.), 2) current products (if any) and their position on the market after the launch, and 3) the company and the product image (Rope 1999). 3.3.4 Environmental Analysis The company operates in a larger macroenvironment that is affected by a range of various actors. Every company needs information from this environment to support their strategic planning and decision making. Some of the issues that the environmental analysis deals are very hard to accurately predict and many of the monitored things are beyond company’s own sphere of influence. These prediction difficulties have made the environmental analysis as one of the under utilised of the fundamental analyses. 27 The challenge for the companies is the accelerating pace of changes that occur in the macroenvironment. The business organisations must learn to cope in the middle of this turbulent environment that often poses threats, but occasionally produces business opportunities as well. The macroenvironmental influences and the interaction between these forces is shown in Figure 3-3. Economic Forces Ecological Forces Company and Physical Environment Cultural Forces Technology Forces Figure 3-3. Macroenvironmental influences faced by the business organisation (modified from Brierty, Eckles & Reeder 1998). 3.4 Strategic Decisions of Commercialization When commercializing new products the most likely situation is that the company faces competition at some time. According to Porter (1980) the companies are better prepared to face competition, if they pursue a clear strategy. He proposed the three winning strategies and one losing strategy. The three winning strategies are: 1) overall cost leadership, 2) differentiation, and 3) focus. The companies that do not have a clear strategy are in danger of becoming stuck-inthe-middle as described by Porter. These companies do not have the lowest costs, or cannot offer the highest value as perceived by the customers, or cannot excel in service in any segments (Porter 1980). Another key issue to the management in the commercialization process is to understand the value that the firm’s product offers for the customer. To maintain 28 the competitive position in the long run the company should strive to deliver superior customer value. Treacy and Wiersema (1993) suggested three new competitive marketing strategies that enable the companies to gain leadership positions in their own area of specialty by delivering superior customer value. They call their competitive marketing strategies as value disciplines and these are: 1) operational excellence, 2) customer intimacy, and 3) product leadership. 1. Operational excellence. The companies that are industry leaders through competitive pricing and customer convenience practice the operational excellence. These companies are constantly seeking ways to reduce costs and improve the customer service. 2. Customer intimacy. These companies provide superior value with pinpoint segmentation of the markets and then serving the customers with tailored products and services. The products and services are designed to satisfy the unique needs of customers and the companies are striving to build long-term and intimate customer relationships. 3. Product leadership. The product leadership companies develop continuously new innovative, often state-of-the-art products or services, that are delivered into the marketplace with the speed that makes their own as well as competitors’ products obsolete. Treacy and Wiersema (1993) point out that only select few companies are able to pursue more than one value discipline successfully at the same time. Most of the time the leading companies are focusing at a single value discipline, while performing adequately in the other two. This has the same purpose of avoiding the situation of trying to be good at everything and ending up being best at none. The message in these classifications of competitive strategies seems to be the fact that management needs to realise the strengths and weaknesses of the company and to maintain the focus on the chosen path. In addition to the selection of basic competitive strategy the management usually sets strategic goals for the commercialization. These goals usually differ between companies and products but share one common feature of being a guiding framework for the management responsible of the commercialization process. 29 Rope (1999) has identified several general strategic goals of commercialization: 1) to maintain market-share, 2) to strengthen market-position, 3) to win new markets, 4) to achieve/maintain innovator status, and 5) to control the competition/keep the competition out. Typically these strategies are more suitable for the companies which commercialize the products as part of business operation. In the start-up businesses, however, the priorities for commercialization are usually considered to be somewhat different. The management in the start-up commercialization is more likely concerned with increasing the product awareness and ensuring the profitability of business. On the other hand, the status of innovator can be the strategic objective for the start-ups, too. 3.5 Commercialization in Biopharmaceuticals At the beginning of next section, the aspects of commercialization charac- teristic to biopharmaceuticals are described. The biopharmaceutical R&D process is at first illustrated in a sequential model, and then it is expanded to include the commercialization phase. After the presentation of the model, the commercialization is examined through the evolution of firm capabilities. Particularly, the evolution of complementary capabilities of marketing and manufacturing are under interest in the following sections. Finally, four important factors that affect the commercialization of biopharmaceuticals are identified. 3.6 Biopharmaceutical Product Development and Commercialization Due to the small size of Finnish NBFs a successful R&D process is a critical step for these companies. The outcome of a successful R&D effort is a functional and marketable product. Although there should be already some preliminary plans made for commercialization at the beginning of the new-product-development process, the commercialization starts at full effect only after the developed product is tested and completed. Furthermore, only the commercialization phase determines if the developed product will ever be a commercial success. Even if the new-product-development process and commercialization are two separate phases, it is important to understand that these are interconnected and failure in one or the other process will usually result an under performing product despite any possible correction activity. 30 OPPORTUNITY IDENTIFICATION Market Definition Idea Generation No Go DESIGN Customer Measurement Product Positioning Forecasting Sales Potential Product Engineering and Marketing Mix No Go TESTING Test Marketing Obligatory Testing Phase Phases I-III No Go INTRODUCTION Launch Planning Selection of Partners Tracking the Launch No Go PROFIT MANAGEMENT Decision Support System Market Response Analysis Innovation at Maturity Product Portfolio Management Reposition Harvest Figure 3-4. New Product Development Process in a biopharmaceutical firm (modified from Urban & Howser 1980). Figure 3-4 depicts a new-product-development process in a biopharmaceutical firm. The pharmaceutical product development is done under strict internationally accepted regulations, and where the testing phases of the product last longer when compared with almost any other business. As Figure 3-4 indicates the biopharmaceutical product development can be described as a sequential process. The first phase, the opportunity identification, defines the best market and the ideas that could be used as a starting point for the new product development process. In the biopharmaceutical business this phase 31 represents the innovation based on the knowledge of the company’s scientists or it exists only as an idea in the possession of an entrepreneur. The design phase includes converting the ideas into a physical and psychological entity. This is the start of the actual new-product-development process in the biopharmaceutical business. It includes, for instance, the basic research phase, and the screening of possible suitable pharmaceutical compounds. After a successful screening process, the biopharmaceutical firm has found a suitable candidate for testing. The testing is the most important part of the biopharmaceutical research since it is the phase where the functionality of the product is determined. This phase lasts typically over 10 years until all the obligatory clinical studies have been completed. It is important to note that the product can fail expectations anytime during the testing period, and the project could face termination without any commercial results. After the testing phase, and if the biopharmaceutical product candidate has been tested successfully without any occurrence of adverse reactions, the biopharmaceutical firm is ready for commercialization. The commercialization process of the biopharmaceutical product is depicted in Figure 3-5. PRODUCT DEVELOPMENT PROCESS Finished and Tested Product COMMERCIALIZATION PROCESS External and Internal Audit Timing of Commercialization Budgeting of Commercialization MARKETING MIX Elements of the Mix Testing of the Elements PARTNER SELECTION OPERATIVE FACTORS OF COMMERCIALIZATION Objectives Plan Implementation Monitoring Figure 3-5. Commercialization process in a biopharmaceutical firm (modified from Rope 1999). 32 The selection of partners is an integral part of the biopharmaceutical business because small firms with heavy R&D spending are not capable of creating their own global marketing networks. Usually the biopharmaceutical start-up firms enter into licensing agreements and select partners who have strong market positions and overlapping interests in the same therapeutic groups of pharmaceuticals. After signing the contract, the biopharmaceutical firm will have to monitor that the selected partner is investing into the marketing of the product because the development of future turnover usually depends on received royalties. 3.7 Development of NBF Complementary Capabilities The marketing between biopharmaceutical firm and established pharmaceu- tical enterprises can be considered to be business-to-business marketing with a high technology aspect. The function of marketing in the typical high technology firm is the same as in any other company – to advance the firm towards its objectives through the use of marketing tools. The biopharmaceutical business is not an exception to this rule but as in many other research intensive businesses the role of R&D is often emphasised at the cost of other functions. Especially in the small biopharmaceutical and start-up firms where the founders often have to perform multiple duties and depending on their educational background, the development of firm’s complementary capabilities can happen haphazardly over time. At the beginning the emerging firm concentrates typically in building the R&D function because it is needed to establish a strong technological leadership position on the market. However, to realise the potential economic returns of the new innovation and the results of the development process, the NBF needs to expand its initial capabilities. This usually requires the complementary capabilities of marketing and production. As the innovation cycle proceeds and the firm requires more downstream capabilities, it must increase both its size and commercial orientation to succeed in the competitive markets (Hamilton & Singh 1992). In the commercialization phase the management of an emerging firm has to decide how long it will be using the assistance of external agents in the exploiting of new technological innovations. If a firm outsources production and/or marketing services, it reduces the need for internal marketing capabilities. This arrange- 33 ment typically lets the firm to focus its limited availability of funds on research (ibid.). It can be argued, however, that the management of NBF should shift the priorities somewhat toward establishing a marketing function with main focus on commercialization activities. The development of successful commercialization practices allows the NBF to further develop its organisation and lets the management to consider a broader range of commercial options. Figure 3-6 illustrates the evolution of strategic choices the management faces over time. Technological and Market Uncertainty HIGH Time LOW Initiation Strategy Options Strategy Positioning Strategy Focus of Innovation Research Development Commercialization Nature of Commitment Low, Expansion Moderate, selective High, focused Degree of externalisation High Moderate Low Figure 3-6. Strategic choices the management of NBF faces evolve over time (modified from Hamilton & Singh 1992). 3.8 Critical Success Factors of Biopharmaceutical Commercialization The marketing effort in the biopharmaceutical business is centred on com- mercialization of products. The successful commercialization of biopharmaceuticals depends primarily on four factors: 1) product, 2) promotion, 3) credibility, and 4) partner selection. 34 1) Product. The most important part of biopharmaceutical business is the offered product. The customers in biopharmaceutical business are more easily attracted by the promise of high-quality or unique product. 2) Promotion. The promotion is used to deliver information about the product to the potential customers. Through promotion the biopharmaceutical firm has to communicate its unique selling proposition (USP) to attract customers. 3) Credibility. Most of the start-ups or new firms have to deal with the credibility problems when facing competition from the established companies in the business or when confronted by the customer. Due to the nature of the business the credibility has even greater importance in the biopharmaceuticals. By means of promotion the NBF/DBF has to assure its prospective customers that the firm has followed the standards and practices related to the industry. The information about the preclinical and clinical trials must conform to the standards of good clinical practices (GCP), good laboratory practices (GLP), and possibly good manufacturing practices (GMP). 4) Partner. The selection of licensee is usually the last part of the commercialization process in the biopharmaceutical business. After evaluation of potential candidates, usually one partner is selected from the potential customers to handle the global marketing and distribution. This is handled usually through various licensing agreements but other co-operative arrangements are possible. These factors fall under the influence of the biopharmaceutical firm. After the partner selection and licensing agreement, the biopharmaceutical firm is only able to affect the partner according to the clauses in the contract. The other important factors that affect the commercialization process are the timing of entry, competitor actions, and market strategy but these are not under discussion in this thesis. The four factors (product, promotion, credibility and partner selection) of biopharmaceutical commercialization are addressed in the next chapter. 35 4 MARKETING IN BIOPHARMACEUTICAL BUSINESS This chapter examines the marketing and partner selection viewpoints of biopharmaceutical business. Chapter three identified the critical success factors of biopharmaceutical business. Two of these (product and promotion) are part of a mix of decision variables more commonly known in the marketing as the 4 Ps of the marketing mix. The third factor, the credibility, is a new aspect and it functions as a basis for customer confidence. The decision variables of marketing mix are tools that can be utilised to make it possible for the company to reach its objective(s), whereas the credibility is used to assure customers of the product quality and expertise of the organisation. In addition to the marketing mix and credibility, the marketing in biopharmaceutical business requires an intimate understanding of stakeholder relationships. By means of these relationships the company is able to complement the marketing mix. Figure 4-1 describes how the marketing mix can be used in the biopharmaceutical business. MARKETING MIX CREDIBILITY Product Place Quality Degree of uniqueness Quality of facilities Availability of outsourcing services TARGET CUSTOMER Price Promotion Initial price Milestone payments Down payment + royalties Personal selling Sales promotion Publicity Figure 4-1. The marketing mix of a typical biopharmaceutical firm (modified from Kotler 1994). 36 4.1 Introduction to Marketing Mix The marketing mix is one of the dominant theories of modern marketing. It can be defined as being the set of controllable tactical marketing tools – product, price, place and promotion (4 P) – that the firm applies to produce the response it wants in the target market. The marketing mix consists of numerous variables that are grouped under the ‘4 Ps’ (Kotler et al. 1999, 109). When the new product development process is near to its completion, the management has to begin planning the details of the marketing mix. While some preliminary plans should have been made already at the start of the new product development process based on the overall marketing strategy, the long-term duration of some projects makes it more suitable to leave the accurate planning to closer the time when the functionality of the product has been ensured. The mix of 4 Ps are usually linked to the consumer goods business, where company operates in mass markets, often with standardised products and uses product or market management structure when implementing marketing. Through the use of marketing mix the company tries to create a demand for its product and achieve a sustainable competitive advantage in its chosen product or market segment. Although the 4 Ps and the variables under the tools are grouped separately, it is important to understand their strong interdependence. Usually a decision concerning one tool affects other and so on. The 4 Ps can be utilised in the business markets also but the emphasis is other in all the four factors. The differences between business and consumer markets concentrate usually around the product and the size of market. The consumer markets of some corporation might literally constitute of millions of customers, while some business markets could include only several firms. On the other hand, business customers often buy larger quantities and these purchases are usually repeated on a regular basis. In addition, from the sellers point of view the marketed products are often technologically complex and customised for the use of customer, which adds value to the product, and guarantees higher price (Brierty et al. 1998). However, it can be argued that both the business and consumer markets are manufacturer centred if the marketing is inspected through the utilisation of marketing mix in isolation from any other companies. In this kind of marketing, cus- 37 tomers are seen as passive and the manufacturer represents the active party in the process. Naturally, in both markets the truth is different, and the majority of marketers have to operate in a more vivid world where interaction and relationships with customers and competitors are part of everyday life (Ford et al. 1998). The relationship and interaction aspect of marketing is especially valid with the small companies that manufacture and market technologically complex products. These companies are also concerned with 4 Ps, but the marketing tasks and responsibilities are more varied and intensive, and cover areas that are usually considered to be outside the influence of marketing. For this reason, the inadequacy of 4 Ps in the high technology marketing has increased the criticism against one of the dominant theories of modern marketing. Many of the high technology products differ, often dramatically, from the so-called regular or standardised products, and companies operating in the high technology sector face technological uncertainties, rapid fluctuations of demand, and products with short life cycles. Consequently, the marketing operations in the high technology sector must be concluded in a short time period, and with the use of massive resources early in a product’s life cycle. Finally, there are examples that in some cases even the role of marketing has been questioned in several high technology companies under the argument that marketing is a secondary function supporting the product development and sales (see Shanklin & Ryans 1987; Pento 1990a, 1990b; Rajala 1997). Despite the previous argument against the capability of marketing function, the high technology products are not forcing aside the theory of 4 Ps, but rather improving it to include some flexible aspects over the more traditional decision variables. Because the marketing of technologically complex products to the customer requires intimate knowledge of both user needs and technological skills, the relationship to customers can be a very intensive. Consequently, the research of several authors on the subject of industrial business relationships and networks seem to indicate that the role of marketing itself is shifting to more of a management of crucial customer relationships (see Håkansson & Snehota 1995; Möller & Wilson 1995). The special features of biopharmaceutical business seem to support these statements. As the biopharmaceutical business is characterised by uncertainty and considerable risks during the development process, the marketing firm has to 38 strive to optimise all the factors that fall under its own sphere of influence. The most important of these factors are: 1) product, 2) promotion, 3) credibility, and 4) selection of partner. The successful marketing and commercialization of a biopharmaceutical product is associated with the credibility of the developing firm. The credibility that convinces the customers furthers the building of a strong corporate image. In addition, the quality and intensity of firm’s contacts to both customers and partners is critical to the commercialization and long-term business relationships. 4.2 Credibility The high technology products are often associated with uncertainty, and marketing firms are required to demonstrate their reliability and trustworthiness in the eyes of customers more often than is usually the case. For this reason the creation or improvement of trust should be one of the main objectives of the high technology companies. The major component in the creation of trust is credibility. The credibility is said to be one of the keys to the commercial success of high technology products and should be the guiding factor of high technology marketing strategy (cf. McKenna 1985). According to Meldrum (1995) the credibility has two aspects: the credibility of the technology forming the focus for product evaluation and the credibility of the organisation. The credibility for a technology or product is developed through the satisfaction of customer whereas the satisfaction is gained from the performance and promises kept. Organisational credibility is usually linked to the size or reputation (Meldrum 1995). Credibility in Finnish Biopharmaceutical Business The pharmaceutical R&D, manufacture and marketing is globally under the regulation of national authorities. When documenting a new drug, the pharmaceutical companies have to follow the guidelines, instructions and recommendations set down by the authorities. The study and development of new drugs must conform to good research practices in accordance to principles of good laboratory practices (GLP) and good clinical practices (GCP). Even the manufacture of 39 drugs is governed under the principle of good manufacturing practices (GMP) (Scheinin 1999). Especially new and small high technology companies such as Finnish biopharmaceutical drug development firms have to adhere strictly to these practices to earn the credibility of their prospective customers. In addition, the personal skills of the entrepreneur-manager and the reputation of firm’s own or associated scientists play a major part in the establishment of firm specific credibility base. The building of credibility in the eyes of customers and to the lesser extent with the general public is a long-term objective for the biopharmaceutical firm. The strong credibility base enhances the firm’s negotiation power in the future projects and allows it to withstand negative publicity to some extent in case of setbacks. 4.3 Product The result of successful R&D effort is a product that can be offered to a se- lected market for attention, acquisition, use or consumption. The product concept includes physical objects, services, persons, places, organisations, and ideas. The product is a basis for any marketing actions, and it is the starting point for the use of other tools of the marketing mix. Basically products are divided to the business and consumer goods but some products can be marketed to both markets (Kotler et al. 1999, 110). The products purchased in the business markets are not intended for personal use, although some products might be viewed as such. Examples of these products could be personal computers and cellular phones used by the sales representatives. In the business markets the buyers are professionally trained, and generally their buying decisions are based heavily to specifications, cost-effectiveness and supplier reliability. Since many business purchasing decisions concern technologically complex products, require large financial commitments, and comprise of considerable risk and uncertainty, the final decision is usually made by multiple individuals, or a special buying centre dedicated for the job (Brierty et al. 1998). Product in Finnish Biopharmaceutical Business At the beginning the product in the biopharmaceutical business is rarely a tangible good. The core biopharmaceutical product is the result of years long de- 40 velopment process and consists of documentation and test results that show the product’s capabilities. Furthermore, the commercialization of biopharmaceutical product is different than many other product launches in other industries. The biopharmaceutical product even differs from the other high technology products because many of the new biopharmaceutical products are based on the heavily defended base of intellectual property, which leads to the fact that many of the new products have to be aimed at specialised niches in the marketplace. In the launch phase the product’s degree of uniqueness should be assessed by the company. If the product is unique and presents a possibility for the company to be a first-entrant in the market, this should encourage the management to create new business functions to support the launch. On the other hand, products with only incremental improvements over the existing products in the marketplace should be assessed carefully and estimations of the potential returns be analysed (Ernst & Young 1998). In addition to the degree of uniqueness, the quality of the product is the other important variable under the product factor of the marketing mix. Customers are rarely interested in mediocre and much less of low quality products. The quality aspect of the product is especially important in the biopharmaceutical business because the end-product is usually meant for the human subjects. Although the biopharmaceutical product is intensely scrutinised by the authorities in the form of clinical trials during its development process, there can be problems in the socalled phase IV or post-marketing surveillance period. Any reporting of adverse reactions are reflected negatively in the sales and the worst scenario could mean the end of the drug’s life cycle. In any event, the image of the marketing company can suffer serious backlashes. While the global marketing and distribution is usually handled by the partner according to the cooperation or licensing agreement, the repercussions of negative publicity are likely to lead down to the original development firm. For a small firm any accumulation of negative publicity could hinder the future projects and cause serious problems in the attraction of partners. 41 4.4 Price The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service (Kotler et al. 1999, 110). In the business markets the price is not deemed to be as important factor as it is in the consumer goods market. Business buyers usually look into other factors first, and after thorough perusal of the offers, and if there are no differences between possible suppliers, they will also buy on the basis of price. Price in Finnish Biopharmaceutical Business In the biopharmaceutical business, where transactions are based on the results achieved in the long-term product development process, the importance of the initial price can be very high for the selling company. The price and pricing is even more emphasised if the firm is completing its first product (start-up business commercialization) development process. The price is usually based on the future sales volume forecasting made by the biopharmaceutical firm. Also the degree of uniqueness and the test results of the already completed phases play a major role in the pricing decisions of the marketing firm. If the marketing firm believes that they hold a cure for a common disease which is still incurable, the initial threshold price asked can easily escalate into hundreds of millions of dollars. The subsequent royalties received according to the agreement can also have a profound effect to the long-term solidity of small biopharmaceutical firm. The pharmaceutical value chain for new innovations is depicted in Figure 42. The value chain is divided into five parts that show the percentage of the value Proportion of the final value of the drug belonging to the stakeholder Basic Research R&D 1-3% 20-30% Manufacturing 5-10% Marketing Delivery to Customer 50-70% (100%) Figure 4-2. The pharmaceutical value chain for new innovations (modified from the source provided by Hormos Medical). 42 added during the process of new drug development. According to Figure 4-2 the major part of value is added during the R&D process and marketing stage whereas the manufacturing accounts significantly less, only 5-10% of final value. The value chain model can be used as a guideline when making pricing decisions or long range strategic investment decisions. It should be noted that during the sales negotiations there is always the temptation of pushing too far. If the terms are perceived to be too high, the potential customer may decide to drop out or, if the agreement is reached, the customer may be inclined to find ways around the conditions of payment. In general, an ideal situation for the both parties would be that the seller receives a reasonable compensation and the signing of agreement does not become a burden for the recipient long before there is an opportunity to exploit the object of sale (Luostarinen & Welch 1993). The biopharmaceutical business deals are usually licensing agreements in which the licensor has a vested interest in seeing the licensee succeed in financial and marketing sense. As to the terms of payment itself there are no internationally unified systems in existence. Even the terminology used is different depending not only on the country in question but also on the nature of the business deal. However, one can distinguish between the four most usual payment methods which are: 1) preliminary or initial payment, 2) down payment and annual royalty, 3) annual royalty, and 4) milestone payments. 1. Preliminary or initial payment. Preliminary payments are compensations made before signing of the agreement for the costs caused by, for example, a feasibility study, documentation or the development of the licensing offer. 2. Down payment and annual royalty. In this payment method, the licensor wishes to gain a sum of money in advance, and an annual royalty based on some clause, e.g., level of sales or period of time. The larger the initial down payment, the smaller the on-going royalty rate. 3. Annual royalty. This is merely an annual royalty payment without an initial down payment (ibid.). 4. Milestone payment. This is not exactly a payment term used in the licensing agreements but rather an investment to a project, which is done by someone else. For example, an established pharmaceutical enterprise could finance the 43 drug research process of a biopharmaceutical firm under the agreement that the resulting product is licensed to the established pharmaceutical enterprise. 4.5 Place The place of 4 Ps is well described by Kotler et al. (1999, 110) as “… the company activities that make the product or service available to target customers”. This statement indicates that in many industries the place has an essential meaning in the commercialization of new products. The delivery of products to the customers both in the consumer and business markets can make the difference between competitors. Also the speed and reliability of distribution is an important part of the quality of product in many industries. Place in Finnish Biopharmaceutical Business From the viewpoint of the small biopharmaceutical firm the place (i.e., availability or distribution) factor of the 4 Ps is perhaps the least significant marketing tool. The first and foremost reason is the fact that the NBF/DBF is primarily concerned of the R&D process and the marketing and distribution is left for the global partner. The pharmaceutical value chain already depicted (Figure 4-2) illustrates how the R&D effort accounts 20-30% of final value of the product and is second only to the marketing phase. In addition, Figure 4-2 indicates that manufacturing of drugs adds only 5-10% of final value which would seem to support the profitable existence of NBFs. While focusing mainly on the R&D process with well maintained product pipeline the NBF is able to achieve a profitability and develop its business in the long-term. The second reason is that the pharmaceutical industry is consolidating. The driving forces behind this development are: 1) cost-containment pressures of the larger companies, 2) increasing complexity of the clinical trials, and 3) versatility of outsourcing services. 1. Cost-containment pressures. Particularly the larger pharmaceutical companies are facing growing costs from research & development and marketing. Furthermore, the global competition between traditional pharmaceutical compa- 44 nies is accelerated by the changing economical realities of the healthcare systems world-wide. 2. Complexity of clinical trials. The clinical trials are becoming increasingly difficult to manage. The existence of global pharmaceutical giants demands simultaneous clinical trials in a number of countries. This in turn requires qualified personnel with abilities to organise the regulatory procedures and the development and maintenance of complicated information technology systems. Such an extensive infrastructure will result in high fixed costs that works against the cost-containment strategy. This has opened new possibilities for the dedicated outsourcing services. 3. Versatility of outsourcing services. In the modern pharmaceutical business the areas most often outsourced are: 1) R&D, 2) clinical trials, 3) manufacturing and packaging, 4) marketing, 5) distribution, and 6) expert services (knowhow). The quality and availability of outsourcing services is important for the NBF/DBFs as most of these companies either are not capable nor willing to build and maintain all the required facilities of pharmaceutical product development and manufacture. For example, in the United States many of the small biotechnology firms have the facilities and expertise to produce gram amounts of biopharmaceuticals, but in the clinical trials the needed amount grows to kilogram range. This requires special manufacturing plants that meet the strict FDA requirements. The cost of building multipurpose GMP facility is $25 to $50 million, and many biotechnology firms, with the risk of their new product not getting market approval are reluctant to finance a facility but rather are willing to outsource their production to contract manufacturers who are either dedicated service companies or firms selling excess capacity (Mitzen 1999; Rautiainen 1999). While the place is not the main factor in the marketing and commercialization process of biopharmaceuticals, the availability of top-level outsourcing services enables the new biopharmaceutical firms to concentrate into their core competence of R&D and purchase the additional services from the other professional providers. If these kinds of services are available at the country of NBF, it certainly increases the credibility of the whole industry sector. 45 4.6 Promotion The promotion mix (also called marketing communications mix) consists of five major tools: 1) advertising, 2) direct marketing, 3) sales promotion, 4) public relations and publicity and 5) personal selling. Numerous specific tools can be listed under the five headings, but the communication includes other aspects as well. For example, in the consumer goods the product’s styling and the colour of package communicate various messages to buyers whereas the salesperson’s dress and manner are important in the business-to-business marketing (Kotler 1994). The importance of promotional tools varies between consumer and business (industrial) markets. Typically consumer-goods companies rate advertising as the foremost promotional tool whereas the industrial marketers favour personal selling over the other tools. In general, personal selling is more heavily used with complex, expensive, and risky goods and in markets with fewer and larger sellers (ibid.). In many new products and industries special promotion campaigns are needed to ensure the important initial acceptance. For the industrial products, the special promotion campaigns could be, e.g., special introductory prices or special deals where the buyer receives free service for a specified period of time (Urban & Howser 1980). The utilisation of promotion tool in the high technology business can be used to differentiate the image of the firm from competitors. For this reason, the managers of high technology businesses are often required to tailor special promotional campaigns to inform customers of the technological superiority of their firm. For example, Dutta, Narasimhan and Rajiv (1999) suggest a tactic such as the hiring of star scientists or engineers that can be used to attract positive publicity and get media space. Naturally the promotion tactic in question has often only short-term effect on media but it could have powerful impact on potential customers. This kind of tactic as part of the overall promotion strategy can be used also by the new Finnish biopharmaceutical firms, if and when they are able to hire world-renowned scientists. 46 Promotion in Finnish Biopharmaceutical Business Based on the interviews, the most important promotional tools for the small biopharmaceutical firm appeared to be 1) personal selling, 2) public relations and publicity, 3) sales promotion, and 4) advertising. The exact order of preference varies between companies but typically personal selling is the most important tool due to the nature of business. 1. Personal selling. Personal selling is most effectively used in the biopharmaceutical business in the later stages of buying process, especially when building up buyer’s preference, conviction, and action. Personal selling has three distinctive qualities that make it more suitable for the use of the biopharmaceutical firm and these are personal confrontation, cultivation of relationships, and response from the side of buyers. 2. Public relations and publicity. Publicity and public relations can be used by the biopharmaceutical firm in its later stage of company life cycle when it is for example a public company. These tools can be used to build investor goodwill and increase firm’s general awareness. 3. Sales promotion. The term sales promotion (SP) covers an extensive area of functions and is typically linked to the consumer-goods business. However, the pharmaceutical business in general employs a multitude of channels to communicate the new product offers to the users which are more often physicians than end-users. These include sponsored group lunches and dinners, conferences, and seminars. In the biopharmaceutical business the SP tool can be used to court the attentions of the representatives of multinational pharmaceutical enterprises. This is possible in the increasingly common dating rounds, where new and dedicated biopharmaceutical firms are searching partners or sponsors for future projects (Kotler et al. 1999). 4. Advertising. Advertisement is generally used in the business markets when companies wish to increase the awareness of their products or services. In the long-term it can be used to build the corporate image. Figure 4-3 illustrates the promotional tools that a typical new biopharmaceutical firm can utilise to communicate and influence its customers of the developed products. 47 Product Personal selling Public relations and publicity Sales promotion Advertising Customer Figure 4-3. Promotional tools of a biopharmaceutical firm. 4.7 Management of Relationships Increasingly, the companies are concerned over the important relationships in the business. The competitive business environment forces the companies to seek continuity in relationships with suppliers, distributors, and other business partners. Therefore, most of the companies have been compelled to examine their overall company functions in hopes of improving these to survive in the modern business environment (Jackson 1985). The management of relationships encompasses all the aspects from the management of customer relationships to the strategic alliances with potential competitors. All of the company relationships can be considered to be assets but the challenge for the management is to find out which are the most critical in the long-term (Ford et al. 1998). Management of Relationships in Finnish Biopharmaceutical Business Typically a small Finnish biopharmaceutical firm has to manage a multitude of relationships. These include 1) investor, 2) personnel, 3) customer/partner, and 4) supplier relations. 48 1. Investor relations. The biopharmaceutical drug development process is a risky and expensive process. Therefore, it is important that the management of a biopharmaceutical firm realises the importance of the investor relations and establishes functional channels of communication between the investors and company. In the long-term the accumulated experience can benefit the company if it intends to aim at IPO. 2. Personnel relations. While the internal marketing is an important part of the marketing of any company, it is typically used extensively only by larger corporations. Nevertheless, in knowledge-intensive businesses such as biopharmaceuticals, the demand for qualified personnel is especially high and thus requires the establishment of various incentive and employee rewarding systems. Furthermore, a rewarding system can be utilised in recruitment of new key employees. 3. Customer relations. In the biopharmaceutical business the customers are often multinational pharmaceutical enterprises. At the beginning the first deals are usually licensing agreements through which the NBF seeks a steady royalty income. Later the biopharmaceutical firm can enter into other types of cooperative agreements, such as research and development limited partnerships (see Section 4.8), to improve its position (cf. De Meyer 1999). 4. Supplier relations. Supplier relationships in the biopharmaceutical business are centred on the outsourcing. This typically comprises such activities as buying the latter part of clinical trials from dedicated organisations or inlicensing research results from company associated scientists for further development. Figure 4-4 illustrates how the management of a Finnish biopharmaceutical firm faces a complex world of relationships, where a vast range of actions are possible but at the same time a large number of restricting factors can hinder the decision making process. The management has to learn to maintain, improve, and in some cases to end any of the current relationships without compromising the future of the firm. In the middle of these relationships, the management has to take care of the business operation, and advance the firm towards its goals. 49 Stakeholders Personnel Partners Investors Incentives Information Internal Communication Customers Outsourcing Marketing Management of Investor Relationships Relationship Marketing Marketing Mix Management of Management of Customer Relationships Outsourcing Relationships Management of Finnish biopharmaceutical firm Figure 4-4. The relationship network of a typical Finnish biopharmaceutical firm. 4.8 Partner Selection in Biopharmaceutical Business The importance of partner selection for many companies has increased in the last decade. The costs of the necessary internationalization process are usually too high for many organisations, and this is especially true for small research intensive firms throughout the world. These firms either choose or are forced to enter into some kind of co-operative agreement with other companies. Rare few companies can attract enough risk-capital to complete the product development and organise the marketing alone in a global scale. Although the co-operative arrangements are seen as necessities of modern business for the small firms, the teaming up with competent partners can actually have unforeseeable advantages in the long run. Today the partnering is seen as a strategic choice where both parties benefit each other. For a small firm the partnership deal with a larger established company could give an access to its distribution channels, and for the larger company the deal could allow it to maintain the growth. In addition to the distribution deals, 50 there can be a virtually any number of reasons which might prompt organisations to seek possible partners to join into some form of co-operative arrangement. This has led to a situation that there exist a number of terms that have been used to describe the collaborative arrangements between two or more organisations. In the last two decades the terms “strategic alliance”, “strategic partnership”, “collaborative arrangement”, and “co-operative agreement” have gained some prominence in the academic literature and in business life (cf. Harrigan 1986; Doz & Hamel 1998). Forrest and Martin (1992) have identified a range of different types of strategic partnerships which the companies can exploit in linking with each other. These are presented in Table 4-1. Table 4-1. The definitions of different strategic alliances and partnerships (Forrest & Martin 1992). Operating Joint Venture An independent third enterprise formed by the company with another firm. Assets are contributed by both parties, who also share risks. Equity Investment An investment by a large established company in the firm. Client Sponsored Research Contract The small company is paid to conduct research on particular products or processes for another organisation. Marketing/Distribution Agreement Agreements whereby another company will market and distribute the product(s) of the firm. Manufacturing Agreement An agreement whereby another company agrees to manufacture products for firms. University Agreement An agreement with a university whereby the firm pays the university to conduct research on its behalf. Research Institute Agreement Similar to the above but with a research institute. Collaborative R&D An agreement between the firm and another company to collaborate on the development of specific products or processes. Research and Development Limited Partnership (RDLP) A tax advantaged investment vehicle which provides funding for new product R&D at no cost to the company. Technology Licensing (Inward) A contractual arrangement by which the firm is granted access to another company’s patents or technology for a fee. Technology Licensing (Outward) The reverse of the above. In this case the firm receives the fee. 51 They have further divided these into three groups: Technology Development Alliances are designed to expand the R&D knowhow and know-what of the firm to ensure that it keeps abreast of the state-of-theart in the rapidly evolving field of knowledge relevant to its technological focus. Commercialization Alliances are designed to provide the firm with and/or expand its manufacturing and marketing capabilities. These can include, for example, advanced development/clinical testing and production scale-up skills, together with those needed to steer a proposed new product or process through the regulative system. Financial Alliances are designed to provide the firm with the money needed to support its technology acquisition and commercialization strategies. Forrest and Martin (1992) point out that the groups are not mutually exclusive and some of the collaborative agreements could have similar functions and resemble each other. For example, Client Sponsored Research alliances should provide financial as well as technology development support, and Operating Joint Ventures could provide support in all three areas. 4.9 Partnerships in Biopharmaceutical Business The various co-operative arrangements between established pharmaceutical companies and the new biopharmaceutical firms have become an industry norm in the biopharmaceutical business. The strategy of creating links with larger corporations started in the United States already at the early 80s. The dedicated new biotechnology firms sought to compensate their underdeveloped company structures by entering into a partnership deals with other companies. These links involved joint development projects, licensing of products for manufacture, marketing agreements, and other joint ventures. The common strategic goal for these first wave new biotechnology firms was to achieve the status of a fully integrated pharmaceutical company (FIPCO) with own manufacturing and distribution capabilities. The expansion of business was planned to do with the use of normal growth strategies so that in time a dedicated biotechnology firm gained greater independence and payback from the transactions with other companies. Daly (1985) has identified three common stages in the evolution of NBF. These are 1) contract R&D, 2) distribution by other companies of products manu- 52 factured in-house, and 3) own manufacture and marketing. The third and the final stage in the evolution of the NBF/DBF represents the greatest and the most critical obstacle the small research-intensive firm faces. In the United States the attainment of full forward integration was perceived as a normal strategic goal amongst the NBFs. This step required significant amounts of working capital to complete, and after two decades it is evident that only rare few of the original start-ups of the late 70s and early 80s succeeded in this endeavour. When the first new biotechnology firms emerged in the latter part of the 70s the established American and European pharmaceutical enterprises found out that they had no in-house expertise in areas of genetic engineering or hybridoma technology. After the initial confusion was over, the established companies responded with a variety of ways. The forms of participation included: 1) equity investments in NBFs, 2) joint ventures and licensing with NBFs, 3) in-house R&D investment, and 4) participation in the projects of academic institutions. The most favoured forms were the equity investments and the buying of licensing rights from the NBFs (Daly 1985). Over the past two decades the interaction between established pharmaceutical companies and biopharmaceutical research companies has evolved from acquiring and equity investments to strategic alliances and project partnerships. The reasons for the development which led to the increase of strategic alliances and partnerships in biopharmaceutical business resulted partly from the first unsuccessful co-operative modes and partly from the world-wide recession of the late 80s. The competitive pressures and the continually rising costs of R&D accompanied by the ever shortening technology/product life cycles further facilitated the companies to seek more flexible forms of co-operative agreements (Ono et al. 1991; Duysters, Kok & Vaandrager 1999). In today’s biopharmaceutical business, the alliances and strategic partnering have a central focus in the strategies of large pharmaceutical enterprises. Many of the established companies are building alliance networks that include wide range of actors from the pharmaceutical business. These include but are not limited to universities, research institutes, contract research services, and biopharmaceutical firms. Most often the main purpose of these linkages is to maintain the growth of the pharmaceutical company as their own research pipelines are unable to produce 53 sufficiently significant products to meet the growth requirements. Especially the competition between the various established companies has opened possibilities for the smaller and more research-intensive firms. The established companies have discovered also that the acquirement of small firm is a less effective strategy when compared to the variety of co-operation arrangements because the intellectual know-how has a tendency to vanish if the working conditions change radically. Nowadays the strongest characteristic of the biopharmaceutical business is perhaps the virtual structure of many drug development companies. Virtual firm can be defined as being an enterprise that is able to use more resources than it currently possesses. It accomplishes this through collaborations with partners and outsourcing services. Virtually structured biopharmaceutical company or VIPCO (Virtually Integrated Pharmaceutical Company) is the result of an evolution in the pharmaceutical business. The modern day pharmaceutical industry has fragmented into a variety of specialist service sectors that can perform many of the pharmaceutical development processes. Due to its light organisational structure VIPCO is able to take advantage of these specialist companies and outsource many of the services required in the lengthy drug development process (Charlish 1999). A virtual company in its purest form owns the intellectual property and exploits outside resources and capacities to complete its projects. This kind of operation method is very flexible and can react quickly to the information received from the various project results, and new projects can be terminated or started rapidly. The capital requirements and organisational costs are low in the virtual structure, and the company can access wide range of technical expertise. The aim of VIPCO is to base its competitive advantage to a particular area of expertise, which can range from delivery processes to specific therapeutic applications. The core staff has to create and maintain relationship networks towards pharmaceutical industry and academic world, and is required to possess strong intellectual property management and commercialization skills. The inherent danger of pure virtual structure organisation is the lack of basic R&D and manufacturing skills and the strong dependence of its subcontractors (Gubser & Hiscocks 1999). 54 According to Love (1998) the pure VIPCO organisations are rare and it seems that the most favoured strategy of today’s biopharmaceutical business is somewhere between the integrated pharmaceutical company and VIPCO structure. Burrill (1998) and Ernst & Young (1998) have identified several business modes in the biotechnology business. Some of the companies have consciously selected the operation mode whereas others were forced because of the market pressures or features in the product. Several examples of companies are presented herein with the choice of business mode and the co-operation arrangement. Most of the companies are originally from the United States and many of them have numerous cooperative arrangements with a variety of organisations. Majority of the companies operates in the biopharmaceutical sector but some of them have projects concerning other biotechnological applications: • Downsized company: failure in clinical trials causes the company to narrow its focus to other technology in the pipeline. Many of the earliest biopharmaceutical companies had to revise their plans and to select a focus area after several failures in clinical trials. One example is Centocor, one of the oldest biopharmaceutical companies, though the firm has since been acquired by Johnson & Johnson company (see homepage of Centocor Inc.). • Hyperpartnered company: this kind of company finances its operations through strategic partnering (Ligand) (see homepage of Ligand Inc.). • Service providers: basically a company that provides services with prices that are lower than the customers’ own operations (Quintiles) (see homepage of Quintiles Inc.). • Niche marketing company: in-licences niche products from other companies, and sells these products through own sales network. These companies have strong marketing capability (Questcor) (see homepage of Questcor Inc.). • Toolbox company: provides “enabling technology” like combinatorial chemistry to other biotechnology or biopharmaceutical R&D companies (Millennium) (see homepage of Millennium Inc.). • Virtual company: in the purest form the virtual company uses contract research organisations (CROs) to carry out all activities except project management. Actually there are as many business models as there are companies but the characteristics of virtual company can be said to include small number 55 of employees which all are highly trained professionals and the capability to rapidly shift resources to new techniques as they emerge or evaluate the efficacy, safety or synthesis of new compounds (Vanguard Medica is an example of a virtual biopharmaceutical drug development firm although it has since changed its name to Vernalis) (see homepage of Vernalis Ltd.). • Established pharmaceutical company: global markets, extensive product line, numerous customer segments (Merck & Co) (see homepage of Merck & Co.). 4.10 Partner Selection Process The important decision of the partner selection comes after the new product development process is nearing to its completion. The biopharmaceutical firm that is commercializing its first product, needs to assess the strengths and weaknesses of its prospective partners. Supposedly there are many ways to evaluate the financial position of the possible partner company, but estimating its technological, marketing and logistical capacities is more challenging. Also if the prospecting partner is a larger company, as is the case in many collaborative agreements in the biopharmaceutical business, the assessment of the partner’s true strategic intentions is a truly difficult undertaking. However, from the viewpoint of a NBF/DBF this evaluation is a vital part of the partner selection process although the international and domestic collaborative agreements are today integral features of many businesses, there is also widespread agreement that a very high percentage of the co-operative ventures fail to satisfy the expectations. Particularly the small biopharmaceutical firms which are commercializing the very first products are highly dependable from large multinational partners. Unless NBF possesses a unique product (such as therapeutic agent for an incurable disease) with the potential of giving relatively high returns, the company should be prepared to face many hard negotiating rounds with the potential partners. Partner selection based solely on the size and financial contribution of a company to the strategic alliance is not the most functioning strategy and in the long run could result in the termination of the alliance. In the worst scenario the possible biopharmaceutical alliance could be the result of the larger party’s inter- 56 est of buying out the competition if the smaller firm is researching new innovative technology to the therapeutic segment where the buying side has an existing incumbent technology. According to Håkanson (1993) the basis of review of the alliance candidates should always include an examination of skills, technologies and markets. However, often this analysis is completed with inadequate preparation and/or understanding of partner’s needs, and many companies enter into alliances due to competitive pressures. The first alliance agreements for the beginning biopharmaceutical firms are usually either commercialization or technology development alliances. While commercialization alliance agreement could be limited to the selling of licensing rights to the selected partner(s), it is important to note from the side of the licensor that the performance of the licensee should be constantly assessed. However, this monitoring could be a difficult process for a small firm but could be organised through good interpersonal communication skills, and whenever possible with close interaction with the licensee. Other way is to compare the constant inflow of royalties against the predicted sum. Having decided to enter into alliance agreement, and after a thorough screening of potential partners, one suitable candidate is singled out (double coincidence of wants) for a longer evaluation period. Based on this longer evaluation period, the alliance will usually either end or be taken to a higher level in which the partners agree to continue, and to deepen their relationship according to the type of the alliance. Figure 4-5 presents partner selection process from the perspective of NBF/DBF. Fail to get deal Take to higher level Negotiate deal Evaluate alliance Continue at high level Evaluate again Decide to partner End alliance Search for partner End alliance Decide not to partner Figure 4-5. The partner selection process in the biopharmaceutical business as initiated by the NBF / DBF (modified from Callahan & MacKenzie 1999). 57 The licensing deals are the most often used way of co-operation modes in the biopharmaceutical business. This has resulted because of the world-wide fragmentation of the pharmaceutical industry and the birth of new breed of biopharmaceutical companies. These firms often lack the financial resources to participate in the marketing of their own products, and thus have to enter into alliances with large established pharmaceutical companies. In addition, several of the new biopharmaceutical firms want to stick to their knitting and concentrate on the R&D aspect of the pharmaceutical business and are not interested in creating their own marketing networks. On the other hand, many of the older dedicated biopharmaceutical companies have integrated forwardly, and in many ways it seems in some cases to result automatically (cf. Fitzgerald 1992; Mothe & Quelin 1999). 58 5 EMPIRICAL RESEARCH METHODOLOGY This chapter presents the empirical research strategy and the methodological choices used in the empirical part of the thesis, which is conducted as a multiplecase study. When carrying out this kind of a study, there are several issues particularly concerned in collection and analysis of the qualitative data that need to be addressed. In the following, the term “phenomenon” is used to refer to the subject under study, i.e. the commercialization process (q.v. Yin 1994). 5.1 Research Strategy The empirical part of the thesis is designed to give a general picture of commercialization practices in Finnish biopharmaceutical firms. In addition, the intention is to discover the main factors which contribute to successful commercialization. By means of the literature analysis in the theoretical part of the thesis, the commercialization phenomenon in the high technology and biopharmaceutical context was described. In addition, the theoretical part sought to establish a pattern for the commercialization process which can be used in the case part of the thesis. 5.1.1 Choosing between Qualitative and Quantitative Analyses There are primarily two alternative methods with which empirical studies are basically carried out. These are either qualitative or quantitative methods of collecting and analysing data. Often the basic assumption is that, e.g., case studies are associated with qualitative data whereas surveys are carried out with quantitative methods. However, the qualitative and quantitative methods are not mutually exclusive, and it is possible to quantify qualitative data in a case research. The differentiating factor can be said to be in the emphasis and objectives of the study (see Yin 1994; Ghauri, Grønhaug & Kristianslund 1995). While the qualitative and quantitative methods can be combined and used in the same study, there are some main differences. Firstly, in the empirical study 59 which uses quantitative data the emphasis is usually on testing and verification of results whereas study based on the qualitative data is focused more on understanding. Secondly, the use of qualitative method in research is process oriented and not result centred, which is often the case in quantitative research. Finally, through the use of qualitative type of data the researcher aims at more holistic perspective whereas the quantitative data is used to gain more particularistic and analytical view of the phenomenon under study (Ghauri et al. 1995; Strauss & Corbin 1998). To achieve the holistic perspective in a qualitative case study the researcher is required to take all the pertinent aspects and elements of the phenomenon under consideration. According to Patton (1990) the use of qualitative data in a case study is considered to be an appropriate method when the available knowledge of phenomenon is scarce, or when new perspectives are searched. If the phenomenon is scrutinised from different angles and with the use of multiple sources of data, the researcher is able to study the selected issues in depth and detail (Patton 1990). For the empirical part of this thesis the selection of a multiple-case study as a research method of choice was based on two deciding factors. First, in order to develop a general picture of commercialization in biopharmaceuticals it is important to select a method which speaks in favour of choosing several firms instead of a single one. Although concentration on a single firm allows to conduct a deeper and more detailed case study, the multiple-case method offers a more holistic view, which makes it possible to distinguish general patterns of the phenomenon of commercialization in the sector. The second factor concerned the method of analysis in which the researcher chose the qualitative analysis over quantitative. This was based on two sub-factors: i) there are relatively few biopharmaceutical firms nearing the commercialization phase thus allowing the researcher visit the companies in person, and ii) scarcity of available knowledge of the phenomenon. 5.1.2 Multiple-Case Study According to Yin (1994) the multiple-case study may consist of either an embedded or a holistic view of the phenomenon. The difference between these two designs is closely related to the type of phenomenon under study but basically 60 a holistic multiple-case study uses only one unit of analysis per case and an embedded multiple-case uses two or more units of analysis per case. The empirical part of this thesis is a multiple-case study which consists of multiple holistic cases. Since the target firms are small and have existed only 2-5 years, we were able to collect the firm specific data only from one source within the companies. However, the focus in each firm was the Chief Executive Officer (CEO) / entrepreneur, who was expected to give the most relevant and valid information concerning the firm specific commercialization practices. Since there were time constraints for the important CEO interviews the researcher needed to consider all the options available for concluding this study. Consequently the use of multiple-case study in the empirical part was deemed to provide a necessary insight into the commercialization practices of Finnish biopharmaceutical firms and therefore was determined to be the preferred method for this thesis. It is expected here that the multiple-case design offers enough latitude for the researcher when examining such complicated issue as commercialization in biopharmaceuticals. However, while multiple-case study offers a certain degree of freedom for the researcher, there exists a risk for the level of validity of the empirical study. Especially the external validity has been the concern of cases and for example, criticism has been presented about that the case studies offer a poor basis for generalisation (Yin 1994). This can be avoided in a multiple-case design by following a replication and choosing cases carefully. By means of replication design the selected cases should either produce: 1) similar results (a literal replication) or 2) contrasting results but for predictable reasons (a theoretical replication). In addition to the replication procedures, the researcher is required to develop a rich theoretical framework that explains the conditions under which a particular phenomenon is likely to be found or not. Furthermore, a strong argument in favour of selecting the multiple-case method is that the researcher is able to increase the understanding of phenomenon by comparing the individual cases as the knowledge accumulates case by case basis (Miles & Huberman 1994; Yin 1994). 61 5.2 Data Collection and Selection of Case Firms Before the actual data collection on the subject, the researcher had to get familiar with the topic. This was done mainly by reading literature and articles concerning the pharmaceutical and biopharmaceutical industry. An important part of the reading process was the understanding of the purposes of biotechnological terminology used extensively in the business. Next step was the collection and analysis of the literature related to the business aspects of the thesis. The obtained literature material comprised of high technology marketing, information about biotechnology and pharmaceutical business, and commercialization related activities, and included dissertations, articles and books. After the familiarisation of the field under study, the researcher began preparations for the interviewing of industry experts and entrepreneurs. The interviews were carried out in collaboration with Janne Gustafsson (Helsinki University of Technology) who was conducting his own master’s thesis on the subject of risk management in Finnish biopharmaceutical firms. The first two interviews were conducted in the latter part of year 1999 and the rest were concluded during the spring 2000. The first interviewees were selected on the basis of recommendations given by Hannele Kuusi (Chemical Industry Federation of Finland) and Professor Ahti Salo (Helsinki University of Technology). At the end of each interview the interviewees were asked whether they knew people who would either possess a valuable knowledge of commercialization practices in the biopharmaceutical business or who would be interested in the issue under study. The interviewed subjects were in order of interview: 1) Hannu Hanhijärvi (Director of Sitra), 2) Christopher Palmberg (Researcher of VTT), 3) Risto Lammintausta (CEO of Hormos Medical), 4) Juha-Matti Savola (CEO of Juvantia Pharma), 5) Markku Jalkanen (CEO of BioTie Therapies), 6) Kauko Kurkela (CEO of Contral Pharma), 7) Kalevi Kurkijärvi (Senior Partner, Chairman of the Board of Bio Fund), 8) Hannu Sundqvist (President of Innomedica), and 9) Pekka Sillanaukee (CEO of Finnish Immunotechnology). The aim of the expert and entrepreneur interviews was to find answers for the questions concerning the commercialization of biopharmaceuticals and the state of practice in the Finnish firms. Each of the interviewed subjects received a 62 set of questions (see Appendix III) sent in advance before the actual meeting commenced. The questions were modified case by case basis depending on the background of the interviewed subject but the main theme and the structure was retained unchanged from the first interview to the last. Interview sessions lasted from 45 minutes to 3 hours, and an average interview time was one hour and half. Every interview session was recorded and researcher made notes during the interviews. In addition to the written notes, a laptop computer was available and it was used to revise the notes after the interview was over. A complete list of interviewees and a date of interview is presented under references subsection of interviews. 5.3 Quality Aspects of Empirical Part This section describes the quality of the empirical part of thesis. Four tests are commonly used to test the quality of empirical case research. These are: 1) construct validity, 2) internal validity, 3) external validity, and 4) reliability (cf. Yin 1994). 5.3.1 Validity of Empirical Part Basically the validity of the case study is subject to three tests of construct validity, internal and external validity. The construct validity is concerned in developing a correct set of operational measures. Yin (1994) argues that to increase construct validity the researcher can use three tactics which are multiple sources of evidence, establishing a chain of evidence, and having the draft version of the case study reviewed by key informants. The second validity aspect is that of the internal validity. According to Yin (1994) the internal validity is a concern mainly for causal or explanatory case studies. However, the issue of internal validity can be extended to include the problem of making inferences. A researcher has to consider all the inferences made during the case study and analyse the source which the ‘inference’ was based on. The third validity test of a case study deals with the generalisation of the research findings. The test of external validity is said to be the critical test for the case studies in general. Particularly single cases have suffered criticism under the argument of offering a poor base for generalisation. However, this criticism stems 63 inevitably from the situation where a case study is contrasted to survey research. This approach is not plausible because survey research relies on statistical generalisation whereas case studies rely on analytical generalisation. In analytical generalisation, the researcher is striving to generalise a particular set of results to some broader theory (ibid.). At the beginning of this study it seemed that there were no sufficient amount of written or documentary data on the subject available. However, after a thorough literature investigation period and several inquiries later the researcher began uncovering material concerning the chosen field of study. Although the material did not exactly correspond to the commercialization in biopharmaceuticals subject, there were enough convergent articles (both academic and press based), research studies, and company brochures available for utilisation in the case study. In addition to the written data, the use of carefully selected interviewees recommended by other experts (as discussed earlier) was used to enhance the construct validity of the empirical part of the thesis. On the other hand, it needs to be remarked that researcher is fully aware that due to the time and logistical constraints the subjects were interviewed only once and they alone represented their companies in the sessions. Despite this fact, it is believed here that the interviewees were in position of authority due to their work experience and education to highlight the unique aspects of the biopharmaceutical business in a detailed and orderly fashion. The test of internal validity is usually concerned with explanatory or causal case studies. One way to address internal validity is pattern-matching. This analytic tactic can be used in a case analysis to enhance the internal validity (see Yin 1994 for more). In the empirical part of this thesis, the researcher aims to maintain internal validity especially in the problematic area of making inferences. As is typical to case studies in general, a researcher has to make inferences every time an event cannot be directly observed whereby an inference is based on interview or some other documentary evidence collected as part of the case study. Finally, the third test of a case study is concerned of external validity. The external validity refers to the generalisations of the case study findings. In the case study the researcher has to try to generalise the results into a theory or broader context. Thus, the analytical generalisations of this study are based on: 1) the the- 64 ory of relationship marketing, 2) new product development process and commercialization, and 3) marketing mix. The selected case firms have been deemed to offer an adequate picture of biopharmaceutical business in Finland. Due to the newness of the sector the practices of commercialization in the selected representative Finnish biopharmaceutical firms are believed to be applicable in most of the biopharmaceutical industry sector. 5.3.2 Reliability of Empirical Part The term reliability refers to a test where another researcher is able to arrive at the same results by following exactly the same procedures set down by the earlier researcher. The reliability of the case study can be improved through the use of a case study protocol and by developing a case study database (Yin 1994). In order to achieve a certain level of reliability in this case study, the researcher used the same type of questionnaires in all the interviews. The questions for the case company interviews were considered as carefully as possible in advance so that the researcher would be able to get the most important topics covered during the session. In addition, the questions were modified to suit the specifics of each particular company in every interview session but the main theme was retained. The interview sessions were recorded in every instances, and the field notes were clean copied after the interviews. The cases in the empirical part of the thesis are based on the transcriptions made from the interview sessions and other documentary material received during the research process (e.g. articles, press releases, and previous studies). In addition, the case compositions were perused by a colleague who then evaluated the achieved results. No significant discrepancies were detected in the cases. 65 6 COMMERCIALIZATION IN BIOPHARMACEUTICAL FIRMS – MULTIPLE-CASE STUDY This chapter presents a short overview of Finnish biopharmaceutical business followed by five individual case studies. The purpose of the cases is to describe how selected case firms strive to organise and manage the process of commercialization of a biopharmaceutical product. In addition, the cases illustrate the historical development and the current state of the firms. The case studies are presented in the order of data collection, and the findings of the previous cases are taken into account in the consecutive cases. After the individual case studies, a cross-case analysis is drawn across the five cases and, finally, the results are discussed. Figure 6-1 presents the outline of empirical part of the thesis. OVERVIEW OF FINNISH BIOPHARMACEUTICAL BUSINESS Case 1 Description: Hormos Medical Case 2 Description: Juvantia Pharma Case 3 Description: BioTie Therapies Case 4 Description: Contral Pharma Case 5 Description: Finnish Immunotechnology CROSS-CASE ANALYSIS: CASES 1, 2, 3, 4 and 5 DISCUSSION Figure 6-1. Structure of the empirical part of the thesis. 66 6.1 Overview of Finnish Biopharmaceutical Business The long-term economical development of Finnish life sciences sector seems to be promising, and especially the biopharmaceuticals and the pharmaceutical service providers are expected to multiply their annual turnovers in the near future (see e.g. Ahola & Kuisma 1998). While the biopharmaceutical business is relatively young in Finland, the global re-organisation of pharmaceutical sector opens possibilities for a wide variety of small companies. To maintain the growth requirements the multinational pharmaceutical enterprises are increasingly concentrating on the marketing aspects of pharmaceutical business and delegating the R&D to the smaller and more flexible organisations. In addition, the various dedicated pharmaceutical service providers such as clinical trials service providers benefit from this development as well. When compared to many other Western European countries (e.g. Germany, France, U. K., Netherlands, and Sweden), the biopharmaceutical business in Finland is still at the emerging stages of business development whereas several European based companies rival already their much older American based counterparts in stock market-valuation (see e.g. Tekniikka & Talous 1999). Most of the Finnish firms are still entrepreneurial start-ups formed in the 1990s with the assistance of venture capital. The estimation of the exact number of operative firms in this kind of business presents difficulties due to the corporate secrecy requirements in some cases and due to the fact that some of the firms are yet at the start-up phase. Despite these factors, the approximate number of Finnish biopharmaceutical firms or companies that have drug development as major part of their business activity, is near to twenty excluding the larger established enterprises (cf. Halme 1994, 1996; Ahola & Kuisma 1998; Helsingin Sanomat 2000). In Finland the word established refers to the Finnish owned pharmaceutical company Orion and to Leiras which is a subsidiary of a larger German corporation – Schering AG. In addition, numerous multinational pharmaceutical enterprises have subsidiaries in Finland. The majority of these subsidiaries function only as marketing offices for the company’s products but few are using the Finnish pharmaceutical service providers in the corporate drug development processes. 67 6.1.1 Background of Case Firms Many of the selected case firms share a similar background. For example, all of the case firms are concentrating on the research and development of drugs for human subjects which is one of the most difficult fields of biotechnology but potentially most lucrative, too. In addition, the firms have been activated if not established in the latter part of 90s and in all cases Sitra (Finnish National Fund for Research and Development) has provided seed financing for the target firms (see Sitra 1999). The existence of patient risk-money from Sitra, a government controlled agency, has enabled the Finnish firms in some cases to take the drug development process far longer in clinical phases than normally would have been possible in other countries. Furthermore, Tekes, another government controlled institution has been participating in the development of Finnish life sciences sector. The role of Tekes constitutes funding for new drug development process in a firm based level and organisation and execution of nation-wide technology programs with the major objectives of promoting networking between companies in the field of business and advance the utilisation of a particular technology (in this case biotechnology). Moreover, the loans granted by Tekes for companies developing products with the use of advanced technologies can be considered to be so-called soft-money which has recipient-friendly interest rates and long refunding times. Additionally, the founders of case biopharmaceutical firms share similar backgrounds. They have strong links to the academic as well business world, and except for two firms, the founder(s) has assumed the mantle of CEO. The academic links are typically personal relationships to university researchers and scientists whereas the business connections are the result from a long career in the service of established pharmaceutical corporations. It should be pointed out that the service means here either a direct employment or contract based research work taken for the established pharmaceutical corporation. Despite the common factors, some differences between firms do exist. For instance, the core competence of each case firm is centred on different base of biopharmaceutical technology, and as a result the firms are not competing against each other in the therapeutic product segment. On the long run there can be com- 68 petition on the availability of risk money, however, if the rest of the case firms intend to launch IPOs in the relatively small Finnish financial market. 6.1.2 Summary of Case Firms The selected case firms present an adequate picture of the current status of Finnish biopharmaceutical industry and Table 6-1 summarises the characteristics of case firms of the empirical part of the thesis. Table 6-1. Summary of case firms (based on interviews conducted during 1999-2000, Internet sources, and press references). BioTie Hormos Juvantia FIT Contral Therapies Medical Pharma Pharma Year of founding 1996 1997 1997 Personnel** 53 31 Core Anti-inflammatory Cell biology of competence drugs, non-animal steroid horheparin mones Business Inflammation, Hormonal area blood coagulation, therapies thrombosis and cancer 3 5 20 G-protein coupled receptors Parkinson’s, and vascular diseases, treatment of depression 3 Yes (IPO on 12.6.2000) No No Products in pipeline** Public company N/A 35 MAbs 1998 11 Opioid receptors HIV, cancer, Treatment of and immune addictions diseases and compulsive disorders * 1 No No Explanation of symbols used in Table 8-1: N/A: Not available * Unknown due to corporate secrecy ** As in spring of 2000 6.2 Case Hormos Medical Oy Ltd. Hormos Medical Oy Ltd. is located in Turku Finland. It has been estab- lished since 1997. It is a privately held biopharmaceutical firm engaged in drug discovery and development of compounds used in hormonal therapies. It currently employs 31 people (in spring 2000) working in two locations in Finland, Turku and Oulu, in close collaboration with the academic community (see homepage of Hormos Medical). 69 6.2.1 Description The core competence of Hormos Medical is related to understanding the cell biology of steroid hormones. Tissue specific distribution of the estrogen receptor subtypes, tissue specific regulation of the genomic steroid effects and tissue specific enzymes in steroid metabolism are examples of the new discoveries. Hormos Medical aims to focus on the development of therapeutical compounds which enable elderly people to improve quality of life. In spring 2000, the staff of Hormos Medical was working on four projects each of which concentrates on a specific class of compounds. The aromatose inhibitor MPV-2213ad for treatment of urinary symptoms in men is the first compound in the pipeline and novel SERM (selective estrogen receptor modulators) for osteoporosis is the second. The financial situation of Hormos Medical looks promising as the firm has already completed the second funding round in winter 1998 which made possible Hormos to raise 50 million Finnish marks worth of capital and strengthen the ownership base with ten new investors. In addition to the old owners Sitra and Bio Fund, the new owners are primarily insurance company controlled risk-funds. According to Chief Executive Officer (CEO) Risto Lammintausta Hormos Medical intends to launch IPO in two to three years when the first product’s safety and efficacy are proved. The listing will be commenced at the Helsinki Exchange (HEX) or alternatively at Stockholm’s marketplace. 6.2.2 Commercialization Activities According to our interview with Dr. Risto Lammintausta, the CEO and the founding member of Hormos Medical, the business operation mode of Hormos Medical is going to be a virtually integrated pharmaceutical company. The firm’s strategy is to develop drugs from discovery phase to early clinical development phase. During clinical trials phase II/III Hormos Medical is going to seek partners to participate in the late clinical phase and subsequent marketing of the new product innovations. The preferred partners would be the large established pharmaceutical companies capable of marketing and distributing drugs in the United States and Europe. At the beginning Hormos Medical is to develop novel drug substances through the first two clinical phases which substantially lowers the risk of adverse 70 reaction occurrence subsequently making the drug more tempting object for licensing to multinational pharmaceutical enterprises. After the first successful licensing deal with a large established pharmaceutical company, Hormos expects to gain enough money in the form of down payments and annual royalties that will facilitate the development of other substances in the pipeline. The revenue is also used to recruit new professionals and to finance new basic research projects with the firm’s associated scientists. In addition, Hormos Medical has made a deal with Innomedica Ltd., a pharmaceutical service provider based in Turku to find a possible marketing/licensing partner company in Japan. In other markets Hormos Medical intends to follow the future licensing strategies in a case-by-case basis. Based on the results achieved in the clinical trials and negotiation power received from results of early clinical trials, the firm either seeks one global partner or tries to find two large pharmaceutical companies with suitable product portfolios representing Europe and United States respectively. 6.2.3 Observations Hormos Medical is personified to the CEO Risto Lammintausta who has a high profile within the new biopharmaceutical industry in Finland. He possesses an extensive experience in pharmaceutical industry and has succeeded in recruiting other professionals to the firm. During an interview session with Dr. Risto Lammintausta, he expressed an interest to maintain the VIPCO structure in the future and maintain the focus on the research and development aspect of the pharmaceutical business. He is confident that the current ongoing restructuring in the pharmaceutical industry opens up new avenues for the smaller dedicated pharmaceutical companies. By maintaining a VIPCO structure Hormos Medical intends to achieve a necessary degree of flexibility due to the light organisation structure and is capable of participating in the new projects or dropping out from profitless endeavours quickly without serious repercussions. At the same time the co-operative arrangement with Innomedica Ltd. enables personnel of Hormos Medical to concentrate on the R&D while service providing firm seeks potential partners in Japan, which is considered to be the third important market in the global market. 71 6.3 Case Juvantia Pharma Oy Ltd. Juvantia Pharma Oy Ltd. is located in Turku Finland. This biopharmaceuti- cal firm was founded in 1997. Juvantia’s business idea is to bridge the basic research innovations to technologically advanced and applied product patents. The firm is developing a system based on a proprietary technology that enables it to operate with a high degree of efficiency and exploit innovations related to therapeutic uses of drugs acting on receptors belonging to the superfamily of G-Protein Coupled Receptors (see homepage of Juvantia Pharma). 6.3.1 Description Juvantia Pharma’s strategic goal is to become one of the leading biopharmaceutical research firms in Europe. Juvantia Pharma’s drug discovery activities are based on proprietary innovations on mechanisms of actions of certain G-protein coupled receptors in the treatment of neurodegenerative diseases, mental illness and vascular wall disease. Juvantia’s new drug candidate identification is based upon Targeted High-Throughput Drug Discovery, which integrates target site modelling, combinatorial chemistry, and high throughput screening. According to the interview with the CEO Juha-Matti Savola, Juvantia’s strategic focus will be on the life quality improving drugs for the elderly people. The market for these drugs is expected to multiply in several years as the so-called baby-boomer generation is coming to a retirement age. Particularly in the Western countries the population pyramid is very favourable to the drug development firms whose therapeutic specialty lies in the researching of drugs for wealthy elderly people. Juvantia’s personnel focus on collecting drug-specific information from the chosen substances up to the phase I and in this way add value to the development process. According to the CEO Juha-Matti Savola, the phase I is a critical stage in the drug development process because once passed the risks begin to decrease and projects start to attract more attention from the global pharmaceutical players. In addition to researching own compounds, Juvantia Pharma intends to offer contract R&D services for innovating new pharmaceutical substances. This function is marketed in the future mainly to the large pharmaceutical companies who are able to afford such specialist services to complement their own in-house R&D. 72 6.3.2 Commercialization Activities Juvantia Pharma has outlined a clear strategy for commercialization activities. At the beginning the main commercialization strategy of Juvantia Pharma, according to CEO, after providing Proof of Concept, and demonstrating the safety and efficacy of the substance in human clinical tests, is to seek a partner who will carry the last tests and marketing in a global scale. Licensing agreements are possible in any phases, and it mainly depends on the innovation’s degree of uniqueness. During the interview, Dr. Juha-Matti Savola stressed the importance of networking principle and VIPCO structure of the modern drug development firm. His opinion was that with light organisation structure and good networking the firm is able to succeed in the competitive market. Dr. Savola has set his sights for the year of 2004 whereby Juvantia should have agreements with few multinational pharmaceutical enterprises, and several projects are already generating revenues. Additionally, somewhere between 2004 and 2006 the listing of Juvantia Pharma will become more actual. The current forecast places the arrival of the first product concept to the market sometime during the year of 2006 if all the trials and testing go smoothly. This product is a novel treatment for Parkinson’s disease. Juvantia Pharma has also two product concepts for vascular diseases. Moreover, Juvantia Pharma has entered into alliance with Innomedica Oy. Innomedica is to assist in finding future commercialization partners for Juvantia’s first product concepts. 6.3.3 Observations Juvantia Pharma is one of three Turku BioCity technology development centre based drug development firms (others being Hormos Medical and BioTie Therapies). Juvantia is currently heavily spending capital on clinical trials for the testing of first product concepts. From the investor’s point of view this phase demands patience because clinical trials are time consuming and costly. In addition, such a process always includes substantial uncertainty for the product concept’s ability to enter the final phases of testing without any occurrence of adverse reactions. In the positive side Juvantia has more than one product concept soon to enter clinical testing which means that Juvantia can weather the possible worst case 73 scenario of adverse reaction occurrence from the first concept. On the other hand, Juvantia seems to have included quite an extensive therapeutic sector in their area of research specialty covering from vascular diseases to schizophrenia when compared to the current number of employed specialists of the firm (17) (as in spring 2000). In the future this could cause some problems in the form of planning the financing of the R&D projects in such a wide scale. Furthermore, the difficulty of attracting highly educated professionals to the firm in the long run can manifest a serious bottle-neck to the growth. However, as some industry experts have pointed out, this is not solely the problem of Juvantia but the whole Finnish biopharmaceutical sector. According to the CEO Savola, Juvantia Pharma is trying to cope with this problem by extending its recruitment efforts to Sweden. 6.4 Case BioTie Therapies Oy Ltd. BioTie Therapies Oy Ltd. is located in Turku Finland. The firm started its operation in the year of 1996. BioTie’s mission is to convert high impact scientific discoveries to pharmaceutical success stories. It develops novel and patented biopharmaceutical drugs/pharmaceuticals for global markets with unmet medical needs. BioTie is focused on finding remedies for inflammation, blood coagulation, thrombosis and cancer (see homepage of BioTie Therapies). 6.4.1 Description BioTie Therapies was already registered in the year 1992 by the founder and Chief Executive Officer Markku Jalkanen to administrate the substantial patent portfolio in his possession. This patent portfolio has since become the cornerstone of the firm, and it mainly consists of the results achieved by various teams of scientists in which the CEO of BioTie has either been a leading member or contributing associate. Patent portfolio is now a property of BioTie Therapies under a royalty agreements with the participating scientists. The royalties are between 0,12 percent depending whether the drugs successfully penetrate the market. BioTie’s own in-house R&D efforts are strongly focused on developing non-animal heparin (BTT-1501) and new anti-inflammatory drugs. Additionally, BioTie has integrated its expertise in biological research with advanced capabili- 74 ties located also in Turku BioCity for the discovery of small molecule drugs, which will be the next generation of BioTie’s future therapeutic compounds. BioTie can be considered to be one of the pioneering new biopharmaceutical firms in Finland and as such has enjoyed some first-mover advantages in the risk-financing sector. At the beginning BioTie received seed funding approximately 18 million Finnish marks to organise the start-up process of the firm. The second financing round was held as a private placement in the year of 1998 and resulted over fifty million marks for the firm. The successful acquisition of venture capital has enabled the firm to concentrate on the R&D process, which in turn has presumably led to favourable results in the drug development process. For this reason, coupled with the personal charisma of the CEO, BioTie Therapies became the first new biopharmaceutical firm in the HEX New Market list one to two years ahead of the original schedule. 6.4.2 Commercialization Activities The first commercialization deals BioTie intends to do with the same general pattern as the other two previous firms. The goal of BioTie is to outlicense the developed drugs to large established pharmaceutical companies, which will handle the marketing, distribution, and in some cases the manufacturing too. The future cash flows will be generated from down payments of partnership deals, milestone-payments, and annual royalties. However, CEO Markku Jalkanen expressed his interest to carry out the future clinical trials as far as possible before outlicensing the research results to a multinational pharmaceutical enterprise. He emphasised that potential blockbuster-level drugs should be developed in-house as long as possible, perhaps including the manufacturing also. The main argument speaking in favour of own production is that the average royalty income from marketing partner is approximately 25-30% from the realised sales of the wholesale cost (non-taxed). If the partner handles the manufacturing, the royalties received by the NBF are approximately 5-15% from the non-taxed wholesale price. NBFs wishing to extend the clinical trial testing to the phase III often require their own manufacturing plant for producing drug substances in sufficient amounts because the continuous outsourcing of the manufacturing services will become expensive in the long run. In addition, while the investment to the GMP 75 manufacturing plant is a risky and requires a considerable sum of capital to complete, the quality of produced substance, however, is under the personal supervision of the firm. 6.4.3 Observations As in the case of Hormos Medical, BioTie is strongly personified to the founder and CEO Markku Jalkanen. In addition, with the successful IPO on 12.6.2000 the firm has received a strong publicity boost from financial press, which is typically positive for a young company. BioTie seems to be enjoying a positive current right now. The company has expanded its personnel to 53 (in spring 2000) and according to the interview with Dr. Markku Jalkanen the interest to the company activities has been strong in these past two years. This is reflected with the fact that when the firm was seeking a new Chief Financial Officer (CFO), the firm received total of 43 applications and many of them from abroad. 6.5 Case Contral Pharma Oy Ltd. Contral Pharma Oy Ltd. is a biopharmaceutical firm specialising in treat- ment of addictions. The firm is headquartered in Espoo and has a clinical research office in Turku. The goal of the firm is to become the leader in developing pharmacotherapies and services for the alcohol abuse and other urge disorders with unmet medical needs. The firm was incorporated in April 1998 and employed 11 persons in autumn 2000 (see homepage of Contral Pharma). 6.5.1 Description Contral Pharma is developing new pharmacotherapies for treating obsessive compulsive behaviours. The core technology relates to opioid receptors. Opioid antagonists offer new effective tools for the treatment of alcoholism and other types of compulsive behaviours. The firm’s primary project is entering phase III clinical studies in Europe and the United States. According to the interview with the CEO of the firm, Kauko Kurkela, there are two other companies in addition to Contral Pharma in the world which are developing therapeutical substances for treating alcoholism. 76 Seven institutional investors have invested in the firm during 1998 and 1999, with the third private placement in autumn 2000. The initial public offering will be expected at the earliest of 2002 or 2003. 6.5.2 Commercialization Activities Commercialization activities in Contral Pharma are characterised by the special nature of the firm. Contral Pharma will be a single product firm for a long time, which implies that the progress of its only product in the clinical trials is vitally important for this firm. The organisation of the firm highlights this special one product, one technology arrangement - Contral Pharma has a light organisational structure, currently employing only 11 professionals. Somewhat exceptional is also the fact that the target market for Contral Pharma is the whole world whereas many other biopharmaceutical drug development firms concentrate only on the richest part of the world – mainly Europe, Northern America and Japan. The firm operates through networking principle in multiple areas of new drug development process. The most important outsourcing activities will be centred on manufacturing whereas Contral Pharma aims to develop its products even through Phase III, but it is presently looking for clinical development and commercial partnerships especially in Japan. According to Dr. Kauko Kurkela, the eventual commercialization strategy will be determined by the financial resources of the firm. That is, although Contral Pharma is planning to carry out the Phase III trials, it is a financial reality that – in absence of sufficient capital – most of the small drug development companies have to seek partners at the beginning of phase III clinical trials. However, at present the firm aims to attract enough risk-capital for concluding phase III and find partners for marketing after market approval is received in the United States. In addition to the main product, Contral Pharma is developing several other products but at the time (in spring 2000) these are still at the discovery phase. 6.5.3 Observations As it was already previously mentioned, Contral Pharma is still basically one product, one technology company. This is the firm’s strength and weakness at the same time. The firm’s researchers and employees are able to maintain focus 77 on the main product and carefully design marketing strategies around the future drug substance. The most serious threat for Contral Pharma is the failure of the main product concept in the later clinical trials. However, the main product is already entering at clinical phase III studies thus reducing substantially the risk of adverse reaction occurrence and as Dr. Kurkela pointed out approximately 80% of risks are behind. Even though the product passed the phase III as planned, Contral Pharma might still face problems with the approval procedures of the FDA. According to many industry experts, the FDA is nowadays considered to be as the foremost authority in setting down the approval procedures for new food and drug substances although it’s concern is mainly for the markets in the United States. In particular, the FDA requires that drug candidates must be shown to be effective as well as safe before they can be approved for marketing. In addition, Dr. Kurkela implied that Contral Pharma’s novel drug could meet prejudice and resistance on the part of authorities because the commonly known ways of treating alcoholism have consisted of various psychotherapeutic sessions which mainly aim to increase the patient’s will power to resist the continuous overuse of alcoholic beverages. According to Dr. Kurkela Contral Pharma is prepared to launch promotion campaigns to inform authorities of the product’s positive impact on the abusive users of alcohol. 6.6 Case Finnish Immunotechnology Oy Ltd. Finnish Immunotechnology (FIT) Oy Ltd. is located in Tampere Finland. FIT is a firm that specialises in selected areas of immunology and medical technology. The firm concentrates on developing products that will improve the possibilities of medical treatment in the battle against incurable diseases. This firm employs 35 professionals, and as is typical to these companies, most of the employees hold either masters or doctoral degrees (see homepage of Finnish Immunotechnology). 6.6.1 Description Finnish Immunotechnology (FIT) is Tampere based biopharmaceutical firm. FIT was established by professors Kai Krohn and Annamari Ranki to commer- 78 cialize research findings. The firm’s headquarters, research and development laboratories, and sterile pilot scale production facility are located in Tampere. In addition, a substantial part of research work is done through interactive network with global partners and top level scientists in USA, Sweden, Germany, Switzerland, Japan, Estonia and Finland. FIT deviates from the other four firms in that it concentrates mainly on the applications of monoclonal antibody (MAb) technology. The strategic focus of FIT is on selected areas of immunology and medical technology. The novel product ideas are developed to pharmaceuticals, diagnostics, and For Investigational Uses Only (FIUO) products in close collaboration with the partners. FIT intends to base their success to the unique gene delivery vehicle and the use of recombinant proteins. The first product concepts are aimed at vaccination and diagnostics sector. 6.6.2 Commercialization Activities Finnish Immunotechnology (FIT) seeks to offer product licenses and outsourcing research partnership arrangements to multinational pharmaceutical enterprises. According to CEO Pekka Sillanaukee, the degree of quality and uniqueness is the main contributing factor for successful commercialization. In addition, FIT has organised a special commercialization team to handle the outlicensing negotiations with large pharmaceutical companies. Dr. Pekka Sillanaukee highlighted specific risks in the commercialization phase typical to the pharmaceutical business: i) failure to correctly estimate the attractiveness of the product, ii) the insufficient coverage of patent protection, iii) negotiation and contract techniques (especially legal aspects with the U.S. based pharmaceutical companies), and iv) the identification of decision makers of the opposing side. FIT intends to finance its operations through the normal way - gaining down payments from projects and annual royalties from licensed products. In the future, the firm is ready to sell research services too. 79 6.6.3 Observations Finnish Immunotechnology’s (FIT) primary difference from the other case firms is the focus on monoclonal antibody (MAb) technology. While monoclonal antibodies were invented already at the 70s, it has taken more than twenty years of research work to achieve successful biopharmaceutical drugs based on monoclonal antibody technology. The first monoclonal antibodies were produced in mice because the easiness of the process but such drugs often triggered rejection in human subjects. The second development phase for the MAbs was a replacement at least half of mouse DNA with human DNA. The first successful so-called “humanised antibodies” reached market in 1994 and since then the percentage of mouse DNA has decreased dramatically making drugs based on MAbs even more efficient and safe. Based on projections of the industry experts the future of monoclonal antibodies looks promising and within a decade there can be more than one hundred monoclonals on the marketplace with estimated revenues starting at $50 billion (see Business Week 2000). Against this background information FIT seems to have decent possibilities to succeed in finding and researching a unique product which arouses interest in the various multinational pharmaceutical enterprises. However, it needs to be pointed out that the U.S. based biopharmaceutical firms are leaders in the development of monoclonal based drugs and the availability and sums of venture capital for NBFs in the United States are entirely from another plane than in Finland. For example, Abgenix Inc. U.S. based biopharmaceutical firm raised $630 million in its secondary stock offering (ibid.). 6.7 Cross-Case Analysis For the reasons mentioned in Section 2.5, the commercialization activities in biopharmaceuticals are generally characterised by the licensing agreements between NBFs and established pharmaceutical enterprises. This is the case with the majority of the selected case firms, too. As the Finnish firms are all in the product development phases there are no substantial evidence concerning commercialization available yet. While licensing will be the main tool for every Finnish firm in the short-term, Contral Pharma seemed to deviate somewhat from the mainstream. 80 According to CEO Kurkela, Contral Pharma intends to handle the clinical phase III all by itself in the United States and Europe, and depending on the reaction of authorities in the approval phase, the firm might opt to use different strategy in the commercialization of its main product. Dr. Kurkela suggested that because alcoholics, the main target market of the end-product, are treated mainly in the clinics, the firm might seek to arrange a franchising deals around the world. The marketing could be arranged together with the selected clinics. In addition, during the interview Dr. Kurkela expressed his interest to include the so-called third world countries as a target market area for Contral Pharma’s product. This kind of approach clearly differs from the designs of the other four case firms. The rest of the firms are mainly targeting the markets of EU, North America and Japan. All of the case firms except FIT employ a marketing service provider company, Innomedica Ltd., based in Turku that promotes the products of the firms in the three largest markets. In spring 2000, the case firms were in fairly similar business development phases. However, BioTie Therapies has since launched its IPO on 12.6.2000 at Helsinki Exchange. The similar phase refers here that all of the firms are spending risk-capital for developing products to the markets and are waiting results from clinical trials. Figure 6-2 illustrates the new drug development processes in spring 2000 in four of the five case firms. The upper part of Figure 6-2 has been divided into seven sections. The first from left depicts the drug compounds, and next five phases are research phases. The last phase represents the New Drug Application process, which every drug substance has to pass before gaining market approval from the supervising authorities in a particular market area. The horizontal green bars indicate the research phase of a given compound. Similar information about FIT’s product portfolio was not available at the time of research. Figure 6-2 reveals that Hormos Medical and Contral Pharma are at a relatively advanced state of research while BioTie Therapies is still struggling at preclinical phase and clinical phase I. This is especially surprising in view of financial situations of these firms. 81 Research Preclinical Phase I Phase II Phase III NDA BTT-1001 (BioTie) Conventional antibody for acute inflammatory conditions BTT-1002 (BioTie) Humanised antibody for chronic inflammatory conditions BTT-2001-7 (BioTie) Small molecule inhibitor of VAP-1 receptor BTT-1501 (BioTie) Semisynthetic heparin and LMWH MPV-2213 (Hormos) Urinary dysfunction in men FC-1271 (Hormos) HRT & Osteoporosis SERM-2 (Hormos) Cardiovascular compound HSD-Inhibitor (Hormos) Breast cancer compound Hydroxymatairesinol (Hormos) A plant compound for health food JP-1730 (Juvantia) Parkinson’s disease Somatostatin subtype selective agonists (Juvantia) Vascular re-stenosis in coronaries CPH-101 (Contral) Alcoholism Figure 6-2. Member companies pipeline in spring 2000 (source provided by Innomedica Oy Ltd.). Interesting times lie ahead for the case the firms, if and when they intend to launch their own IPOs. Especially an issue of importance is the selection of the stock exchange at which the IPO will be launched. On one hand, it can be argued that Helsinki Exchange with its strong emphasis on high technology and new economy firms is an interesting marketplace for a biopharmaceutical firm. On the other hand, the recent world-wide financial turbulence indicates that it hits harder on the periphery stock markets such as HEX causing powerful volatility in the shares of the smaller firms whose value consists mainly of the expectations in the future. In addition, Finnish stock market capacity is quite small making it entirely 82 possible that only few biopharmaceutical firms are able to successfully list and attract enough capital for their own purposes. It remains to be seen what the rest of the four will do in the next few years but for example, CEO Juha-Matti Savola said that NASDAQ is not excluded as an option for Juvantia Pharma whereas Dr. Risto Lammintausta of Hormos Medical hinted at Neuer Markt of Germany or OMX at Stockholm. One of the competitive advantages of the smaller drug development firms is the virtual structure of the company. All of the interviewed CEOs were favourably inclined to the modern development of pharmaceutical business that among other things makes possible the existence of the smaller firms. The mutually shared vision of the entrepreneurs is that established pharmaceutical companies have older technology and their business culture is not encouraging for gifted scientists. However, when the discussion was directed to the future development of a given case firm some differences of opinion became evident. For example, CEO Markku Jalkanen did not reject the idea of forward integration as long as it does not jeopardise the flexibility of the firm. In fact one of the main objectives of the BioTie Therapies is to build a GMP standard fulfilling production plant which enables the firm to produce their own drug substances. In addition, while Dr. Kurkela pointed out that Contral Pharma will remain a pure virtual structure company, he added that all the successful drug development firms are always more or less forward integrated. The rest of the CEOs - Lammintausta, Savola, and Sillanaukee shared the opinion of maintaining the virtual structure far into the future and expressed their interest to maintain and building a strong network of contributing scientists and suppliers. When the selected case firms’ product portfolios are compared, it can be noted that every single firm is concentrating on the specific therapeutic sector according to their areas of specialty and no significant overlapping in R&D activity was detected. This can be considered to be a positive factor if the onlooker maintains perspective in Finland. However, if the perspective is extended to abroad first to Europe, particularly to Britain and Germany which are European leaders in biotechnology, competitors are sure to appear. Additionally, one has to bear in mind that Europe is a latecomer to the biotechnology business (with the possible exception of one company in Great Britain – Celltech which was founded 83 already in the year of 1980 and was then involved in MAb-based diagnostics and molecular biology) whereas the United States is the undisputed leader of the business. Moreover, European based high technology start-ups have long suffered from the underdeveloped venture capital market when compared to U.S. firms and while situation has since been improved, one interviewed industry expert said that U.S. based companies have already been circling European countries and buying patents when the original holders lacked capital to further develop the R&D results. Since the finding of a totally unique concept can be difficult, if not impossible, Finnish biopharmaceutical firms have to rely also on other factors than finding a blockbuster drug of their own. An industry expert suggested that Finnish biopharmaceutical firms can succeed in the competitive business environment by focusing on their special fields combined with hard work and with the backing of patient risk-capital. In addition, the same expert added that the Finnish NBFs should focus on producing drug substances to diseases with major socio-economic impact which ensures demand to more products thus benefiting possible latemovers. It is probable that the product concept owned by Contral Pharma and currently under development is close to the unique status, and according to the information given by Dr. Kurkela, there are perhaps only two other firms currently interested or focusing on urge disorders. Against this information Contral Pharma might succeed in finding a breakthrough concept. However, it needs to be pointed out that Contral Pharma, despite passing successfully through the clinical trials and gaining a market approval for the product in the future, can face unexpected problems from the direction of the target market. 6.8 Discussion Commercialization in biopharmaceuticals is generally a more complex pro- cess than in other fields of high technology. While the primary concerns of typical high-technology companies are 1) competitors and 2) fast product life cycles, the management team of the biopharmaceutical firm has also to i) understand the needs of the end-user (not just those of licensing partners), ii) be able to monitor possible changes in the technological environment, iii) cope with the regulations 84 set down by the authorities, and iv) finally develop mutually profitable relationships with established pharmaceutical companies which handle marketing and distribution. Furthermore, despite the diversity of aforementioned tasks, costcontainment pressures make it necessary for the NBF to cope with a minimal organisation. This requirement tests the personal skills of the core management team, which has to consist of a professionals with a deep understanding of both the R&D and business aspects of the field. Planning of Commercialization One of the basic prerequisites for successful commercialization is the analysis of external and internal fundamentals affecting the company activities. The fundamentals that are commonly analysed are i) company, ii) competitor, iii) environment, and iv) market situation. At the beginning the most important fundamental for the Finnish biopharmaceutical firms is the market situation, on which the estimate of the market potential of the drugs are based. As the firm capabilities evolve the rest of the fundamentals typically gain more prominence. According to the interviews, the management teams of the case firms have made a market analysis for their products. In addition, it became obvious during the interviews that the CEOs were familiar with the other analyses and that they monitor the business environment for possible changes or opportunities. Marketing Mix The product tool of the marketing mix plays a central role in the marketing strategies of the Finnish biopharmaceutical firms. As it was stated already in Section 4.3 the management bases its future marketing strategy decisions on the degree of uniqueness of the drug. After the product, the price and promotion tools are next important for the management team of a Finnish NBF whereas the place (distribution) does not hold strategic value due to the nature of the business. An interesting finding centred around the concept of credibility which is a crucial factor in the biopharmaceutical business, because potential partners demand a high level of credibility from the part of new biopharmaceutical firms. The high 85 level credibility along with well-managed relationship network of stakeholders appears to be one of the guiding principles of the marketing in the case firms. Critical Success Factors One of the empirical goals was to find the critical success factors that contribute to the commercialization process of a Finnish biopharmaceutical product. According to the results gained from the interviews the single most important contributing factor is the uniqueness of the product. The product’s uniqueness consists of two parts: 1) the product concept and 2) the disease it addresses. Firstly, product concept can be a new way to cure disease, pill instead of a vaccine etc., or secondly, product is targeted against previously incurable disease making it a pioneering product. In addition, the developing firm has to be able to prove that it is strictly adhering to all pharmaceutical standards in the product development process thus ensuring the smooth passing of the approval procedures. Other, less important success factors are, as identified from the interviews, promotion, credibility, and partner. These are discussed in more detail in Section 3.8 and Chapter 4. Required Resources The second empirical research question focused on finding out the sufficient resources, both material and intellectual, that Finnish NBF requires for successful commercialization. One of the main findings was the importance of the composition of the management team of drug development firm. In the optimal situation, the team members should augment each other in different fields of business. Moreover, for the start-up firm developing its first product concept the importance of the financial resources cannot be underestimated. It is worth noting, that all of the interviewed CEOs confirmed that if the financial issues are properly handled (enough capital), it facilitates the management of the core business (R&D) thus enabling the team members to plan future strategies. 86 Partner Selection Finally, the last question concerned partner selection. The empirical findings implicated that the partner should have a non-conflicting portfolio and possibly a clear focus on the therapeutic sector under the interest of NBF. Furthermore, the strength of the distribution network of the partner in target continents plays an important role in partner selection. It is also possible that different partners are selected for different markets. Many Finnish biopharmaceutical firms also employ a marketing partner to promote their products to possible licensing partners. 87 7 CONCLUSIONS The primary purpose of this thesis was to increase the understanding of the management of commercialization in the Finnish biopharmaceutical firms. To achieve this goal a literature review and a multiple-case study were carried out. The literature review revealed that there are surprisingly few studies concerning commercialization in the marketing literature. The multiple-case study provided, in turn, valuable insights into the commercialization practices of Finnish NBFs. However, it should be pointed out that the case firms are still at a relatively early stage of their product development cycle and hence possibilities for far reaching inferences are limited. 7.1 Summary of Findings The theoretical part of the thesis was based on the literature review. Based on theories concerning commercialization and high technology business-tobusiness marketing a framework for biopharmaceutical commercialization was developed. The purpose of the framework was to find the elements that contribute to and assist in creating successful commercialization strategies for Finnish biopharmaceutical firms. The main findings centred on four factors which were identified as being critical to success in biopharmaceutical commercialization. These are: 1) product, 2) promotion, 3) credibility, and 4) partner selection. 1) Product. The biopharmaceutical product is the single most important contributing factor in the successful biopharmaceutical commercialization. The successful biopharmaceutical product needs to be unique. The concept of uniqueness can be further divided in two factors: i) the product concept and ii) the disease it addresses. Furthermore, the biopharmaceutical product is concerned with quality. The quality aspect in biopharmaceuticals means both the satisfaction of customer (licensing partner) and consumer (end-user). While consumers rarely consider the quality-level of the medicines ordered to them by their personal doctors, the final quality in biopharmaceuticals is tested in the 88 market approval procedures where authorities demand documented results to prove the drug’s safety and effectiveness to human subjects. 2) Promotion. By means of promotion the Finnish NBFs aim to deliver information about the product to potential customers. Through promotion mix the NBF communicates its unique selling proposition to arouse interest among prospecting customers. The promotional tools commonly used by the NBF are: i) personal selling, ii) public relations and publicity, iii) sales promotion, and iv) advertising. 3) Credibility. Credibility is the factor on which the Finnish NBF has to base its commercialization and overall business strategies. Credibility consists of four factors: i) adherence to pharmaceutical standards, ii) reputation of the scientists associated with the firm, and iii) the quality of the firm’s relationship networks, and iv) pharmaceutical drug development and business traditions of the country. The first three factors are under direct control of the management of the NBF whereas the fourth factor is beyond the firm’s sphere of influence. 4) Partner selection. Perhaps the most difficult part, after the creation of a unique product, is the selection of partner. The partner selection process depends on multiple factors but basically the management of NBF is required to carry out a thorough analysis of potential partners. The empirical part of the thesis was carried out as a multiple-case study that included five Finnish biopharmaceutical firms: 1) Hormos Medical Oy Ltd., 2) Juvantia Pharma Oy Ltd., 3) BioTie Therapies Oy Ltd., 4) Contral Pharma Oy Ltd., and 5) Finnish Immunotechnology Oy Ltd. It needs to be pointed out that the case firms are still developing their first major products and planning the eventual commercialization. Therefore, the deeper study of the individual case firm’s commercialization procedures and organisational structures was not yet possible. Quite surprisingly, while BioTie Therapies is the only firm to have launched its IPO, Hormos Medical and Contral Pharma seem to be closest to the commercialization phase in view of their product portfolios. If all goes as planned, BioTie Therapies and Contral Pharma can be ready in one to two years to start extensive promotion campaigns for their first products out of pipeline, whereas Hormos appears to be ready for licensing its product FC-1271. The rest of the firms have 89 to participate in clinical trials little longer to receive a confirmation that no adverse reactions are reported. Based on empirical findings and interviews it was concluded that the studied case firms had adopted the market oriented way of doing business. It is worth mentioning here that the managers of case firms were paying a particular attention for the observation of primary markets. They were ready to adjust firm strategies based on information received from the markets which implied that they had developed contingencies. These actions undertaken by the case firms, despite the obvious limitations of resources both financial and personnel, indicate that CEOs of the firms have realised the importance of market orientation in the biopharmaceuticals. 7.2 Theoretical Implications of Thesis One of the main theoretical findings is in some cases the overlapping use of the terms of commercialization and launching in the marketing textbooks and previous studies. Traditionally thinking commercialization is seen as a last stage of new product development process and in many cases it is often regarded as an extension of R&D process (see, e.g., Kotler 1994; Jobber 1998). For example, Kotler (1994) uses both terms in his books. The concept of commercialization is used to describe the last stage of the traditional new-productdevelopment decision model whereas launch refers to the actual event of introducing the product to target markets. While this arrangement seems to indicate that commercialization is a larger phenomenon when compared to the launch, the relation between concepts, however, is not clearly defined. For instance, the terms are used quite interchangeably on numerous occasions. Some other sources add to the confusion, and use mainly the concept of launch instead of commercialization to describe the culmination of new product development process (cf. Booz, Allen & Hamilton 1982). The variability in the use of the terminology can mean that the concepts have been utilised for some time and have become established both in the academic and business life as interchangeable concepts. To clarify the use of the concepts, we propose that commercialization is thought as a comprehensive process parallel to the new product development pro- 90 cess that encompasses the launch stage, which introduces the product to the market. Another interesting issue is that in the businesses where R&D dominates the firm’s operations, the commercialization cannot be analysed without R&D function taken into account. As the R&D often plays the central role in the smaller high technology firms, the marketing has to take care that R&D is managed in a customer driven way of thinking. 7.3 Managerial Implications of Thesis Empirical results indicate that there are ways to improve the effectiveness of the commercialization process in the Finnish biopharmaceutical firms. If not already founded, it would be recommendable for the case firms to begin establishing a special licensing teams at the earliest phases of the company life cycle. The professional and dedicated licensing team can benefit a given firm at the later stages of company life cycle when the firm has actually established itself in the competitive biopharmaceutical business field. Although the establishment of the team comprising of highly educated professionals is an expensive venture for a firm without constant revenues it is of strategic importance in the long-term for NBFs. The value of licensing team for NBF increases once the firm begins to generate more products out of the pipeline. These teams would be handling the future out-licensing negotiations with the prospecting partners, thus allowing the top executives to handle the strategic planning. Another interesting issue from the marketing point of view is the special nature of the biopharmaceutical business. On one hand it seemed that new Finnish biopharmaceutical firms needed only to concentrate on out-licensing the results of R&D and securing the important licensing deals with lucrative terms thus making the business mainly product-oriented. On the other hand it soon became evident during the research process that the biopharmaceutical marketing domain was more complicated and included other aspects as well. The main finding was that NBF has to understand intimately the needs and wants of the end-user before entering into the lengthy R&D process. As a consequence this has the effect of making the biopharmaceutical business customer or market oriented. While the customer or market orientation should be a normal way of doing business in many 91 businesses, it is often not the case in the highly competitive high technology industry (see, e.g., Rajala 1997; Dutta et al. 1999). In particular, the thesis shows that marketing capability is vitally important to the small high technology start-ups in terms of future profitability. It was determined to be especially strategic for businesses consisting of long development times and a substantial technology risks. Since biopharmaceuticals matches with previous two factors the importance of marketing seems to be especially valid in this area of business. 7.4 Suggestions for Future Work The empirical results gained from the multiple-case study show that the se- lected case firms despite being founded in the late 1990s have already stabilised their business operations. The next few years reveal how successful in terms of financial return the case firms are going to be. Nevertheless, to understand better the commercialization activities in the Finnish biopharmaceutical firms there remains some future research to be done. For instance, a new multiple-case study with more personnel in the interview sessions could be conducted. As it was mentioned earlier in this thesis, many of the founders had been originally researchers before they started an entrepreneurial career. After the business operations had stabilised many of them hired personnel more experienced in business development matters. For this reason, the interviewing could be focused around them or alternatively centred on a possible commercialization team, if the firm in question has one. This would give more insights to the general marketing actions and commercialization activities. In addition, the research could concentrate more on to the special virtual characteristics of the firms and to the partner relationships. Another interesting aspect of biopharmaceutical business study could be the comparisons between foreign and Finnish firms. For example, if the researcher could gain access to a data concerning possible successes/failures of projects in the foreign firms this would give valuable information for the future business development of the younger firms. 92 REFERENCES Literature Ahola, E. and M. Kuisma (1998), Biotekniikkasektori Suomessa: Laboratorioista lupausten lunastajaksi. Helsinki: Tekes. Albaum, G., E. Duerr and J. Strandskov (1998), International Marketing and Export Management 3rd edition. 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Thousand Oaks, California: Sage Publications, Inc. 98 Interviews Hannu Hanhijärvi, Director, Sitra, Helsinki, 11.10.1999 Markku Jalkanen, CEO, BioTie Therapies, Turku, 14.1.2000 Kauko Kurkela, CEO, Contral Pharma, Espoo, 26.1.2000 Kalevi Kurkijärvi, Senior Partner, Chairman, Bio Fund, Helsinki, 22.2.2000 Risto Lammintausta, CEO, Hormos Medical, Turku, 10.11.1999 Christopher Palmberg, Researcher, VTT, Espoo, 6.10.1999 Juha-Matti Savola, CEO, Juvantia Pharma, Turku, 5.1.2000 Pekka Sillanaukee, CEO, Finnish Immunotechnology Ltd., Tampere, 13.3.2000 Hannu Sundqvist, President, Innomedica, Turku, 27.1.2000 99 Internet Sources http://www.biofund.fi/ http://www.biotie.com/ http://www.centocor.com/ http://www.contralpharma.com/ http://www.ey.com/ http://www.fda.gov/ http://www.finnish-immunotech.com/ http://www.hormos-med.com/ http://www.juvantia.com/ http://www.laaketietokeskus.fi/ http://www.leiras.fi/ http://www.ligand.com/ http://www.merck.com/ http://www.millennium.com/ http://www.orion.fi/ http://www.quintiles.com/ http://www.sitra.fi/ http://www.tekes.fi/ http://www.vernalis.com/ 100 APPENDIX I Acronyms AIDS. Acquired Immunodeficiency Syndrome. CEO. Chief Executive Officer. DNA. Deoxyribonucleic Acid. rDNA. Recombinant Deoxyribonucleic Acid DBC. Dedicated Biotechnology Company. FIPCO. Fully Integrated Pharmaceutical Company. FDA. Food and Drug Administration. GCP. Good Clinical Practices. GLP. Good Laboratory Practices. GMP. Good Manufacturing Practices. HEX. Helsinki Stock Exchange. IND. Investigational New Drug. 1 INDe. Investigational New Drug Exemption. IPO. Initial Public Offering. IT. Information Technology. NAS. New Active Substance. NASDAQ. National Association of Securities Dealers Automated Quotations System. NBF. New Biotechnology Firm NCE. New Chemical Entity. NDA. New Drug Application. OTA. Office of Technology Assessment (U.S. Congress). R&D. Research and Development. Sitra. Finnish National Fund for Research and Development. SWOT. Strengths, Weaknesses, Opportunities, and Threats. 2 Tekes. The Technology Development Agency of Finland. USP. Unique Selling Proposition. VIPCO. Virtually Integrated Pharmaceutical Company. VTT. Technical Research Centre of Finland. 3 APPENDIX II Glossary of Terms DBC. Dedicated biotechnology company. This term is usually used when referred to the US based company which operates strictly in the biotechnology business. Development research. Technical activities concerned with non-routine problems which are encountered in translating research findings or other general scientific knowledge into products or processes, i.e., proving whether an invention has clinical utility. These include pharmaceutical and chemical development, toxicology and kinetic studies in animals, clinical evaluation (volunteer studies, pre- and post-marketing) regulatory affairs activities and patent costs. Discovery research. This includes both basic research for the advancement of scientific knowledge which may not have specific commercial objectives, together with investigations (chemical, biological and pharmaceutical) directed towards the discovery of new scientific knowledge which have specific commercial objectives with respect to a new product (i.e., identification of new chemical entities) or processes. Discovery research activity includes synthesis, extraction, biological screening and pharmacological testing. Drug candidate. An NCE selected for development from a group of screened compounds, which possesses promising biological activity and the potential of patent protection. Ethical pharmaceuticals. Any medicinal chemicals, biologicals, products of biotechnology or in vivo diagnostics which are used for the cure, alleviation, 1 treatment, prevention or diagnosis of diseases of humans and are available as ‘Prescription Only Medicines’. FDA. Food and Drug Administration is a government institution responsible for the controlling the drug trade in the United States. INDe. Investigational new drug exemption. US based practice, in which the US based firms or firms intending to do research in the USA have to apply from FDA an IND. The FDA can reject IND applications if there is insufficient evidence that the new compounds can be safely tested in human beings. NBF. New biotechnology firm refers to the recently founded or a very young firm that is part of the biopharmaceutical industry. This term is usually associated with the European companies while in the United States the term DBF refers to the dedicated biotechnology firm which is part of the established US biotechnology industry. NCE. A new chemical entity or biological compound or a product of biotechnology (excluding new salts or esters unless they confer some additional therapeutic advantage over and above the parent compound) which has not been previously available for therapeutic use in human and is to be made available as a Prescription Only Medicine and to be used for the cure alleviation, treatment, prevention or in vivo diagnosis of disease of disease in human. NDA. New drug application. In the U.S., once a new compound has passed the clinical tests, companies have to present formal request to FDA to market the drug. FDA can accept or reject the application, alternatively, require that the new medicine undergo further testing to assess more carefully its safety and effectiveness. 2 Pre-clinical trials. Pre-clinical research consists of laboratory screening of molecules (bioassays and animal tests) to evaluate their therapeutic potential and toxicity. Phase I clinical trials. Studies usually conducted in a small number of healthy volunteers. They aim to establish safety at a given dose level and information regarding absorption, distribution, metabolism, excretion, including bioavailability and the pharmacological aspects of the drug’s action. For some conditions (e.g. cancer) Phase I trials will be carried out only in patients with the target disease. Phase II clinical trials. Studies conducted in a limited number of patients suffering from the target disease. These may initially be open studies providing evidence of general activity and efficacy, establishment of an effective dose range and frequency of administration. Patients will be carefully monitored for all possible side effects. Later Phase II studies will use larger numbers of patients and will generally be double-blind studies making comparisons wit a placebo. Phase III clinical trials. Studies involving large numbers (several hundred to several thousand) of patients with the target disease and often a long period of administration. There will be comparisons with established medicines for the target disorder. Such studies will provide further documentation of any side effects, toxicity and general safety of the medicine and may be used to check for interactions with any other medications patients are likely to receive concurrently. ‘Phase IV’. Post-marketing surveillance scrutinising new drug usage and clinical trials carried out after marketing. These studies aim to determine whether previously unrecognised adverse effects or abuses occur, or whether there is a change in the occurrence of known adverse effects. Such work may also 3 reveal if there are differences in effectiveness of the medicine for labelled indications under circumstances of widespread usage or if new therapeutic indications of the medicine can be recognised. The definition excludes studies in support of marketing. Product candidate. An NCE which, subject to satisfactory completion of later clinical trials, is marketable product. Screening. Testing for specific activity in a (usually biological) model. Synthesis. Refers to directed and deliberate first chemical synthesis or extraction of an NCE. 4 APPENDIX III A template of questionnaire sent to a firm. COMPANY X Company Specific General Information A) Vision and Strategy – What is the vision and the strategy of the firm? B) Project Portfolio – What kind of a project portfolio the firm possesses? C) Personnel Resources – What is the number of employees? What are their areas of speciality? What is the future requirement of personnel? D) Financial Situation – What is the current and expected future financial situation of the firm? Commercialization Practices A) Important Problems and Risks – What are the most important risks and problems at getting the product from laboratory to market? B) Strategy Options at the Different Cycles and Phases – What are the different commercialization options for NBF at the different company lifecycles? C) Commercialization at Different Phases of Project – In what phases biopharmaceuticals are normally commercialized? What are the affecting factors? What are the available options? What are the strengths and weaknesses of the commercialization options? D) Licensing Deals – What is the validity of the licensing deals? What are the possible other options? When the other options become valid? E) Outsourcing Activities – What is the availability of outsourcing services in Finland? 1 F) Critical Success Factors of Commercialization – What are the critical success factors of commercialization? What are the possible pitfalls in the commercialization process? Information Sources A) Interviews – Recommendations of persons to be interviewed. 2