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"A trade off of technology and product rights for financial, regulatory, clinical, manufacturing or marketing support could turn out to be the right prescription for a balanced growth besides being a practical financial alternative."

After having proven the competence and the feasibility of the technology, many an entrepreneur is at cross roads. Ideally he would want to start his own drug delivery company, but this is easier said than done. He has to plan and organize for regulatory clearances, clinical trials and tests, build a competent management team, set up and manage a feasible manufacturing facility, iron out the marketing trials and finalize the distribution channel and support functions.

In the post-genomics era, though the investor preference has decisively shifted in favor of companies that are in the business of drug delivery, raising adequate capital at a fair valuation continues to be a formidable exercise.

Bringing a new drug to the market, as all of us know is a very expensive and time-consuming proposition. Access to capital has restricted the ability of emerging and smaller biotechnology companies to discover and develop drugs. To counter this, many a company channeled their resources on a single drug with disastrous consequences. Some smart ones gave away potential successes at early stages for decent returns to hedge their risks across multiple drugs, and more importantly, lived to fight the battle another day.

Under these circumstances, alliances with corporate that have access to resources and markets can provide the much needed boost to the fledging bio companies. More importantly, it will enable the entrepreneur to focus on areas of his strength.

An emerging bio company needs finances and resources to address any or all the areas discussed below. A corporate alliance reduces a huge burden on the fledging company thereby enabling it to focus on other critical issues.

Instead of choosing to re-invent the wheel, the company could enter into an alliance with a corporate that has experienced regulatory and clinical departments with the capacity to conduct clinical trials and help obtain regulatory approval. However, monitoring process and deadlines need to be defined clearly. In lieu of this service, the corporate could be given the right to sell and distribute the products, thereby obviating a need for substantial fund raising at a relatively lower valuation.

Having secured the regulatory approvals, the company is now set to commence production. Here, again the facilities used for production need to be made compliant to the standards of the regulatory authority. Newer and novel technologies take that much longer to be ratified and approved. Should the company choose to set up its own facility, then issues such as costing, facilities management, staffing, quality control and funding need to be addressed. It's here the company has to make a call as to whether it would prefer channeling its resources into discovering multiple drugs and/or get into production activities also at such an early stage.

Should the company decide to have the manufacturing contracted out, it can enter into alliances with companies that have facilities approved by the regulatory body and have the spare capacity to execute orders. Issues such as quality control and secrecy of formulation need to be addressed for the success of this alliance.

Commercializing the product is another major challenge. Many start-ups cannot afford to make adequate investment in marketing, selling and distribution needed to effectively cover the millions of hospitals, specialist physicians and clinics that are spread allover the targeted market space. The cost of setting up a direct sales force large enough to address targeted markets is pretty hefty. Further, product penetration is a challenging exercise for emerging companies. In an international market, issues like specific government regulations, new languages, cultural factors and geographical distances are to be addressed. Again, a stupendous task for any emerging company with limited resources.

A reputed corporate partner can lend substantial credibility to a new company in the local and international markets. Such an alliance could cut the time and costs to hit the markets by years and provide decent penetrations at the shortest possible time. Selling and distributing through established channels could turn out to be a very prudent decision for an emerging company.

Not capitalizing the potential of the technology at the opportune time is probably one of the nightmares that haunt a start-up company. This is because not all uses of the technology gel with the strategic objectives of the company. Besides, resource constraints force the company to focus on a well-defined product and marketing strategy.

The company may explore a contract for transferring technology or for developing the product to another company that has the resources and the strategic fit to ensure that the potential usage are realized. However, care should be taken to transfer only those potential usages that do not fit with the strategic objectives of the company.

The company could seek a corporate alliance for any or all of the reasons discussed above. The nature and the extent of the alliance are largely determined by the needs of the company, the resources at its disposal, its overall growth strategy and the alliance partner. Having decided on the extent of the alliance, the company can go about deciding on its alliance partner/s. Any alliance could take the following shapes, and come with their own benefits and limitations.

Under this arrangement, the company agrees to develop technology for the corporate for a fee. The corporate usually seeks the rights to the technology developed and agrees to pay royalties based on future sales of the products. The company should take care to negotiate the right to use the technology it develops in products that are outside the purview of the alliance. For the corporate, this arrangement provides an opportunity to acquire technology at a competitive price from a partner who is technologically far superior. The company benefits from a cash infusion and reserving specific rights to the technology that's being developed. However, it runs the risk of giving away potential money-spinners in exchange for meager royalties.

Under this arrangement, the company agrees to license certain technology and or product applications for a fixed fee payable up-front. This fee is normally used for covering the expenses incurred in developing the technology. Patented technologies normally command higher fees that non-proprietary ones. Most licensing arrangements provide for royalties on the future product sales. Licensing arrangements can either be with exclusive rights for the corporate or with sharing arrangements with the company. The nature of the agreement is dictated by the negotiating capacity of the partners. A licensing arrangement provides a cash flow for the emerging company and an incentive for the corporate to either manufacture or commercialize the technology or both.

A licensing arrangement is done after the technology has been developed successfully, patented and after the necessary regulatory clearances have been acquired. Again the company runs the risk of giving away potential money-spinners in exchange for meager royalties, and exclusive licenses tend to devalue technologies. Adequate measures must be taken by the company to protect its rights to the advancement of technology.

Under this arrangement, the company agrees to manufacture the product and the corporate agrees to distribute the product. The corporate does not own anything, but gets compensated for distributing the product. It however, enjoys a preferred distribution arrangement. The company benefits from the corporates' selling and distribution assets.

Under this arrangement, the company and the corporate decide pool their resources and float a new company to take their relationship forward. While the company would have to bring in its technology and key management personnel, the corporate would contribute the cash, manufacturing and marketing muscle. Ownership in the joint venture is usually commensurate with the value of the assets transferred to it, with both parties gaining from any increase in value of the jointly owned entity.

However, consensus has to be reached on issues like corporate structure, management, staffing and exit strategies. Responsibilities of both the JV partners should be clearly defined with specific milestones.

Equity investment from a strategic corporate partner into the company is another viable financial alternative for the company. The investment could fund the growth plans of the company. Under this arrangement, the corporate takes a minority stake and seeks a board seat to monitor his investment. This alliance brings in funds from and the support of an established partner who understands the business, and more importantly validates the company's blue print for the future. Institutional investors prefer making investments into companies that have such relationships. However, issues of valuations and potential interference remain. Such a relationship could also come in the way of potential strategic corporate alliances.

The key to the success of this arrangement largely rests on the ability of the company to negotiate the valuation and the rights that are given to the strategic partner in lieu of his investment.

Under this arrangement, the company agrees to invest its technology in an existing corporate and gets equity or options in return. The company gets access to the resources of the corporate and continues to function as a division of the corporate. The company gets to participate in the growth of the corporate through its equity holding, and the corporate gets access to new technology.

However, due care has to be taken while valuing the technology and while negotiating autonomy for functioning of the division.

Often the optimum route to create value from technology requires a combination of two or more of the discussed structures. To illustrate, the application of technology may be licensed for a particularly territory to provide the initial cash flow that can be used for developing products for other applications and territories. Or a JV could be created for a particular product line. Further, it might make senses to enter into manufacturing arrangement for a given line of product with a corporate that has excellent and spare manufacturing facility, while continuing other ongoing relations. The options are multifold...

Corporate alliances can provide the desired impetus to a fledging company at the early stages of its existence and especially when the conventional financing is not easily available. Generally, the more a technology is broken down into its parts, the more valuable it becomes. Through alliances the company can accelerate the commercialization process without taking a sizable hit on equity dilution and valuation. But the alliances need to be carefully planned, defined, negotiated and executed.

The corporate on the other hand benefits from the new opportunity, obviates a potential threat and benefits a lot from being associated with an emerging company that enjoys all the advantages of being small. In short a WIN - WIN arrangement...

Before signing off, I would like to take you back to circa 1978, when an emerging bio-technology company entered into a licensing and marketing agreement with Eli-Lilly for cloned human insulin it had been developing. This agreement was entered during its second year of operation and it received a license fee up-front, and had further payments linked to development milestones together with royalty payments that began accruing after the commercialization of product in 1983. These funds helped the company finance the development of products it now markets itself. These path-breaking products include human growth hormone and tissue plasminogen activator. Yes sir... we are talking about the same Genentech that has a market capitalization in excess of USD 45 billion today.