In April 2000, the biopharmaceutical company Abgenix faced the important strategic decision of how to most profitably commercialize its XenoMouse based high potential cancer product ABX-EGF, which had reached phase I clinical trials after having successfully passed preclinicals. Specifically, Abgenix had to choose among three salient alternatives for the route to market of ABX-EGF. These were: 1.
Entering into a licensing agreement with “Big Pharma” Pharmacol, yielding a series of development fees as well as royalties of Pharmacol’s ABX-EGF sales. 2. Forming a joint venture with the biotech firm Biopart, equally sharing all future costs and profits. 3. Pursuing a “go-it-alone” strategy through the end of phase II trials, thus postponing the decision of whom, if any, to partner with.
The first two alternatives were somewhat consistent with Abgenix’ past business model that yielded revenues in two ways: 1) by issuing exclusive licenses to use XenoMouse for drug development targeting specific diseases to leading pharmaceutical and biotechnology companies and 2) by undertaking the early stages of XenoMouse based drug development and subsequently selling off the rights to further develop and bring the drugs onto the market. In contrast, the “go-it-alone” method would require an expansion of Abgenix’ resource base and capabilities: a more risky approach with the potential of a relatively high value generation.
In order to arrive at conclusions as to which alternative Abgenix should opt for, the three alternatives are analyzed in the following pages based on a financial assessment in the form of strategic assessment as well as an NPV analysis. Strategic assessment In addition to the strictly financial analysis based on potential risk and reward prompted by each of the three alternatives, a strategic assessment is crucial to single out Abgenix’ current resources and capabilities so as to unveil its core competencies.
Once this is understood, the appropriateness of Abgenix’ skills relative to the three options of moving forward the ABX-EGF can be addressed. Also, it can be determined whether there are any strategic learning opportunities associated with each of the options. Abgenix’ competitive advantage According to the case Abgenix’ key asset is its ownership of the humanized transgenic mouse, capable of producing antibodies, specifically targeting human diseases.
Thus, having XenoMouse as a resource renders possible a vast array of antibody therapies, the development of which can either be undertaken in-house or licensed to a corporate collaborator for payment of, typically, an upfront fee, early development fees as well as royalties following market launch of a given treatment. Abgenix believes that XenoMouse is superior to other humanized mice and, importantly, to the HuMAb-Mouse owned by Medarex, which had also proved promising.
Utilizing XenoMouse, Abgenix has a competitive advantage in antibody development to specific disease targets, which normally are discovered and validated by Research and Technology Organisations (RTOs) or small technology firms. Once antibodies for a specific target have been developed, Abgenix has in-house the capabilities to carry the therapy based hereupon through preclinical trials and until phase II clinical trials. Reaching the end of phase II trials with a therapy entails substantially more perceived value from potential buyers than having a product in phase I, such as ABX-EGF.
Throughout phase III the “value per effort” is sloped significantly lower than for phase II. Thus, strictly considering value at the time of handing off a therapy, the end of phase II is the ideal moment to sell (Annex 1). This knowledge is consistent with Abgenix’ previous work. As such, the company has never taken a product through phase III by itself, and further, does not immediately have the human resources to do so, as no employee has tried it before. Thus, Abgenix capabilities do not reach beyond phase II clinical trials, for which reason the company does not have a resource base capable of commercializing an antibody drug, e. . sales force. Handing off ABX-EGF to Pharmacol Having $12 billion in sales in 1999, experience in marketing a wide array of drugs –including some already dealing with cancer— and a powerful sales force, licensing the Xenomouse to Pharmacol seemed to be the best option, knowing that, ultimately, Abgenix’ revenue would depend on ABX-EGF sales. Indeed, sales, if the drug succeeded past clinical phases II and III and got FDA approval, were forecast to reach $700 million a year in ten years, of which, Abgenix would get a 10% fee as perpetuity.
Thus, although they had had no relationship with Pharmacol in the past, the company’s reputation and savoir-faire in drug marketing assured Abgenix a sturdy stream of revenues was the drug to reach the market. In addition to these royalty fees, Pharmacol would make some initial payments during clinical testing, which offset the potential risk of failure. In sum, handing off ABX-EGF was as risk-free an option as it gets. Even in the worst case scenario, with ABX-EGF not making it to phase III (as going into phase II was practically certain) Abgenix would still get some revenues. t was in line with its current business model and did not require from the company any other efforts in terms of marketing and sales. Establishing a joint venture with Biopart Relative to Pharmacol, Biopart is a small industry player, which is not able to carry out an equivalent marketing effort and thus generate the same sales of a potential commercialization of ABX-EGF. However, taking into consideration the joint development process with Biopart, who has clinical skills and expertise in both phase II, phase III and final FDA approval, provided the basis for significant learning opportunities for Abgenix.
The joint venture entails co-development work in phase II, whereas Biopart will take the lead in subsequent phases including in what concerns commercialization activities. Abgenix will, however, remain significantly involved through all stages, which strategically could be important, since it gives the potential for acquiring the complementary assets needed to perhaps single-handedly bring future products to market. The “Go-It Alone” strategy
The marketing and sales barriers to entry not being scalable, Abgenix would be forced, at one point or another, to either partner or sell its rights on ABX-EGF. However, the company did have the in-house capabilities of taking the drug through the second phase of clinical testing. If the drug successfully made it beyond this point, then Abgenix would be in possession of a much stronger product, as the biggest chunk of uncertainty around drug innovation would have been left behind. This would entitle the company with a much higher bargaining power when entering the negotiations to choose a partner.
On the other hand, testing costs ($28 million) would fall entirely upon Abgenix. Would renegotiation allow for the company to compensate that “extra” investment? Financial assessment -NPV & Risk From the NPV calculations (Anex III) one can conclude that: • Option 1 (Hand-off) is the less risky as Abgenix will not have any more costs and guaranties some revenues upfront just for signing the deal along with some milestone payments. Furthermore if the product is commercialized they will receive a 10% royalty rate on sales.
Looking to the NPVs we can see that this option is the one with the lowest figure, so financially it should not be the chosen one. • Option 2 (Hands In) has medium risk as all costs and profits will be shared with Biopart. Although having negative net results until year 6, if we look at NPV it is much better option than the first one. • Option 3 (Do Phase II alone) has the higher risk as it means that, if the project fails the company will have significant costs as it requires high investments fully supported by Abgenix.
Furthermore they miss an opportunity to have some profit with this product. The decision on moving forward with this option is very dependable on the percentage of success in Phase II, that in management’s words would be “highly likely”. Strictly considering NPV one can conclude that Option 3 (Doing phase II alone) is undoubtedly the best option. Conclusion Analyzing the partner decision through the decision tree framework of vertical integration with regard to innovation, the joint venture option with Biopart is supported.
Accordingly, specialized complementary assets are definitely required for Abgenix in order to bring ABX-EGF to market as their current resources are limited to taking a product to the end of phase II and no current sales organization exists. Copying is considered to be hard as the ABX-EGF is utilizing the proprietary and protected XenoMouse as development platform. The existence of “big pharmas” with huge R&D departments and sales organizations entails that the appropriate option according to the decision tree is “Integrate if barriers to entry into complementary assets are scalable; otherwise acquire or form joint venture with going firm”.
Developing an efficient and large enough sales force not being a scalable barrier –a small and inexperienced sales force would prove inefficient— Abgenix’ better option is to partner with Biopart and benefit from its already existing complementary assets. However, when to partner is one more key question: Abgenix has the in-house capabilities of carrying the preclinical testing up to the end of phase II, when the value perceived by the buyer substantially increases.
Given that the company has very good expectations for ABX-EGF making it to that stage, a then increased value could allow them to renegotiate the partnership with Biopart (in terms of percentage of sales), which would translate into a more dense stream of revenues. Annex I: Value perceived by buyer according to the success in clinical trials [pic] Annex II: Vertical Integration and Innovation – Game Tree [pic] Annex III: NPV calculations By Adam Thyboe, Diogo Onofre and Daniela Mallard