Keys to Choosing Corporate Partners – Aradigm

Posted on October 12, 2008

Partnerships between two firms are often difficult to manage and often fail to bring results.  This essay digs into one of the more extreme partnerships and how it was made to work with Igor Gonda, CEO of Aradigm Corporation (OTCBB:ARDM), a life sciences firm.

There we were, 11 CEOs sitting in a conference room in Marin County:  All members of the Alliance of Chief Executives, bringing the business issues we’d been banging our heads, trying to sort out.   That was the first time we got the taste of the extreme ‘sport’ of running a biotech business from Igor.  You see, Igor Gonda, CEO, runs Aradigm Corporation, a life sciences company, and most life sciences companies function in the land of extremes — extreme scientific research, extreme finance, and extreme partnering.

But all of us can learn a lot from observing and studying those CEOs like Igor that push it to the extreme.  In life sciences, pushing to the extreme is required if we want new treatments.  The norm is very high risk/high return for investors because of a very high probability of a negative outcome on the product (most don’t pass FDA trials), and development time frames that easily stretch to 10 years or more.  And there’s not often a good fallback position, like a treatment or drug that kinda-sorta works, or downgrading expectations to a small stream of cash flow after getting say tens or hundreds of millions in investor money.

Aradigm’s focus is on drug delivery to the lung, so that instead of getting injections or pills, drugs can be delivered through inhalers.  Much of Aradigm’s past research was focused on delivering insulin to the body via inhalation for the treatment of diabetes.

I saw Igor again at an Alliance life sciences CEO Round Table discussion and the challenge of creating good partnerships between businesses came up again.  So I drove over to Aradigm’s Hayward, Calif. headquarters and sat down with Igor to zoom in on the art of extreme partnering.

“I am lucky to have been a part of two successful drugs getting to market: Pulmozyme – recombinant human rhDNase enzyme that is given by inhalation for the treatment of cystic fibrosis; and Evamist, a transdermal spray for the prevention of the symptoms of menopause. But the life sciences world is so risky that many in the field never have that pleasure.” Igor said, with his unusual accent that evolved through living in Czechoslovakia, England, Australia and the USA.  He continued, “Partnering with a big pharmaceutical firm (“big pharma”) often appears to be the best way to reach our dreams–to bring a new life saving or life enriching drug to market.  It is universally viewed as the enabler for a smaller company (“biotech”) to get access to that scarce and expensive commodity—cash and to gain access to marketing and sales know-how and distribution channels. All of this, at least in theory, should be appreciated by the financial markets so that the smaller biotech firm benefits from an increase in stock valuation that occurs when a big-name company shows  “faith” in their product or technology.  But often, this valuation uplift does not happen, and even when it does, this kind of happiness rarely lasts.”

What had looked liked the perfect deal in 1998 to Aradigm was a partnership with Novo Nordisk to develop inhalable insulin.  Aradigm had generated very attractive human data with its AERx inhalation delivery system for insulin; Novo Nordisk had the cash, was the global leader in the treatment of diabetes with insulin , and was one of the very few companies that had the capability to manufacture this drug economically on the enormous scale that was forecast for this needle-free form of insulin.  After the deal was made, millions and millions of dollars flowed to Aradigm over a decade, allowing it to continue its research on inhaled insulin in collaboration with Novo Nordisk.

But as events unfolded, it turned out that Novo Nordisk had partnered with Aradigm only as a defensive strategy — rival Pfizer had partnered with another firm to develop inhalable insulin and Novo Nordisk realized they’d be badly injured if Pfizer brought a new drug delivery system for insulin to market that would compete with Novo Nordisk’s injectable insulin business.  The US giant in the insulin treatment of diabetes Eli Lilly took the same step as Novo Nordisk and partnered with another one of Aradigm’s competitors to develop inhalable insulin.    But when Pfizer gave up on the effort in 2007, Novo Nordisk quickly cut its partnership with Aradigm loose – and Eli Lilly terminated its partnership, too. The dream of lucrative licensing revenue streams from inhalable insulin that would have sustained future product R&D and would have provided much awaited returns for investors in the companies who partnered their inhaled insulin technologies with big pharma, vanished.  Indeed, the share prices in these companies plummeted.

But some partnerships work out well.  In 1990 Roche and Genentech partnered in arguably the most successful biotech “marriage”, and today that partnership is still critical to the success of both companies, and has created a powerful and important line of cancer drugs that are saving lives every day.  In fact, Roche views the partnership with Genentech to be so critically important for its business that it is trying to buy Genentech.

As the afternoon wore on, Igor and I decided to pound out a list of keys to successful partnerships between companies right then and there.

At the top of the list, drawn from the Novo Nordisk experience, is that the partnership must be crucial to both firms, and in a sense, must make them mutually dependent.  Real commitment to the ups and downs of partnerships, and in particular, a long process like drug development means there must be no easy out for either party.  The strategic value must be an offensive play for both, not a defensive strategy like it was for Novo Nordisk.  This strategic alignment will increase the odds that the partners goals must be aligned over the long term; a critical element.

If the partnership is between a smaller company and a giant, then there must be a strong advocate at the giant who is willing to risk a career over the partnership.   Such dedication on the business front parallels the extreme devotion that the scientific advocates of biotech products display.  A great example is Napoleone Ferrara at Genentech.  He fought doggedly for his drug for 17 years until he got the breakthrough when Genentech and  Roche rolled out the cancer blockbuster Avastin.  Without a strong, entrenched champion, the giant can forget about the partnership, or change its mind easily.  The champion must be emotionally motivated, not just some financial manager evaluating portfolio risk.  The partnership needs to be their “baby”, too.  As development of biotech products is often marred with technical and clinical challenges on a time line similar to human maturation, changing “dirty diapers” in the early stages of partnerships and dealing with predictably unpredictable “teenage behavior” in product development requires “parents” who have more than just ROIs at stake.

The partner must be strong enough to bring in other resources as needed.  At first, it looked like having Novo Nordisk’s global experience in all aspects of insulin business was the key advantage for Aradigm that even the world’s most powerful pharma company, Pfizer, was missing.  But Pfizer was committed enough to the inhaled insulin and strong enough that it bought at a very substantial cost, access to another source for insulin.  And, while ultimately Pfizer gave up on inhaled insulin, they aggressively pursued its development to create a new, important market opportunity for themselves.

If the main reason for partnering is access to capital, don’t look at cost of capital alone.  After all, a partner may dump you after years of collaboration, just when you need to do a round of capital raising.  That may be more “expensive” than no partner at all. While computing the value of a strategic partner is difficult, quantitative models can and should be created that help compare it to the more objective cost of capital. Above all, a great partner must bring strategic value to your company. However, it seems that the best guarantee of success is that you, too, bring such long term strategic value to the partner that they would never walk out—because they would take such a big strategic hit.

It goes without saying that the weaker you are on the “wedding day” the more likely you are to enter into a bad partnership.  Develop relationships and position the firm for partnerships long before you absolutely must have them.  Just like in a good marriage, passion is what starts the relationship but commitment, perseverance, mutual respect, sharing of values and key interests are the ingredients required for long term success.

After years of research and development, it’s hard to argue with the desire to have a big launch into the marketplace, and this desire drives many partnerships between developer and distributor.  But sometimes it’s better to stay small and do it yourself at least a little longer.  If the partner’s only contribution to your joint business is cash, then do the math to see if you won’t be better off borrowing the money or raising it through sale of equity.  .  Even if you have to “dilute yourself” a little upfront, it may be worth it if you have your destiny in your own hands.  The moment you’ve proven that your product (or drug in this case) is viable, the interest in and desirability (and valuation of your company) often goes way up.  If you have the R&D know-how and the financial resources, you may cross that finish line faster with a highly focused organization, and then, if needed, have your pick of great marketing partners.  Too many firms go for the big launch scenario before the product is proven, and thus have to give up much of the product ownership to do so.  Only have a partner if there is a compelling need for it.

Igor and I could have gone on and on about the multitude of challenges he’s facing, as is typical in the world of the extreme CEO.  Almost nothing impedes Igor’s attitude because he has a passion for healthcare products that can help humankind, and he can’t wait for that exhilarating feeling again when the new drug approval letter from FDA arrives.  .  But it was getting late, and Igor, peeking through the blinds in his office, saw his wife pull up to remind him that it was time to go home.  The quest would have to wait for another day.

Key Takeaways:

1. Partnerships often fail, so if you can get to market, even in a smaller fashion without partnering, consider it carefully.  Once the product is to market and has proven viability, the valuation of your firm will jump nicely – even if the debut isn’t as grand as it could be.  You’ll have more suitors wanting to partner, and you’ll have to give up less.
2. Partnerships that last are essential for both firms, not just the smaller firm.  Look for situations that will create mutual dependence.
3. There needs to be someone in the bigger firm with power and authority that is willing to risk their career to make the partnership work over time.  They have to be emotionally invested.  If your partnership is just another portfolio bet, look out.