Keys to Success

Mergers, acquisitions, alliances, licensing deals—call them what you will. No matter the form and attendant differences, there is, in this post-millennium world, a common thread running through them all. In a word, just about every deal is about relationships.

Rodney Ferguson, J.P. Morgan Partners

Until recently, most deals were essentially transactional: A large company purchased technology from a smaller one, commercialized it, then paid royalties. But times have changed. For one thing, the playing field has become more equal. With easier access to money, smaller entities—for example, biotechnology, biomedical, or specialty pharmaceutical companies—are able to bring a product to market themselves. In effect, they're saying, "If you want our product, buy the company—or involve us more intimately in co-development or co-marketing."

Big Pharma is getting the message. "Larger companies are opening themselves up more to the insight contributions of small partners," says David Brinkley, senior vice president, commercial development for Theravance. "Just as these companies have understood the need to integrate functions to come out with a better product, they also realize that there's much to gain by tapping the acquired company's knowledge and wisdom. Integration is key."

Relationship building (a more descriptive term than partnering) is difficult in any context, but especially one in which a cash-flush Goliath sits across the table from a less endowed David. The complexity of partnership building is not for the managerially-challenged, which may explain why so many deals head south for no technical reasons. In survey after survey, culture clashes, lack of senior-level commitment, poor communication, and other "soft issues" surface as the key elements that pollute a merger or alliance. It must be said that this doesn't have to happen, especially when so many of these issues fall within the control of executives from both parties involved in the deal.

Tracy Lefteroff, PricewaterhouseCoopers

This article identifies 10 tips for forging successful partnerships—10 things to keep in mind the next time your company heads down the acquisition or alliance trail.

1 Stay Strategically Aligned

Tracy Lefteroff, global managing

partner of PricewaterhouseCoopers' life sciences industry services, recalls the case of a large medical device company that embarked on an alliance with a smaller one. Soon after the deal was signed, a violent disagreement erupted between researchers in the smaller company and management of the larger one over marketplace trends and future strategic direction. It did not matter that the researchers had data from their advisory board of world-renowned experts to back up their conclusions; the other side refused to listen and insisted on charting its own course. Eventually, the partnership broke up over these irreconcilable differences.

In the world of partnerships, strategic congruence is next to godliness. Every deal should include a thorough review of each partner's strategic goals and an assessment of how well the partnership will meet those goals. If there's no match, there should be no deal.

Even when there is agreement on strategic goals at the beginning of a project, changing conditions can cause strategic rifts. Robert Wills, PhD, vice president of alliance management for Johnson & Johnson's (J&J's) pharmaceuticals group, recalls one such situation:

"J&J's alliance management team sensed an emerging issue when the company's Velcade [bortezomib] partnership with Millennium Pharmaceuticals began to move in a new strategic direction. Realizing that the new direction was in conflict with their company's business plan, Millennium personnel began to express concerns. Our alliance team quickly stepped in, along with the alliance manager at Millennium, and apprised senior management at both companies of the incipient problem. The situation was resolved at the top and the solution quickly communicated, nipping the concerns in the bud."

Laureen DeBuono, Thermage

Strategic congruence is not only a matter of going-in agreement. It must be continuously managed as the partnership confronts a marketplace characterized by chance and churn.

2 Make It Win-Win

Maybe it goes against the fictitious high-testosterone image

of deal making, but entering a partnership is not a zero-sum game in which one side is the victor and the other the vanquished. Rodney Ferguson, now a partner in the venture capital firm of J.P. Morgan Partners, was involved in legal affairs and business and corporate development at Genentech for 11 years. He remembers an alliance between Leukocyte (which has since been purchased by Millennium) and Genentech. Leukocyte was responsible for the lion's share of the development work, with Genentech taking the lion's share of the profits. Even at Genentech's board meeting to approve the deal, it was clear that Genentech's directors believed the deal was very much one-sided in its favor.

With so little to gain, Leukocyte quickly lost interest, and the project floundered. Leukocyte was bought by Millennium, which realized that Leukocyte had signed on for a bad deal. "It took five years to develop the product, when it should have taken two," Ferguson says. "That's typical of deals that don't provide equal motivation to both sides."

Ferguson contrasts the Leukocyte deal with a role-model partnership: the alliance formed between Genentech and Idec to co-promote the blockbuster cancer drug Rituxan (rituximab). "There was a mutual need," Ferguson explains. "Idec had a great cancer product with early but compelling clinical data. It needed money and manufacturing help to get its recombinant molecule antibody to market. Genentech was the premier manufacturer of recombinant proteins, and it needed revenues in commercial products."

Robert Wills, Johnson & Johnson's pharmaceuticals group

Ferguson also says Genentech's head of research at the time, Art Levinson (now CEO), was the first to see the potential for Rituxan. "Art was intrigued with the idea of letting a smaller partner take the lead in developing a new drug, and he made sure that Genentech took a hands-off approach. Idec led the clinical program up until approval and did the early manufacturing; Genentech took over commercial manufacturing. Both companies sold and promoted the product, built a joint sales force, and commercialized the product together. It was a win-win for both.

3 Get (and Keep)Top-Level Commitment

Two senior vice presidents want to partner and champion a deal in

their respective companies. Their enthusiasm is contagious. The deal is signed, and the partnership takes off. A year later, both executives have moved on to other jobs. Progress slows—or stops entirely—and the joint venture falls apart.

It's an all-too-common scenario for pharma and biotech companies. Without the presence of deal champions on both sides, it's better to look elsewhere to fill the pipeline. An effective champion creates an enduring deal by first finding the win-win and then making sure the transition, from the negotiating team to the execution team, goes smoothly. As the alliance progresses, new people are continually being brought into the operation. Deal champions must stay around to answer their questions and motivate them, or momentum will be lost. The first six months after signing are critical, and if a company loses its champion during that time, it puts the deal at real risk.

Power is the breakfast of champions in building a partnership. "The more power a champion has, the more effective he or she will be," Ferguson says. In a large pharma company, it's best when the person selling the deal is the senior vice president of research, development, or clinical. On the other hand, when the CEO of a smaller company is committed to the alliance, you know the whole company will take it seriously."

A sense of urgency is a good marker of commitment. For example, if you send the deal team a draft of a confidential disclosure statement and it takes them a month and a half to turn it around, or if it takes a year to finalize a three-page term sheet, chances are that senior executives do not think it is a high priority. They have not imparted a sense of urgency and importance throughout the organization, so they are most likely not committed to the deal.

William Dubiel, Bayer Healthcare Diagnostics

Take the Theravance/GlaxoSmithKline alliance for Advair (fluticasone) as a model of top-management championship. "There was a lot of high-level contact between GSK and Theravance executives: GSK's CEO, J.P. Garnier, Tachi Yamada, chairman of R&D at GSK, and Theravance CEO Rick E. Winningham," Brinkley says. Within each company, there was also constant communication between senior management and the developers: Yamada and Garth Rappaport, head of GSK's Respiratory Center for Excellence in Drug Development, worked closely with that company's business development group. On the Theravance side, Pat Humphrey, executive vice president for research, liaised with the research group. It was clear to everyone, in both companies, that this project could happen."

4 Look For Cultural Fit

Culture is an organization's norms, values, and beliefs.

It is the way an organization does business. Because culture exercises an imperceptible influence on decision making, a cultural mismatch is an invitation to disaster.

Laureen DeBuono, CFO of Thermage, vividly recalls one such case. Nellcor, where she was associate general counsel, was a $1 billion manufacturer of respiratory and anesthesia machines, based in Silicon Valley. Nellcor's atmosphere was entrepreneurial: Employees drove their own goals and were motivated with long-term cash bonuses and performance-based option plans. Strict adherence to policies and procedures took a back seat to creativity and innovation.

In 1998, Nellcor merged with Mallinckrodt, which at the time was a $3 billion pharma and medical device conglomerate. Based in Missouri, Mallinckrodt's culture was jarringly different from that of its smaller partner. It was a classic buttoned-down, hierarchical environment that favored incentives such as country-club memberships and company cars over cash and options.

DeBuono and her colleagues at Nellcor were concerned about the cultural mismatch even before the deal was signed. They retained an outside consultant to address the issue, but his recommendations went nowhere. In the end, most of the Nellcor executives were let go, and the merged company became top heavy with Mallinckrodt "suits." Then, the compensation system was changed. "Bonuses and options were cut back, and Nellcor employees weren't motivated by Mallinckrodt perks," DeBuono says. "Before long, disillusioned Nellcor employees began leaving. The merged company began to miss its numbers, and the business went sideways."

David Brinkley, Theravance

Mention the word culture to anyone involved in an international deal, and you will likely see visible pain and suffering. But some companies do it right. At J&J, an alliance with a Japanese partner was at that delicate decision point that typically causes most executives to lose sleep at night. After several months of painstaking analysis, J&J concluded that the product would not be a commercial success in the United States. Wills' alliance team members had to convince their partner that it would be best to cut its losses. That meant taking their Japanese counterparts through the decision process, but, "In Japan, decision making can be much slower and more deliberate than it is in the US," Wills says. "A decision of this magnitude needs to be made by senior management, but middle-management teams can be reluctant to escalate the issue, especially if it isn't good news."

Normally, at J&J a decision to abort would be made in six weeks. In this case, it took six months. But Wills believes it was worth it. "We had to ensure that their team could take this news forward through their organization in a way that it would be accepted, even if it was disappointing. At the same time, we were very interested in retaining a positive future relationship with that company. By exhibiting patience and demonstrating an understanding of their process, we achieved both goals."

Old-fashioned, face-to-face communication remains one of the best ways to avoid misunderstandings. Wills believes that one of the major reasons J&J and Millennium have been able to avert major conflicts within the alliance for Velcade, an oncology treatment, is the close personal relationship that has been forged between executives at both companies. "Because they communicated so often and have so much trust in one another," he says, "all it takes is one phone call to get the alliance realigned."

Michael Curran-Hays

5 If It Ain't Broke, Nurture It

Time and time again, m&as fail because

the larger partner just can't resist tinkering. Too often, no sooner does the dominant partner acquire the creative genius of a scientific team than it moves immediately to make changes in that "zone of excellence." Frequently, in a cost-cutting move, the R&D function of the smaller entity is absorbed by the larger one. But economies of scale often lead to deficiencies in creative output. It's better to look for cost-cutting opportunities in other areas of the company. Shared services is a logical place to begin, especially when one partner is substantially larger than the other and has well-established functions in place.

In the fight to eliminate redundancy, it's smart to keep in mind that the focus should always be on retaining the best-in-class and to not assume that the systems and structures of the larger partner are better than those of the smaller one. William Dubiel, vice president, North American services, Bayer Healthcare Diagnostics recalls, "When Bayer acquired Chiron, our CEO, Rolf Clausen, told everyone on both sides, 'I am the first employee in a new company. All of you are going to join me in this company, which we will create together, taking the best from Bayer and Chiron.' He looked at both companies objectively, made only changes that added value, and tried not to disrupt those things that were working well."

6 Watch What You Reward

Competition has its place in business, but not

between partners. Think collaboration, not one-upmanship. People often react to a merger by building protective walls around their operation. Without a shrewd balance of both positive and negative consequences to modify such behavior, that fortress will never come down. Look at the reward system and ask: Are we discouraging ego-based behavior and encouraging teamwork?

Performance is not only about tracking and evaluating hard-edged results. Build team and relationship skills into performance evaluations, the way it is done at J&J within its pharmaceutical group. Wills says that in his company such skills are "a built-in expectation. It's how people are supposed to do their job. Everyone who participates in an alliance is compensated for behaviors that contribute to mutual success."

Look not only at individuals but also at structures and systems that encourage competition. Competitive wars are often most intense in the sales units. Ferguson considers the Genentech/Idec Rituxan deal one of the best ever because of the way the sales force was structured and rewarded. "Dick Brewer, head of sales and marketing at Genentech, and Bill Rohn, senior vice president of commercial operations for Idec, sat down together and mapped out the sales strategy," Ferguson says. "They developed their plan, then carefully considered where each company's sales force was going to be deployed. They made sure the two groups weren't calling on the same physicians. You can divide it up a number of ways—family practitioners versus specialists, community-based physicians versus hospitals, geographical areas. The important thing, which Dick and Bill never forgot, is to make sure your people are competing with other companies, not one another."

Martin Wing

A performance environment that does not include an effective feedback system is woefully deficient, especially when it comes to modifying behavior. Referring to the Bayer/Chiron merger, Dubiel concludes that the integration would have gone much more smoothly if more attention had been paid to human resources issues, including feedback. "We could have been better one-minute managers," he says. "If someone has a poor attitude or is engaging in unwanted behavior, you need to give them immediate feedback, based on the observable behaviors."

7 Establish Protocols for Decision Making

The ability to make decisions is the

acid test of effectiveness, especially when two companies become partners. Smart partnerships establish clear protocols for decision making. For example, at J&J, decision-making protocols—rules of the road—are built into most agreements. The company outlines which decisions will be made unilaterally, which will be collaborative, and which by consensus. It also determines who will have the final say, what will happen if there is a dispute, and how issues will be escalated. "If you don't spell out all of this in the agreement, differences of opinion would have to go to arbitration, which isn't to the advantage of either partner," Wills says.

The steering committee of a joint venture or alliance is often a hotbed of decision-making conflict, and having a common decision-making process helps avoid gridlock. Steering committees and other decision-making bodies should focus their process on five key questions:

• What's the intent of the decision?

• What are the objectives?

• Which objectives are "musts" and which would just be nice to have?

• What are the alternatives and how well does each meet the objectives?

• What are the risks?

There is another benefit to having a common decision-making process: "The higher the stakes, the higher emotions run," Brinkley says. "Using a standard process takes the emotional, subjective component out of the decision and focuses on the facts. By moving step by step—from objectives through risks—we analyze the available information objectively rather than merely exchanging opinions."

8 Plan Smart

In 1995, Nellcor acquired Puritan

Bennett. "Even though it was the acquiree, PB was larger than Nellcor," says DeBuono, Nellcor's cousel at the time of the merger. "Half its sales force was direct; the other half was comprised of third-party distributors who handled accounts for PB."

Nellcor decided to eliminate the third-party distributors and replace them with direct salespeople. The distributors were notified that their services would be terminated in 90 days. The planners thought this would be sufficient time to train a new sales force to replace the distributors.

"The planners never stopped to think that, as soon as they received notice, the distributors would stop working on PB accounts and begin looking for new business," DeBuono says. The 90-day lead time was a myth. To Nellcor's surprise, sales tanked immediately, and the company had to scramble to cover the impact of the loss of revenue."

At J&J, the focus on smart planning led to the formation of the Pharmaceuticals Alliance Management group. The group consists of dedicated staff who are assigned to each alliance from the beginning of the deal through commercialization. They are resident experts in every aspect of alliance planning. And it shows.

As proof, Wills points to the J&J/Millennium alliance for Velcade, which was consummated in 2003. It was the second time J&J applied the formal strategic alliance management process in negotiating and executing the deal after it was signed. The partners have both an R&D and a commercial relationship. They share resources and budgets, and representatives from each serve on joint committees. Some of these committees deal with operational issues; others are charged with strategic decision making. There have been few bumps in the road, and all have been minor.

"It works as well as it does because our dedicated staff ensures that the right experiences and conditions for operation are included in the deal structure," Wills says. "Before the deal is signed, our people construct a general integration plan, based on objectives and best practices from inside and outside J&J. They incorporate lessons learned from past partnerships."

Plan as you will, without communication, planning becomes an exercise in futility. Amy Flynn, former business analyst at J&J's Ortho Clinical Diagnostics and now an independent consultant, recalls an instance in which the implementation plan was never communicated: "In one company I worked with, the day after an acquisition was announced, people were standing around asking what they were supposed to do. They didn't know how their job was going to change, what impact the new structure was going to have on them. For example, the sales force didn't know whom they'd be reporting to, who would be selling what, how their responsibilities would be divided."

At J&J, the strategic alliance group has set up several communications channels to keep information flowing, especially within teams. "To avoid misunderstandings or surprises, we set up secure 'e-rooms,'" Wills says. "Team members can access or input information, get feedback from others, and pose questions. In addition, certain formal, written communications are required at specific milestones. We schedule regular videoconferences. We publish contact information for key players in both companies so team members can always find one another when they need to. And we say, 'If you still have a concern, pick up the phone.'"

9 Stay Flexible

In today's environment, the race

is more often to the nimble than to the swift. From contract negotiations through commercialization, most successful partners have learned to go with the flow and make mid-course corrections.

Velcade, for example, has been a goldmine for both involved companies, Millennium and Ortho Biotech Products. But it had a dicey beginning. Wills remembers a day back in 2003 when it looked as if the proposed deal would fall apart:

"J&J was one of several companies negotiating with Millennium for the worldwide co-development and co-commercializion of Velcade. Several were close to finalizing contracts. On a Wednesday morning, we received a call from Millennium saying it no longer wanted to make a worldwide deal, but was willing to negotiate with us for an ex-US one. What made this more onerous is that Millennium insisted that the deal still had to be signed and announced by Monday morning as originally agreed upon. Not knowing what the other potential partners were willing to do, given the time frame, we said, 'All right, we are willing to lock ourselves in a room with you over the weekend and hammer out a new deal by Monday morning.' We did, and the rest is pharma history."

Flexibility during negotiations is often a predictor of how partners will behave later. For example, "In Theravance's Beyond Advair partnership with GlaxoSmithKline's respiratory CEDD, both sides understood that it was a give-and-take," Brinkley says. "By remaining flexible, we went from term sheet to signed contract in under sixty days. Our relationship after signing continued in the same vein—lots of discussion and willingness to make adjustments to do what was right for the product, not ourselves."

One way to avoid post-deal ossification is to bring together executives from both companies to openly debate issues. For example, when Bayer acquired Chiron, each company was using a different information system. Bayer's management wanted to stay with its infrastructure and, initially, that was the plan. But the issue quickly became politically charged. Former Chiron employees lobbied hard for a conversion to their system. Instead of digging in, management formed a team with representatives from both companies to evaluate the systems and recommend which should remain. The joint team discovered that Chiron had strong information systems, particularly in its corporate accounts, while Bayer's information system wasn't nearly as buttoned up. The result: Chiron's structure remained intact, and Bayer's was brought into line with it.

10 Measure What Matters

How can you judge the effectiveness of a partnership? It may be years before alliance partners bring a new drug to market or former competitors successfully meld their operations after a merger or acquisition. There must be some way to measure success along the way.

Here's where, once again, everything hinges on the excellence of the initial plan. Executing on the plan is the only metric that matters. Sure, stock price, systems integration, and a motivated workforce are important, but hitting the up-front milestones is what it's all about. "If you agreed to have five compounds ready for clinical trials by September 30th and you only have two, the partnership isn't working," Brinkley says.

Wills agrees. "We have metrics for operational progress—timelines, budgets, and the like—which keep us on track. Success is getting a drug to a patient who needs it." But his group also puts in place metrics to assess the softer side of its partnerships. "To get a pulse on the relationship, we conduct web-based surveys that probe how well we are collaborating and communicating. We administer them at both the operational and management levels. We have one survey at the start of the alliance, when everyone is excited about the new relationship. Six months later, we ask the same questions, then compare the results. We often find that the enthusiasm has waned, and that tells us we have to work with people on both sides to revitalize the relationship. We continue to survey the joint teams annually for the life of the alliance, working with them whenever the results indicate the need," he says.

DeBuono adds another dimension to the discussion of metrics. In M&As, she believes that one important measure of partnership success is a comparison of pre- and post-merger metrics. "You can't allow the new arrangement to negatively impact your metrics," DeBuono says. "If before the merger your customer service department averaged twenty seconds to answer a call, and post-merger the average rises to sixty seconds, something has gone wrong. You need to correct it, so performance reaches or exceeds pre-merger levels."

In any discussion about measurement, the issue of stock price inevitably surfaces. The pressure to make the numbers for Wall Street has caused many good deals to fail. The situation is somewhat akin to weather reports: You can't change them, but you can at least take steps to protect yourself. To the extent possible, shy away from moves focused on jacking up short-term profits and put time and energy into ensuring the long-range success of the partnership.

The Ultimate Test of Success Years ago, one of the authors walked into a pharmaceutical manufacturing plant three years after a merger. He saw signs on the walls and literature on people's desks with the name of the old, acquired company. Employees even referred to themselves as belonging to the former company. Clearly, this was a house divided. A true test of a successful partnership is whether an outsider coming into a meeting of employees from both sides would be able to tell who worked for which partner. When it's that seamless, you know your partnership has beat the odds.

Michael Curran-Hays (left) (mcurranhays@kepner-tregoe.com) is a partner and practice leader of the North America Pharmaceutical Practice for Kepner-Tregoe, in Princeton, NJ. Martin Wing (mwing@kepner-tregoe.com) is a partner and practice leader in the consultancy's European unit.