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 / Winter 1996 / Issue 2(originally published by Booz & Company)


How Strategic Alliances Work in Biotech

Strategic alliances are less costly and less risky ways to acquire capabilities than outright acquisitions. But which alliances succeed? And how can companies be assured they are on the right path? With 20,000 alliances formed since 1988 and the number growing 25 percent a year, New York Times technology writer Lawrence Fisher looks for answers to the drug industry where the growth of alliances has been dramatic.

From 85 deals to 376 in just the two years from 1993 to 1995, biotechnology companies and pharmaceuticals are setting the pace for strategic alliances in the U.S. Sharply different in size, in culture even more so, their divergent time frames add another contrasting twist - yet the deals continue to multiply. The reason goes back to the early 90s when financial failures squeezed biotechs out of the stock market at about the same time the big pharmaceuticals were restrained from raising prices by managed care, health care reforms and market forces. The timing was perfect, and biotech alliances caught fire.

Mr. Fisher’s conclusions begin with the obvious: a strategic alliance must relate back to a strategic plan. The areas in which companies wish to acquire capabilities, rather than grow them internally, must be identified. Having taken the initiative, however, and selected a partner to fill the gaps, care must be taken to ensure that the strategic alliance is a true collaboration. As Mr. Fisher points out, for giant pharmaceuticals and tiny biotechs to find the mutual respect required for true collaborations to work is not always so easy to achieve.

Another potential stumbling block is the vastly different time frames on which the partners operate. Biotech executives live with the constant need to raise cash, while cash-laden giant pharmaceuticals can afford a more deliberate pace. Still, if Mr. Fisher is right, the giants have an end-game in mind and will nurture - and finance - their best relationships. When an acquisition finally takes place, the experience of the alliance will have helped to ensure its success.

Independence and integration used to be hallmarks of strength for American corporations. Today they could be signs of weakness as companies large and small rush to spin intricate webs of strategic alliances.

With technology in a constant state of change, transforming one industry after another in its wake, no company can afford to hang on to the status quo for long. But neither can it predict with assurance which promising piece of technology will pan out, spinning off tomorrow's hot new product. Alliances are the places to hedge all bets.

Some alliances are between partners of like size, whether big or small, who have reason to come together on a particular project. But strategic alliances--to fill gaps in such growth factors as the ability to innovate and distribute products--often involve companies of unequal size, and it is their size itself that sometimes brings them together. Big companies are looking to sign up with small companies to tap into their cutting-edge research and entrepreneurial energy. Small companies are looking for the deep pockets and vast distribution networks that big partners offer. And both sides like the fact that they can start a relationship without tying the knot for all time.

In short, alliances are a less costly, less risky and more flexible way to acquire capabilities than are outright acquisitions. Acquiring a company, after all, means buying its weaknesses along with its strengths. A successful alliance can lead to an acquisition, and many do, but the likelihood of a good marriage is enhanced in these cases by a period of living together.

All kinds of companies have been trying each other out in this way since the Reagan Administration got the ball rolling by relaxing enforcement of the antitrust laws. United States companies have formed 20,000 alliances since 1988 alone, with the number growing at a rate of 25 percent a year.

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