The number of cancer patients have been increasing at a very rapid rate and so have the costs for treatment. Abgenix with its mouse, XenoMouse valued at 3 billion dollars by investors has a huge potential in the treatment and eradication of cancer, based on its technology. The managers at Abgenix have to decide on whether to develop and commercialize the product by themselves or to go in for a Merger with either Pharmacol or Biopart.
It is seen that the merger with Biopart proves to be a better one as it is associated with high risks, high rewards and Abgenix currently, has a very high liquidity here it can afford to take risks. In addition to the merger with Biopart, Abgenix would continue to utilize their platform product namely XenoMouse for the treatment of other diseases. Introduction: Having raised around $600 million dollars in its financial round of investments, Abgenifs CEO Scott Greer is faced with the following three opportunities for its product ABX-EGF(Epidermal Growth Factor).
He could either partner with Pharmacol, which is a pharmaceutical company with a very large market capitalization and sales value of $12 billion. This partnership would be a complete “hand-off’ where-in the only source of evenue would be a high royalty fee of on the total sales. The other option that Scott has, is that he could partner with Biopart, which is a biotechnology firm, focussed on oncology.
This deal would be a “hand-in” deal, where-in Abgenix would have a 50-50 say in the matter and will have to share 50% of the development, Operating and Marketing costs. From this deal however, Abgenix will get a larger share of the of sales). The third and final option which Scott has, is a “go-it-alone” strategy, where he could completely discard the idea of a partnership. Following sections deal ith each of these aforementioned scenarios and the decisions involved based on their likelihood of being profitable.
Market Segmentation: Abgenix has been conventionally licensing its XenoMouse technology through a gamut of antibody based products such as ABX-CBL ABX-lL8, ABX-EGF and ABX-RB2 to cure various diseases like graft versus host disease, Arthritis, Cancers and Organ transplant rejection. Since all the aforementioned products are derivatives of XenoMouse based antibody generation, Abgenix should go for a market segmentation in coming up with the best strategy for ll of its products. It should segment its markets for ABX-EGF based drugs and other XenoMouse based products.
In the case of the other XenoMouse based products it should create a platform market with XenoMouse being the platform for companies to create different antibodies for different antigens. Whereas for ABX-EGF, Abgenix should consider looking at the following strategies. Go-it-Alone Strategy: The core-competency of Abgenix was, creating its own product-generating platform namely “XenoMouse” which could produce the required antibody for the specific antigen. Currently, Abgenix is only dealing with Phase 1 of the total 3 Phases for ABX-EGF.
FDA approval can be received only after Phase 3 becomes successful. Out of these phases, as suggested by the Chief Business Officer Ray Withy, the maximum profits would be realised only after Phase 2 (Refer Appendix). If Abgenix decides to take their own path, “go-it-alone” and not partner with either firm, they would have to incur double the costs in developing skills to carry the product over the different phases of product manufacturing and commercialization. This would not be attractive due to the following reasons:
As discussed before, they would incur huge Operating and marketing costs which is not in the interests of the investors, as it will hamper the timeline required to become profitable. The market for cancer drugs was not a Blue Ocean, and had many competitors namely Herceptin, Rituxan etc. From the five force analysis (Refer Appendix) it is evident that HuMabMouse, developed by Medarex, is a major competitor. Medarex’s continued collaboration with firms such as Amgen, Squibb, Merck and Novartis , which have been potential buyers for Abgenix, poses a threat to the total revenues of Abgenix.
If Abgenix decides to adopt the “go-it-alone” strategy, Medarex would have the opportunity to partner with either of the experienced firms such as Pharmacol or Biopart and thus might end up capturing a larger share of the market. Also, Abgenix being a relatively new firm in the field of biotechnology, lacks the necessary complementary assets including capabilities for mass manufacturing of the product, necessary marketing expertise, sales force for marketing and the relevant reputation needed for market penetration.
It also lacks the knowledge and experience of managing the regulatory processes to btain the FDA approval in the process of commercialization of its drugs. Hence it is concluded that Abgenix should not adopt the “go-it-alone” strategy and should consider partnering with either Pharmacol or Biopart in the course of developing and commercializing ABX-EGF in the cancer drugs market. Biopart or Pharmacok Based on the recent financial success of Abgenix, and attainment of “Worldwide Rights” for the ABX-EGF cancer curing product, a lot Of firms showed interest in partnering with Abgenix.
Of these Pharmacol and Biopart were of interest to Abgenix. The partnership with either of the above two firms would be focussed around Cancer-treatment. The pre-clinical trials of ABXEGF, proved the potential it has, in eradicating preformed human cancer tumors injected in all the mice used for testing. Owing to the large market share in the treatment of cancer(refer Financial Analysis) it makes a logical sense for Abgenix to focus on developing and commercializing ABX-EGF as an antibody based product to eradicate cancer.
If Abgenix partners with Pharmacol, it would completely lose its power, over the knowledge and intellectual property it had acquired. In return, it would only receive 10% of the sales in the form of royalty. In this deal, one advantage that Abgenix has, is that, it need not incur any additional costs. All the costs associated with the operations, marketing and commercialization of the product would be solely borne by Pharmacol. Whereas, in the deal with Biopart, Abgenix 2 would have a 50% share in its product and would also incur 50% of the costs.
The profitability of the firm by collaborating with either of these two firms from a solely Net-Present-VaIue point of view, will depend on the approval by the FDA. If the FDA does not approve, Abgenix would end up making a net profit of $16 million, if it partners with Pharmacol, but would lose up to $26 million, if it partnered with Biopart(see Financial Analysis). However, Ifthe FDA approval goes through, Abgenix would end up making $1 OD million more with Biopart (see Financial Analysis).
Partnering with Biopart thus presents a high risk, high reward scenario for Abgenix and it takes approximately 4 years of sales to Break-Even. The core competency of Biopart as a biotechnology company is, on the treatment and study of Cancer(Oncology). Biopart has better regulatory processes and has a very good reputation for innovation. These competencies of Biopart will compliment the competencies of Abgenix and will aid Abgenix in the development and commercialization of ABX-EGF. This would however, not be the case with pharmacol, which has a diverse portfolio of drugs.
Abgenix will also have an opportunity to opt out of the deal with Biopart if and when it wants to, which it cannot, in the case of Pharmacol due to complete “hand-off’. Pharmacol is a relatively much larger organization when compared to Biopart. Because of its diverse portfolio, there is a possibility that Pharmacol may decide to neglect ABX-EGF in the event of it not being successful. This might not be the case with Biopart as its exclusive focus on cancer drugs . Due to its recently successful IPO, Abgenix has sufficient funds to venture into a merger which promises greater returns.
Abgenix’s current liquidity ratio is 28. 9(See financial analysis) which shows that Abgenix has sufficient capital for investment and should take risks. Also, it is seen that the debt ratio is 0. 03 which indicates that Abgenix is self- ufficient. Keeping in mind the above criteria, it is clear that partnering with Biopart via a “hand-in” deal is the best way forward. This not only provides an opportunity for Abgenix to have sufficient hold over the development of the drug, but also results in much higher gains, if successfully approved by the FDA, the chances of which are higher with Biopart.
Table 1: Summary Table NPV($ million) Just before FDA approval Just after FDA approval After 10th year of sales Abgenix/Pharmacol $15. 91 $22. 41 $156. 68 Abgenix/Biopart -$25. 88 -$42. 13 $259. 99 Risks Involved: Now that it has been decided that Abgenix should partner with Biopart, the following are the risks associated with this Merger. Given the fact that drug development is a precarious business and is contingent on the approval by the FDA, the risks associated with that are inevitable for Abgenix.
FDA approval is a long process(5 years) which would affect future business strategies. As seen in the previous section, Abgenix would stand to lose a large amount if the FDA does not approve, which is close to $26 million. Although the chances are low, there is also 3 risk that the product may fail to capture the market just after getting an approval from the FDA. In that case Abgenix would stand to lose $42 million and 5 years of research and development. Partnering with Biopart would involve high initial fixed costs which may or may not be recoverable as seen above.
There is a chance that the fixed costs might turn into sunk costs if the product fails to gain an FDA approval. Another risk involved in partnering with Biopart is the probability of the product gaining market acceptance, which is in coherence with the previous stated risk. Alternate drugs like Rituxan and Herceptin which have already been introduced in the market, are a potential competition to XenoMouse based cancer drugs. Also, the direct competition from HuMabMouse developed by Medarex can have a significant impact on the sales of XenoMouse.
Since HuMabMouse is a direct competitor to XenoMouse, there is a high chance that it WOUld collaborate with Pharmacol(rejected by Abgenix), thus grabbing significant market share from Xenomouse. Success of HuMabMouse based products thus, can directly affect the sales of XenoMouse based products. Also, as in any other joint venture, here is a potential risk of technical and managerial conflicts between Abgenix and Biopart during the course of development and commercialization of the product. Not all but a few of the above risks could be mitigated by the following suggestions.
Obtaining an FDA approval is a risk that is inherent in the process of drug commercialization and the best way to deal with it is to iteratively repeat the drug development and testing process until the product receives an FDA approval. Both the firms should collectively practice a Stage- Gate methodology of measuring the progress of the technological innovation. Proper performance metrics and relevant performance measuring gates would check the progress of the technology at regular intervals. Market acceptance could be increased by developing an aggressive marketing strategy focusing on the unique product attributes.
