Vladislav Gurin :: BioTech & Pharma consulting

For years we’ve been perplexing about why so many wise, diligent managers in famous companies find it difficult or even impossible to innovate successfully. Our investigations have unveiled a number of reasons. These include paying too much attention to the company’s most profitable customers (thereby leaving less demanding custormers at risk) and creating new products that don’t help customers do the jobs they want to. Now we’d like to list the misguided application or 3 financial-analysis tools as an accomplice in the conspiracy against successful innovation:

1. Usage of Discounted Cash Flow (DCF) and Net Percent Value (NPV) to evaluate investment opportunities causes managers to underestime the real returns and bonuses of proceeding with innovation investments.
2. The way that sunk and fixed costs are considered when evaluating future investments grants an unfair advantages on challenges and shackles incumbent firms that attempt to respond to an attack.
3. The emphasis on earnings per share as the primary driver of share price and hence of shareholder value creation to the exclusion of almost everything else, diverses resourses away from investments whose payoff lies beyond the immediate horizon.

They aren’t bad tools and concepts. But the way they are commonly wielded in evaluating investments creates a systematic bias against innovation.

So, we will recommend alternative methods that can help managers innovate with a much more keen eye for future value like Stage-gate innovation and Discovery-driven planning.

Many years ago money changers and merchants used a hard black stone, such as jasper or basalt, to test the quality of gold or silver by comparing the streak left on the stone by one of these metals with that of an alloy…

Essentially, emotions play similar roles in the interactive workings of the mind and brain. Using emotions as touchstones, the brain assesses the value of incoming information in terms of needs—the stronger a need, the stronger the emotional response to something that can satisfy the need. No emotional response to a marketing message means it failed to arouse emotions strong enough for the brain to think it relates enough to its owner’s interests to send the message to the owner’s conscious mind. This is not theory. We now know from brain research that it takes emotional arousal for a person to connect anything to his or her personal interests.

Emotions energize behavior. They are not vaporous puffs in our minds, but material changes in our body states. Emotions are formed by changes in blood pressure, adrenalin flow, pulse, muscle tension, salivation, and other body systems. Feelings of love, surprise, anticipation, fear, anger, and rage are outcomes triggered by stimuli in body chemistry. Many changes are too subtle to be detected by the conscious mind, yet they influence moods, perceptions, thoughts, decisions, and behavior. They are called background emotions.

For example, when you have a “gut feeling” about something, the feeling literally did originate in your gut. Changes in body states signal what is important enough for the brain to bring to the conscious mind’s attention. Reason plays a much smaller role in decisions than we have long thought—even less so as we age because once we enter our 30s, we make increasing use of emotion-generated gut feelings or intuition. We put more trust in first impressions, which are emotionally generated and experienced as feelings. The more we trust our feelings, the more resistant we are to efforts of others to change them. In the New Customer Majority, if you don’t get it right the first time, you are less likely to get a second chance than with younger customers.

We become less rational and more intuitive as we age because the more experiences we have reasoned through, the fewer we need to reason through in the future. With a neuronal macro in place, a mental activity that once took many steps to work through to yield a perception or thought can now be accomplished virtually instantly when something activates that neuronal macro. A more common term for neuronal macro that marketers often use is hot button.

The material brain uses the language of emotions to communicate with the nonmaterial mind. An emotion is how a need feels, or how an action or event that satisfies or frustrates a need feels. Feelings are the conscious mind’s attempt to figure out and label what our emotions are trying to tell us.

Emotions guide us toward pleasure and away from pain by how they make us feel. People choose products for the emotional payoff they feel the product will provide—not for what they think the product will provide. Companies and customers usually operate in a dichotomy of features versus feelings, because

• most companies focus on features, while
• all customers focus on feelings.

Companies will generally find greater success in today’s more emotionally directed second-half markets by focusing less on product features and more on customers’ feelings. This is what the “the customer experience” that everybody is talking about calls for. However, why has the customer experience seemingly overnight become the “big” thing in marketing? Some say it is because products have become commoditized. I say it is because of the New Customer Majority, most of whose members are experiencing ebbing of materialistic influences and rising influence of experiential aspirations on their behavior.

Nowadays the global drug problem is being contained. In 2006/07, the global markets for the basic illegal drugs – the opiates, cocaine, cannabis, and amphetamine-type stimulants – remained considerably stable. Particularly notable is the stabilisation seen in the market of cannabiods, which had been expanding rapidly for some time. In line with a long-term trend, the share of total drug manufacture that is seized by law enforcement has also increased – some 42% of global cocaine production and 26% of global heroin production never made it to consumers.

Of course, within this aggregated picture, there remains considerable variation. Most notably, heroin production continued to expand in the conflict-ridden provinces of southern Afghanistan. While global heroin consumption does not appear to be growing, the impact of this surge in supply needs to be monitored carefully.

In general, most indications point to a levelling of growth in all of the main illegal drug markets. This is really good news and may indicate an important juncture in long term drug control. A stable and contained problem is easier to address than one which is expanding chaotically, provided it is seen as an opportunity for renewed commitment rather than an excuse to decrease vigilance.

Most indications are, however, that Member States do have the will to re-commit to drug control. Although it is outside of the scope of this article to assess policy, the estimates and trends contain several examples of progress forged on the back of international collaboration. The extent of international collaboration, the sharing of intelligence, knowledge and experience, as well as the conviction that the drug problem in the world must be tackled on the basis of a ‘shared responsibility’ seem to be growing and bearing fruit.

Bioethics was preceded by medical ethics, which focused primarily on issues arising out of the physician–patient relationship. The ancient Hippocratic literature (which includes but is not limited to the Hippocratic Oath) enjoins physicians to use their knowledge and power to benefit the sick, to heal and not to harm, to preserve life, and to keep in the strictest confidence information that ought not to be spread about. These basic values remain an essential part of contemporary bioethics. However, after the Second World War it became clear that the old medical ethics was not sufficient to meet contemporary challenges.
Unprecedented medical advances, such as the use of penicillin and immunization against childhood diseases, have saved literally millions of lives. So have open heart surgery and cardiac catheterization, chronic hemodialysis, and organ donation. At the same time, many of the methods of modern medicine are very expensive, and thus out of the reach of many who might benefit from them. Medicine’s success thus led to a debate about how to pay for healthcare. In most industrialized countries, the provision of healthcare is viewed as the government’s responsibility, comparable to the obligation to provide public education. By contrast, in the U.S. many still regard payment for healthcare as an individual responsibility, or at least something that employers, not the state, should provide. Among those who agree that some kind of national health insurance is both fair and fiscally sound, a debate continues between egalitarians, who insist that no care should be provided unless it is available to all who need it, and those who favor a tiered health care system that allows some medical services to be distributed by the market.
Medicine’s success in the post-war years raised another issue: the value of preserving life. Respirators were originally invented for people who were expected to recover and be able to breathe on their own. Within a short period of time they began to be used on people in persistent vegetative states, forcing medical professionals to ask whether this was an appropriate use of technology. Should people who are permanently and irreversibly unconscious be kept alive indefinitely? A similar issue resulted from the development of neonatal intensive care units (NICUs), which have saved the lives of many premature babies who would have died in earlier decades. Many of these babies go on to have normal, healthy lives, but many face a lifetime of severe disabilities and serious health complications.
Thus, NICUs raise the question: Ought life to be preserved regardless of the nature or quality of that life? And if there are times when life should not be preserved, who should be authorized to make these decisions?
During the 1960s these questions began to be debated at academic conferences and in scholarly journals, giving birth to the field of bioethics.

In 1969 the Hastings Center in Garrison, NY, an independent, nonpartisan, and nonprofit bioethics research institute, was founded by Dan Callahan and Willard Gaylin to explore fundamental and emerging questions in health care, biotechnology, and the environment. Its journal, the Hastings Center Report, first appeared in June 1971. In July of that year the Kennedy Institute of Ethics at Georgetown University opened, with two research scholars: LeRoy Walters, who soon became its Director, and Warren Reich, who was the editor of the first edition of the Encyclopedia of Bioethics, published in 1978.
The term ‘bioethics’ was coined in the early 1970s by biologists who brought to the public’s attention two pressing issues: the need to maintain the planet’s ecology, on which all life depends, and the implications of advances in the life sciences toward manipulating human nature. In his book, Bioethics: Bridge to the Future, published in 1971, Van Rensselaer Potter focused on the growing human ability to change nature, including human nature, and the implications of this for our global future.
Although the term ‘bioethics’ has referred almost exclusively to problems in biomedicine, in recent years the field has returned to ‘the wider context provided by the life scientists of the early 1970s, including their environmental and public health concerns’.
While bioethics has been interdisciplinary since its inception, theology played a foundational role in its creation. It continues to have a profound influence today, as reflected in the careful analysis and defense of the rule of double effect by Daniel Sulmasy. Three theologians in particular were instrumental in the birth of bioethics: Joseph Fletcher, an Episcopal minister; Paul Ramsey, a Methodist minister; and Richard McCormick, a Jesuit moral theologian.
The theologians were soon joined by philosophers who rejected the emphasis in contemporary analytic ethics on meta-ethics, to the exclusion of normative ethics.
Events in the 1960s—opposition to the Vietnamese war, the civil rights movement, and other social movements it spawned, such as the women’s movement, the disability rights movement, and the gay and lesbian rights movement—played a role in the revitalization of normative ethics, and philosophical interest in applied ethics. Students began to demand that their courses were ‘relevant’, and professional philosophers also became interested in writing on the issues of the day.

A number of HIV attributes and its mode of infection conspire to render creation of an effective vaccine less than straightforward. These factors include:

• HIV displays extensive genetic variation, often even within a single individual. Such genetic variation is particularly prominent in the viral env gene whose product, gp160, is subsequently proteolytically processed, yielding gp120 and gp41.
• HIV infects and destroys T-helper lymphocytes, i.e. it directly attacks an essential component of the immune system itself.
• Although infected individuals display a wide spectrum of antiviral immunoresponses, these ultimately fail to kill the virus. A deeper understanding of what immunity elements are most effective in combating HIV infection is required.
• After initial virulence subsides, large quantity of cells harbour unexpressed proviral DNA.
  The immune system has no method of identifying such cells. An effective vaccine must thus induce the immune system to:
  (a) bring the viral infection under control before cellular infection occurs; or
  (b) destroy cells once they begin to produce viral particles and destroy the viral particles released.
• The infection may often be spread, not via transmission of free viral particles, but via direct transmission of infected cells harbouring the proviral DNA.

Arthur Kornberg, the Stanford University Nobel laureate, who first synthesised DNA in a laboratory and whose identification of the enzymes used by cells to reproduce DNA laid the basis for the biotechnology, died of respiratory disorder on Friday at Stanford Hospital at the age of 89.

Kornberg was the founder of the Stanford University School of Medicine’s biochemistry department, taking in a talented group of unique scientists who worked together for nearly 50 years.

Kornberg lived to see his son Roger win the 2006 Nobel Prize in Chemistry.

It is often hard to conceive how little was known about the mysterious DNA molecule when Kornberg began his research in the 1950s. Scientists were pretty sure that it was the repository of genetic information. In spite of that, DNA was a mystery.

During the second world war Kornberg was interested in enzymes, the bioproteins used by cells to carry out chemical reactions, especially the synthesis of substances used by cells.

After preliminary work isolating enzymes involved in vitamin manufacturing, Kornberg tackled the more difficult challenge of DNA and RNA, the messenger molecule used by cells in the conversion of genetic information contained in DNA into proteins.

Kornberg reasoned that cells would produce DNA by stringing together pre-made nucleotides - combinations of a base, a sugar molecule and a phosphate group.

While Kornberg was working on the project in 1953, James Watson and Francis Crick published the DNA structure, providing clues to direct his efforts. By the following year, Kornberg and his colleagues had isolated the enzymes used to produce the nucleotides used in RNA and DNA.

By 1957, Kornberg had discovered and purified the key molecule, named DNA-polymerase, and submitted two papers describing the work to the Journal of Biological Chemistry. Referees, however, objected to calling the material produced by the enzyme DNA.

Disgusted, Kornberg withdrew the papers, but they were published the following year when the journal appointed a new editor.

His work confirmed speculation by Watson and Crick that genetic information was encoded in opposite directions on the two strands of double-helical DNA.

Kornberg shared the Nobel Prize in Physiology/Medicine for the DNA synthesis in 1959.

In association with Financial Times

TRIPS is the most significant agreement on intellectual property of the 20th century. More than a 100 ministers signed it on behalf of their nations in the magnificent Salle Royale of the Palais des Congrès in Marrakesh on 15 April 1994.
TRIPS is one of 28 agreements that make up the Final Act of the Uruguay Round of Multilateral Trade Negotiations, the negotiations that had begun in Punta del Este in 1986. Another of those agreements established the WTO, and it is the WTO that administers TRIPS.
TRIPS was the first stage in the global recognition of an investment morality that sees knowledge as a private, rather than public, good. The intellectual property standards contained in TRIPS, obligatory on all members of the WTO, would help them to enforce that morality around the world.
In India, generics industry warned of dramatic price increases in essential drugs that would follow from the obligation in TRIPS to grant 20-year patents on pharmaceuticals.
TRIPS is about more than patents. It sets minimum standards in copyright, trade marks, geographical indications, industrial designs and layout-designs of integrated circuits. TRIPS effectively globalizes the set of intellectual property principles it contains, because most states of the world are members of, or are seeking membership of, the WTO. It also has a crucial harmonizing impact on intellectual property regulation because it sets, in some cases, quite detailed standards of intellectual property law. Every member, for example, has to have a copyright law that protects computer programs as a literary work, as well as a patent law that does not exclude microorganisms and microbiological processes from patentability. The standards in TRIPS will profoundly affect the ownership of the 21st century’s two great technologies – digital technology and biotechnology. Copyright, patents and protection for layout-designs are all used to protect digital technology, whereas patents and trade secrets are the principal means by which biotech knowledge is being enclosed. TRIPS also obliges states to provide effective enforcement procedures against the infringement of intellectual property rights.
No one disagrees that TRIPS has conferred massive benefits on the US economy, the world’s biggest net intellectual property exporter, or that is has strengthened the hand of those corporations with large intellectual property portfolios. It was the US and the European Community that between them had the world’s dominant software, pharmaceutical, chemical and entertainment industries, as well as the world’s most important trade marks.
The rest of the developed countries and all developing countries were in the position of being importers with nothing really to gain by agreeing to terms of trade for intellectual property that would offer so much protection to the comparative advantage the US enjoyed in intellectual property-related goods.
For instance, an Australian study of copyright royalty flows during the 1990s showed that Australia paid out to overseas copyright owners around Aus$1.2 bln more than it received. Another Australian study showed that the cost to Australia of the TRIPS provision which extended the patent term of 20 years to patents already in existence could be as high as Aus$3.8 bln.
In Australia, as is the case in all small- to medium-sized developed country economies and developing country economies, the vast bulk of patents is in foreign ownership.
Sometimes we were told that ‘we will be eventual winners from intellectual property’. While it is good to be optimistic about one’s distant destiny, it does not explain why normally hard-nosed trade negotiators would take the highly dangerous route of agreeing to the globalization of property rules over knowledge that had brought their countries so few gains in the past. Of the 3.5 million patents in existence in the 1970s, the decade before the TRIPS negotiations, nationals of developing countries held about 1%.
Developing countries such as South Korea, Singapore, Brazil and India, that were industrializing, were doing so in the absence of a globalized intellectual property regime.
More disturbing for developing countries is the development cost of an intellectual property regime. The basis of competition lies in the development of skills. The acquisition of skills by newcomers disturbs roles and hierarchies.
After India built a national drug industry, it began exporting bulk drugs and formulations to places such as Canada. A developing country which had acquired skills threatened those at the top of an international hierarchy of pharmaceutical production – the US, Japan, Germany and the UK.
Australia has shown in the field of wine-making that the acquisition of skills can upset a European-led hierarchy of wine quality and production. The French have responded, in part, by insisting on protection for geographical indications, a form of intellectual property protection allowing them to claim, for example, exclusive use of the ‘Burgundy’ and ‘Champagne’ labels.
Underneath the ideology of intellectual property there lies an agenda of underdevelopment. It is all about protecting the knowledge and skills of the leaders of the pack.
The answer to the question about why developing countries signed TRIPS has much to do with democracy – or rather, its failure. Put starkly, the intellectual property rights regime we have today largely represents the failure of democratic processes, both nationally and internationally. A small quantity of US companies, which were established players in the knowledge game, captured the US trade-agenda-setting process and in partnership with European and Japanese multinationals drafted intellectual property principles that became the blueprint for TRIPS. The resistance of developing countries was crushed through trade power.
One answer to this might be that corporations are entitled to lobby, and, in any case, developing countries agreed to TRIPS through a process of bargaining among sovereigns. It is indeed true that big corporations are entitled to lobby. It is important that big business makes its views and policy preferences known to government since around the globe it represents hundreds of millions of jobs and investors. However, that lobbying in relation to property rights should take place under conditions of democratic bargaining.
Democratic bargaining matters crucially to the definition of property rights because of the consequences of property rules for all individuals within a society. Property rights confer authority over resources. When authority is granted to the few over resources on which the many depend, the few gain power over the goals of the many. This has consequences for both political and economic freedom within a society.
The stakes are high in the case of IP rights. Intellectual property rights are a source of authority and power over informational resources on which the many depend – information in the form of chemical formulae, the DNA in animals, the algorithms that underpin digital technologies and the knowledge in books and electronic databases. These resources matter to communities, to regions and to the development of states.

After drawing on research from AMR Research, McKinsey & Company, I point to the widespread adoption of CRM technology solutions.
CRM (Customer Relationship Management) is the technology that tracks customer activity and tailors marketing pitches accordingly. Estimates of the size and growth of the CRM software market vary considerably. Nevertheless, the investment in this technology is both substantial and growing and an important focus of companies’ budget. The Gartner Group estimated that worldwide spending on CRM was already $23bln in 2000 and would grow to $76bln by 2005 (or about $100bln by 2007).
Two-thirds of all telecom operators in U.S. and half or more of all U.S. financial services, pharmaceutical, BioTech and transportation companies are either implementing or already utilizing such solutions. Across the USA and Europe, approximately 45% of the companies in the high technology, healthcare, aerospace, retailing and utilities sectors have invested in CRM systems.
Most large organizations dealing with a giant number of customers have adopted or will adopt one or more IT-based CRM solutions. Medium-sized and smaller organizations need to consider their existing and potential scale in relationship to the technology requirements.

Having analysed extensively CRM project management and using a range of sources I’d like to emphasize some of organizational prerequisites that make a company an ideal candidate for adopting an IT-based CRM solution:

• Do you have a large number of people in sales and service in direct contact with customers, say more than 30?
• Are you in a highly collaborative environment, with customer interaction requiring input from multiple players within each function (sales and service)?
• Do you sell complex products that require a high degree of configuration and customization?
• Do you have a large number of customers, say more than 10 000?
• Is a typical customer relationship worth a lot to you from a profit standpoint, i.e. will it cost you to lose one?
• Can your customers interact with you across multiple channels?
• Do you have frequent contact with large groups of customers, or all customers, across multiple channels?
• Is there a need to customize what you are saying to each customer through these channels?

I will try to provide several examples of a real option analysis in contractual relationships between two parties: a delivery contract for a service product with uncertain development time; a supplier contract for assets with short lead times such as fashion goods with market uncertainty; and a joint venture agreement to co-develop a new original drug with significant technical and market payoff uncertainty.
For instance, a joint venture on a product Research & Development program can be viewed as a sequential compound option whereby after the initial learning experience one of the partners makes an equity investment in the other partner.
Successful product development during the joint venture creates the option to expand the agreement to include sales or distribution rights and may ultimately create the incentive—and real option—to acquire the joint venture partner. These types of agreements are frequent in high-tech industries such as semiconductors, software development or biotechnology, which feature high R&D intensity and high levels of technical uncertainty.
A recent article in Financial Times alludes to Pfizer’s changing drug strategy to restructure R&D, which now involves a series of investments in start-up BioTech companies in exchange for equity. The size and research budget from Pfizer’s approximately $7bn in annual R&D spending and to be corrected later.
These examples also extend to other industries. Anheuser-Busch, the global brewery, within the past few years has initiated a novel strategy of growth option acquisitions by making small equity investments in local breweries in foreign markets. These investments given Anheuser both growth options as well as learning options: By participating in the small breweries, Anheuser learns quickly about the market structure, demand, and growth potential of these markets, thereby reducing much of the noise that would otherwise cloud assumptions about the attractiveness of these markets. This, in turn, facilitates informed decisions as to which of those growth options should be exercised by acquiring target firms in proliferating markets.
A joint venture creates the option to learn about technical and market uncertainty by preserving a stake in the development program. It provides the opportunity to participate in the upside potential while also sustaining enough flexibility to exit at low costs if the project fails. Those partner strategies that build on sequential investments constitute an important part of corporate strategies. They avoid the risk inherent in premature acquisition of some technology firm prior to obtaining a good understanding of the feasibility of the emerging technology and its market acceptance.
An agreement between two partners, be it to jointly develop a new product or to provide for product or service supply, should allow for sufficient embedded options and flexibility to sustain a fair and just allocation of obligations and rewards to each party for both the current conditions, under which the agreement is closed, and a set of future uncertainties. In other words, the agreement should create a Pareto optimal allocation of risks and reward in the face of uncertainty: there is no other allocation in which some other individual is better off and no individual is worse off. It implies that both parties can benefit equally from future upsides and are equally protected against downside risks. Contract embedded options that permit fair risk and reward sharing during the presumed lifetime of the agreement under a set of future uncertainties are likely to stabilize and sustain the relationship between the two parties.
One solution to the problem of future uncertainties is contingent contracts.
In a contingent contract, some of the deal terms are not finalized but are left open for future events, that is, the contingencies, to occur. Those contingencies may relate to uncertain market payoffs, the success of a joint project, or the costs it may take to complete a task. Real options are a great analytical tool to reconcile disparate assumptions and expectations in the structure of a contingent contract.
In other words, contract embedded options are constructed to make behavioral motives or penalize unwanted actions. These include delivery contracts with penalty clauses for delays or employment contracts that entail incentive options.

A company acquires a growth option by making an initial investment in a new market, a new product line, or a new technology. This investment often requires more initial costs than the expected revenue would justify.
In other words, the Net Present Value (NPV) gives a negative result. However, the value of this investment opportunity comes from creating future growth opportunities. If the new market proves profitable, the initial cost can be expanded into a broader geographic region. If the new product line is successful in a pilot market area, production and launch can be expanded. If initial experience in a pilot plant with a new production technology decreases costs and increases efficiency, the technology can be implemented throughout the entire corporate enterprise.
Growth options create infrastructure and opportunities for future expansion and hence are of strategic value. They are sequential options that link distinct growth and expansion steps but always preserve managerial flexibility to embark on the next expansion step, depending on prevailing market conditions. Even if the pilot project turns out to be a complete failure, the company will gain experience and insights that may be of value for the planning or implementation of other growth options in the future.
Growth options exist virtually in every industry, but they may be especially essential for high-tech, high-risk endeavors. Growth options have been valued for BioTech companies, for the development and implementation of new software, or for an entire Information Technology infrastructure, including the consideration of competitive scenarios drawing on game theory. For example, Benaroch and Kauffman apply the binomial and Black-Scholes models to evaluating IT investment, with a real case study on the Yankee-24 electronic banking network.