Licensing Agreements in the Pharmaceutical Industry

Abstract

This paper studies the licensing process, the mode of cooperation that is most frequently encountered in the pharmaceutical sector. Within the framework of a licensing agreement, the ’donor‘ transfers an innovation, a ’brand‘ and sometimes the raw material while the ’beneficiary‘ is committed to the payment of royalties and other forms of payments (fee upon signing, annual fee…) that may also involve profit sharing over the product lifecycle. This study however, will be limited to an examination of two particular cases of licensing that involve agreements of co-promotion and co-marketing between pharmaceutical firms, which result in the constitution of fairly stable networks and provide both cost and competitive advantages. It has published in part in Direction & Gestion.

Full text

Licensing agreements in the
pharmaceutical industry
Received (in revised form): 24th July, 2002
Daniel Simonet
was a post-doctoral fellow at the Wharton school, the Joseph L. Mailman School of Public Health (Columbia University), a
visiting faculty and consultant in Asia and the Middle East and a researcher with the University of Venice (Italy). He is an
assistant professor of Strategy with the Nanyang Business School, Singapore.
Keywords alliance, license, competitive advantage, rivalry
Abstract This paper studies the licensing process, the mode of cooperation that is most
frequently encountered in the pharmaceutical sector. Within the framework of a licensing
agreement, the ‘donor’ transfers an innovation, a ‘brand’ and sometimes the raw material
while the ‘beneficiary’ is committed to the payment of royalties
1
and other forms of
payments (fee upon signing, annual fee. . .) that may also involve profit sharing over the
product lifecycle. This study however, will be limited to an examination of two particular
cases of licensing that involve agreements of co-promotion and co-marketing between
pharmaceutical firms, which result in the constitution of fairly stable networks and provide
both cost and competitive advantages. It has published in part in Direction & Gestion.
REASONS FOR PARTNERING
As more and more progress in the
pharmaceutical sector occurs by a
combination of different technologies,
2–4
a
phenomenon that dates back to the early
1930s (chemistry, electric equipment. . .),
5
the growth of agreements
6,7
implying
activities of research and development has
been strong. Indeed during these last years,
radical innovations have provoked major
discontinuities that, in numerous cases,
have opened the way to new applications
for already existing products and to the
creation of more successful ones. They also
ended in the implementation of
substitutive technologies, for instance the
drug design technique (and others, such as
proteomics, genomics, gene therapy or
bioinformatics), called to substitute itself or
to complete the more classic research
methods used until now. Consequently,
research perspectives became more
numerous, but also more expensive,
8
which prevented many companies from
bearing all of them. Besides, the
complexity and the intensity of research
activities have increased.
9
Since few drug
manufacturing companies master these
new research techniques, they are required
to get access to them
10
through alliances
with other companies (drug manufacturing
firms, biotech companies). In some cases,
partners may come from a complementary
sector or industry (for instance, chemical
industry).
11
Finally, the extension of the
field of application of certain preventive
treatments (combination vaccines) had also
sparked alliances. For instance, in the field
of vaccines, Merck and Pasteur Me´ rieux
Connaught (Pasteur) established (1994) a
50 per cent owned joint venture to
develop and market combination vaccines,
which, in a single injection, would
immunise patients, and in particular
children, against a larger number of
diseases.
Another way of analysing the
development of the agreements in R&D
Daniel Simonet
Nanyang Business School,
Nanyang Avenue,
Singapore 639798.
Fax:+65 6792 4217
Henry Stewart Publications 1469–7025 (2002) Vol. 2, 4 329–341 International Journal of Medical Marketing 329

consists of advancing the increasing
uncertainty in the competitive
environment of the drug manufacturing
companies:
12,13
in front of very unstable
conditions of the competition, the
reactions of laboratories must be flexible,
resource-saving and quick.
14
Several
elements make the agreements the most
flexible mode of development: first, they
do not inevitably imply capital
movements. For instance, two joint
ventures created in 1991 within the
framework of the alliance, Sanofi
Winthrop grouped together the technical
and commercial means of both laboratories
in two different geographic areas, the USA
and Europe. The two companies’ capitals
were crossed so that no laboratory had to
release capital. These agreements can also
take multiple forms (simple license, co-
marketing, co-development) that can be
combined (a license agreement that can
allow exclusivity for some period of time
and be followed by a period of co-
promotion or co-marketing).
15
The
laboratory has the possibility of putting an
end to the agreement if it proves to be less
profitable than foreseen. Compared to the
situation of a laboratory that would have
invested a lot in a geographic or
therapeutic market, the sunk costs are
divided between partners alliances (partial
integration) are easier to dissolve and, for
each partner, sunk costs are generally less
than those which would be incurred by an
acquisition (total integration) or the
creation of a new company in the targeted
market.
16
Finally, as they are quicker to
implement than an acquisition, they allow
a fast introduction of a pharmaceutical
drug, which facilitates the pre-emption of
the market. Risks of seeing another
product leading the market are therefore
reduced.
A development agreement can also
contribute to forge a market power
17
resulting from the subjective differentiation
of the product
18,19
: first of all, through a
cross-border development, a laboratory
can benefit from a certain reputation or
image resulting from a collaboration with
its partner. The agreement can lead it to
tie up contacts with key opinion leaders of
the country where the marketing of the
product is envisaged. Indeed, although
medicines are sold by pharmacists and
consumed by the patients, the doctor rules
the market. Because he/she is the one who
prescribes, the demand hinges on his/her
convictions and prescription patterns,
especially in areas where managed care has
not taken over the market. The latter is in
front of a plethora of drugs that are more
or less effective, safe or new. Given that it
is impossible to know them all, he/she is
going to have to inquire to make a
judgment of the therapeutic value of any
of these products. To do that, he/she can
either trust his/her colleagues’ experience,
rely on his education or, most often, if he
is in a solo practice and not linked to a
hospital, turn to other sources of medical
information, which would include various
promotions. So it is on the medical
profession that the various pharmaceutical
companies are going to concentrate their
efforts in order to influence demand in
their favour. For example, the license
agreement between Merck & Co and
Astra AB allowed the second to benefit
from a certain recognition due to its
seniority in the market and to the fame of
its partner. Merck & Co was indeed one of
the oldest American laboratories, and its
research activity was largely praised.
Certain alliances can be compared with
prenuptial agreements before a marriage:
these are agreements that, originally, were
limited to a simple license operation and
that subsequently evolved in a more
structured cooperation, for instance a joint
venture (a joint venture as a mode of entry
is more profitable than a licensing
agreement)
20
and finally an acquisition.
21
The drug manufacturing company can
wait until a more favourable situation
Simonet
International Journal of Medical Marketing Vol. 2, 4 329–341 Henry Stewart Publications 1469–7025 (2002)330

appears, identify the narrower set of
technological possibilities that satisfies its
needs and ponder the merits of its strategic
decision, before taking a bolder decision,
for instance by acquiring the participation
of its partner. The co-promotion
agreement signed as early as 1982 between
Merck & Co and Astra AB supplies the
illustration: originally, the Swedish
laboratory had entrusted the development
and the marketing of all its new medicines
in the USA to Merck & Co that, at that
time, dominated the pharmaceutical
industry. In a second stage, this agreement
foresaw the creation of an autonomous
joint firm, Astra Merck Inc, the capital of
which would be shared at the level of 50
per cent by both partners, should sales on
the American territory of Astra AB
products reach a certain level. Due to the
success met by Astra products with the
American clientele and in particular with
the Losec, the sales of which exceeded
US$1 billion, this transformation was
made possible in 1994. The Swedish
laboratory then stopped collecting
royalties. The profits of the common
baptised company Astra Merck Inc were
then equally shared with Merck & Co.
This joint venture benefits from an option
on the new products stemming from
Astra’s research, with the exception of
certain products intended for the hospital
sector and for which Astra AB already has
an independent subsidiary on American
territory (Astra USA). Similar facts can be
also observed in Asia, where relatively
simple license agreements (no joint
ventures were formed) between Western
and Asian laboratories could be observed
at the end of the 1980s agreements, which
gradually changed into real interfirm
cooperations marked by the then creation
of joint ventures.
An agreement with a local firm can
overcome institutional barriers
22,23
because
this generally benefits from good relations
with the medical authorities, which can be
used by the laboratory to facilitate the
approval of health authorities to launch the
drug in the aimed geographic zone.
24
It is
one of the reasons that led the Swedish
Gambro AB to join with the Japanese
Shimizu Pharmaceutical Co Ltd, to market
dialysis products in the Japanese market. In
Japan, Fluvoxamine Maleate was also co-
developed by Solvay Meiji Yakuhin KK
and Meiji Seika Kaisha, Ltd. In March
1996, both made a joint submission, to the
Ministry of Health and Welfare, with an
application for registration of fluvoxamine.
Barriers to entry however, never disappear
totally: a certain number of limitations
may be imposed on the laboratory by the
hosting country, for example, the sharing
of the property of the capital of the joint
venture with a local company in return for
an access to research centres or hospitals
for clinical trials.
LICENSING AGREEMENTS
Definition
There are various definitions of licensing
agreements, and some of them are quite
explicit about its advantages: ‘under a
licensing agreement, the licensing firm
grants rights to another firm in the host
country to produce and/or sell a product.
The licensee pays compensation to the
licensing firm in return for technical
expertise’.
25
According to the NIH,
26
a
license ‘is a contract between the owner(s)
of the subject matter of the license and one
or more parties that seeks the right to
make, use, sell, or import the subject
matter of the license’. And according to
Pearce and Robinson (2000),
27
they are
recommended for ‘companies that want to
venture beyond exporting but are not
ready for an equity position abroad’, or for
firms that display a combination of global
activities. They are also able to avoid tariffs
or import quotas.
28
Not surprisingly, in
this sector, licensing agreements are
frequent and, assuming that the buyer has
Licensing agreements in the pharmaceutical industry
Henry Stewart Publications 1469–7025 (2002) Vol. 2, 4 329–341 International Journal of Medical Marketing 331

the expertise and that the technology is
sufficiently developed, the buyer knows
what he buys, which makes it the surest
mode of access to innovation. Also, they
enable the licensor to gain much-needed
capital and they are often immediately
exploitable (in case commercial
exploitation is not immediate, the alliance
is limited to an early stage of technology).
Before the negotiation of royalties
(royalties range from 5 to 10 per cent on
average, sometimes up to 25 per cent if the
product’s development is advanced),
partners should focus on property rights
(formula, know-how, intellectual property
rights), uses of the product (manufacture,
use in a manufacturing process, sub-
license), geographic coverage and
indications (for instance, veterinary use as
opposed to human use). Other issues, such
as the exclusivity (unlike in Europe, in the
USA a patented technology co-owned by
more than two parties can be licensed by
one of the parties without the other
owner’s knowledge or consent), restrictions
(the agreement must be specific enough to
exclude certain potential applications that
the licensor want to keep for himself) and
antitrust concerns, should be addressed.
Furthermore, one should not forget the
adoption of a clause to exit the license
(after a period of advanced notice, usually a
few months) and a specific scheme to share
the costs needed to enforce and defend the
patent. In return, the amount of money
paid to the licensor may consist of a fee
upon signing, an annual fee based on
market size and revenue potential (either
paid on a per unit basis or on sales value) or
an equity investment. The selection of the
partner is not only based on the size of its
sales forces, other criteria are taken into
account: experience in the therapeutic field,
degree of internationalisation in order to
rapidly capture a global market share,
commitment to pursue clinical tests for
other potential therapeutic indication, and
so on.
Classification of drug manufacturing
companies
The following classification brings a
typology of the drug manufacturing
companies, which is a function of the
number of new products in developments
that were acquired through licensing
agreements. Three major categories can be
mentioned:
.Drug manufacturing companies that are
‘development-oriented’ as they have
acquired a significant number of new
products from outside entities. For this
group, mainly composed of American
companies (Schering-Plough, Johnson &
Johnson, American Home Products,
Bristol-Myers Squibb Co, Abbott), the
number of products acquired under license
was equal or superior to half of the
products that constituted their pipeline.
.The manufacturing company with a well-
balanced portfolio. For the latter, the
percentage of new products under license is
close to the average of the sample (that is
41.6 per cent). Among these are mostly
European drug manufacturing companies
(Aventis, Roche, Novartis,
GlaxoSmithKline).
.Finally, the typology displays a group of
drug manufacturing companies, which can
be qualified as ‘research-oriented’, as these
only have a small number of products
under license in their portfolio. They
appeal less often to licensing agreements to
enrich their portfolio of products under
development. Most of them are European
(Boehringer Ingelheim, Novo Nordisk,
Schering AG), followed by US (Merck &
Co) and Japanese (Yamamouchi)
companies (see Table 1).
TYPOLOGY AND MODALITIES
OF MANAGEMENT OF
CO-PROMOTION AND
CO-MARKETING AGREEMENTS
Within these agreements, several
motivations, some concerning advantages
of cost and others of more general strategic
reach, can be distinguished. If one or the
Simonet
International Journal of Medical Marketing Vol. 2, 4 329–341 Henry Stewart Publications 1469–7025 (2002)332

other of these advantages prevails in
accordance with the form of the
agreement and the end result targeted by
the partners, the motives are frequently
present whatever the nature of the
agreement. An important difference must
be noted between the licensing agreements
and the agreements of co-promotion and
co-marketing:
29
the classic licensing
agreements mostly have a character of
exclusivity in a given country. On the
other hand, the agreements of co-
promotion and co-marketing are not
exclusive, by definition, because the
product is marketed by at least two entities
in one specific geographic area.
The agreements of ‘co-promotion’
Within the framework of a co-promotion
agreement, two pharmaceutical firms (one,
the holder of an exploitation license for a
substance acquired from another
laboratory, the other, usually the creator
of the drug) launch on the market a single
product, under the same brand, with the
same price, and a single marketing
strategy. It consists in joining two or more
companies to provide products to the end-
customer or influencer (a prescriber, such
as a general physician, a specialist or a
pharmacist). Mostly, the product is
manufactured by one of the partners and
marketed by two or more companies. In
most cases, two or more companies join
together to market each other’s products.
30
In that case, the partner, like a service
provider, brings a supplementary sales
force. The launch of a common offer to
the allies suppresses any possibility of
competition between them. It is thus
clearly an additive alliance.
31
Mostly, these agreements are formed
with a clear objective with respect to
size:
32
the conjunction of R&D efforts
within the same entity allows financial
costs to be borne, that are too high for a
Table 1 Ranking of 19 pipelines (number of products under development)
Drug manufacturer Pipeline (1999) Rank Products under license
(% of licensed products in
the pipeline)
In house products
Schering-Plough 58 18 37 (63.8%) 21 (36.2%)
Johnson & Johnson 73 11 43 (58.9%) 30 (41.9%)
American Home Products 93 5 50 (53.8%) 43 (46.2%)
Bristol-Myers Squibb 68 14 36 (52.9%) 32 (47.1%)
Abbott 72 12 36 (50.0%) 36 (50%)
Eli Lilly 74 9 35 (47.3%) 39 (52.7%)
Aventis 148 2 69 (46.6%) 79 (53.4%)
Pharmacia & Upjohn 80 8 37 (46.3%) 43 (53.7%)
Pfizer 146 3 65 (45.4%) 81 (54.4%)
Roche 122 4 55 (45.1%) 67 (54.9%)
Novartis 89 7 36 (40.4%) 53 (59.6%)
GlaxoSmithKline 206 1 80 (38.8%) 126 (61.2%)
Yamamouchi 59 17 22 (37.3%) 37 (62.7%)
Schering AG 67 15 23 (34.3%) 44 (65.7%)
Novo Nordisk 53 19 17 (32.1%) 36 (67.9%)
Boehringer Ingelheim 68 13 20 (29.4%) 48 (70.6%)
Merck & Co 89 6 25 (28.1%) 64 (71.9%)
Bayer 59 16 16 (27.1%) 43 (72.9%)
NIH 73 10 4 (5.5%) 69 (94.5%)
Total 1697 706 (41.6%) 991 (58.4%)
AstraZeneca was excluded as figures were not available.
Rank is based on the size of the pipeline.
For drug manufacturing firms that merged in 2000 or 2001, figures were based on data before the merger (except for
Pharmacia & Upjohn).
Source:
30
Hamdouch, A. and Depret, M. H. La nouvelle economie industrielle de la pharmacie. Structures industrielles,
dynamique d’innovation et strategies commerciales. Elsevier. Biocampus collection, 2001.
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Henry Stewart Publications 1469–7025 (2002) Vol. 2, 4 329–341 International Journal of Medical Marketing 333

single laboratory. The savings limit the
investment, particularly when a partner
has already solved an outstanding research
problem. An organisation, a process of
R&D, or a method of marketing that fits
the partner’s needs is then adopted. In
certain cases, the commercial development
requires an investment too high to be
raised by a single drug manufacturing
company, even if the latter is sufficiently
large to develop the product alone. While
clinical trials can be outsourced to a
Contract Research Organisation (CRO),
many biotech firms that cannot outsource
marketing activities will contract with
major pharmaceutical firms to ensure
successful access to patients. Indeed,
because the market share of a laboratory is
often, but not always (see for instance
specialised products for cancer, HIV etc.),
related to the number of medical
representatives, the marketing of
pharmaceutical products targeted to large
numbers of physicians requires the creation
of an additional sales network. The high
costs engendered by the constitution of the
network however, clearly make a
partnership appealing because it reduces
risk, rather than investments (the partner
often ends up spending more money on
the marketing of the considered product
than they would have done individually).
Regarding the commercial plan, the
addition of new products in the same
network, shared with a partner, generate
only marginal additional costs.
In most cases, the pooling of sales forces
concerns a territory onto which the sales
network of the creator of the concerned
drug is weakly implanted, mostly because
of the size of the network, or because of
the uncertainties of the aimed market.
Since 1995, the mid-sized company UCB
Pharma (Union Chimique Belge) has
allowed Pfizer Inc to co-promote the
allergy drug Zyrtec in the USA, while
different pharmaceutical companies co-
promote the same product in Japan and
other international markets. Another
illustration is the agreement concluded
between Wellcome laboratories and the
Upjohn Company
33
to maximise the US
sales of Wellcome’s Zovirax. The
agreement indeed established a pooling of
the respective sales networks of both
companies. The agreement between
Abbott Laboratories and Boehringer
Ingelheim Ltd for the Flomax (in North
America), Roche and AstraZeneca
Pharmaceuticals (Novaldex, in the USA),
and Merck & Co and Novartis
Pharmaceutical Corporation (Starlix,
Europe, Africa, South East Asia, South
America) also illustrate that point. Finally,
by stabilising the expense of distribution
and marketing, the associated laboratories
were also able to create supplementary
resources to finance research and
development activities. On the other hand,
agreements involving co-marketing are
inappropriate for niche products, or when
the sales potential is insufficient to justify
the integration of two distribution
companies.
The agreements of ‘co-marketing’
Laboratories can also use a technique called
co-marketing to guarantee the distribution
of their products. Within the framework
of a co-marketing agreement, two (or
more) pharmaceutical laboratories launch
the same medicine (the same formula,
galenic form, the same dose, the same
administrative file) in the market, but
under two different commercial names.
The co-marketing agreements thus
associate collaborating laboratories while
letting competition remain on the final
products. Therefore, these alliances are
practically invisible to the market, because
the allies remain rivals. The patient and the
doctor may be ignorant of the fact that it
is the same product that is being marketed
under two different brand names.
However, the Managed Care revolution
has made that advantage more difficult to
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International Journal of Medical Marketing Vol. 2, 4 329–341 Henry Stewart Publications 1469–7025 (2002)334

acquire, as large Managed Care
Organisations have enough experience to
overcome that hurdle and select, mainly
on the basis of price, the drug they want
to include in their formulary. This is why
the agreements of co-marketing can be
considered pre-competitive. According to
the terminology of Dussauge and Garrette
(1995),
34
they fall into the category of
alliances of co-integration or joint
integration (Figure 1): the alliance concerns
the upward stage of the activity of the
allies, the stage for which the critical size is
superior to that of each laboratory taken
individually. In the eyes of the market
however, every laboratory has a different
product.
Agreements of co-marketing have
essentially been developed since 1980,
most notably in young markets, and for
products with high prices and a great
potential for growth.
35
Among the
agreements intended to bring to the
forefront products within highly
competitive markets, one can quote
Captopril which in France can be
prescribed under two different
commercial names (Lopril and
Captolane); Zocor (Simvastatin) from
MSD was sold in France by Elf Sanofi
under the name of Lodale` s and by
Boehringer Ingelheim Ltd under the
name of Denan; and Isoptin of BASF
Pharma marketed by Searle & Co under
the name of Calan. Another illustration is
Septrin and Bactrim, co-marketed in
various countries by GlaxoWellcome
PLC and Roche.
AGREEMENTS AND
CONSTITUTION OF
COMPETITIVE ADVANTAGES
The objective of commercial alliances
between laboratories can include the
exploitation of cost advantages and the
constitution and the exploitation of
competitive advantages vis-a
`-vis industry
rivals.
36,37
These alliances provide an
answer to concerns of a strategic nature.
Specifically, they can reflect the desire
to:
.strengthen the market power of the actors,
which can be regarded as a collusive
behaviour. The alliance is perceived as a
Company A Comp an y B
Market
Figure 1 Co-integration alliance
Source: Dussage, P. and Garette, B., 1995.
Licensing agreements in the pharmaceutical industry
Henry Stewart Publications 1469–7025 (2002) Vol. 2, 4 329–341 International Journal of Medical Marketing 335

means to raise entry or exit barriers,
38–41
sometimes against rival groups of firms
42
.look for complementarities between the
networks of medical representatives offered
by the partners.
43,44
Two situations can be distinguished: one
or both laboratories advocate an alliance to
penetrate into a market, or, they can seek
to dissuade potential new entrants. Besides,
the configurations of the alliance can be
based either on the pooling of identical
resources, or on the exchange of
complementarities. In the pharmaceutical
industry, the licensing agreements can be
used in two ways:
1 When a drug manufacturing company
tries to penetrate into a market where
the promotional ‘tickets of entry’ are
high. Licensing agreements that are
designed to ‘consolidate’ a ‘therapeutic
concept’ usually face a market where
competition is already significant
(antibiotherapy, anti-ulcerous,
cardiovascular). Such a strategy is
mostly used when it can realise the
following advantages: reducing the
selling price of its product, and due to
economies of scale, improving the
availability of its product in the market
through financial clout and credibility
of the partner.
Another argument involves the
consideration of the following matrix.
The market size (generally the number
of patients and the frequency of usage)
of the medicine corresponds to the
value of the therapeutic segment, while
company resources (resources
dedicated to development, number of
medical representatives, training,
experience in the considered
therapeutic domain) refer to the firm’s
resources in the market. The matrix
creates a diagonal below which it is
recommended to resort to a licensing
agreement to penetrate an important
market with limited resources. Indeed,
the size of the market is such that it
requires a partner. It also suggests the
quest for a sizeable partner, as the
biggest companies are reputable for
entering markets quickly, and are
capable of deploying large and
experienced sales forces to market
products effectively. Furthermore, as
regulatory scrutiny becomes tighter,
more trials, as well as more patients in
each of them, are required. This
scenario also demands major partners
as they are capable of developing new
drugs more rapidly. Bristol Myers
Squibb Company, for instance, which
derived more than 95 per cent of its
oncology revenues from in-licensed
products, has long-standing experience
of licensing and developing cancer
drugs such as Taxol, Paraplatin and
Platinol, and possesses the largest
oncology sales force; Pfizer Inc
captured the rights to Celebrex by dint
of sales and marketing expertise and a
record of co-promoting products, such
as Lipitor (Warner-Lambert) and
Aricept. Merck & Co and Pfizer Inc,
two recommended partners, would
create tough competition for any new
entrants in the cardiovascular area,
where they are already strongly
established. A licensing agreement
would also avoid head-to-head
competition (see Table 2).
2 Such a license can be used when the
patent is about to establish a barrier to
entry,
45
in particular by making
possible deferred penetrations; the
license, qualified as a ‘protection’ or as
a ‘deterrence’ agreement, is intended to
strengthen the position of the
laboratory to the detriment of its
competitors.
46
By doing so, an
incumbent laboratory tries to prevent
the entry of a new laboratory and thus
the imposition of a competing
standard. Products with delayed
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International Journal of Medical Marketing Vol. 2, 4 329–341 Henry Stewart Publications 1469–7025 (2002)336

launches can be five years old. An
example is the alliance (May 2000)
between Merck & Co and Schering-
Plough for the purpose of co-
developing a combination of drugs
against asthma and cholesterol in order
to counter generics and to extend the
life-cycle of their best-selling drugs on
the US territory (Zocor and Claritin,
respectively). In 1993, in order to pre-
empt potential competitors, Merck &
Co, through a joint venture with
Johnson & Johnson, launched a
strategy of cannibalisation of one of
its products that came off patent, with
the development of an over-the-
counter version of its ulcer drug
(Pepcid).
47
These agreements do not mean the end of
competition, but modification of the rules
of competition. Sometimes, the consensus
brought about by the solidarity of all
partners appears to be indispensable to the
launch of a new product; in other cases,
the establishment of standards
48–50
between
the members of a network allows the
formation of protected market territories.
Finally, the interest of those commercial
alliances can also lie in the search for
complementarities. Indeed, the training of
the medical representatives to the needs of
a given clientele is an important source of
competitive advantage; indeed promotion
in doctors’ offices indeed requires a
network of medical representatives which
differs from that of the distributive
network serving hospital complexes and
private clinics. So when pharmaceutical
laboratories offer products that aim at
different customer groups, trade
agreements can allow each of the
associated laboratories to obtain
considerable earnings that result from the
complementarity of their networks of
medical representatives, due to the
mobilisation of their commercial teams
with different customer groups. This
search for complementarities can base itself
on therapeutic, as well as geographic
segments.
.In the former case, when its product
presents multiple applications, a laboratory
can keep marketing it in a particular
therapeutic segment, and transfer the rights
to another laboratory with regard to the
other therapeutic segments. One example is
Erythropoietin Alfa or EPOGEN
1
(Epoetinalfa), an Amgen’s drug mainly
used to treat anaemia in patients
undergoing hemodialysis or chemotherapy.
The latter was licenced-out to Johnson &
Johnson, which marketed the drug to
everyone except haemodialysis patients in
Table 2 License management matrix
Size of the market
Small Average Big
Strong Internal
Development
No licensing-out
Internal
Development
No licensing-out
Internal
Development
No licensing-out
Resources of
the company
on this market
Average Internal
Development
No licensing-out
Internal
Development or
Co-development
Co-development
Licensing-out
Co-promotion
Co-marketing
Weak Internal/Co-
development
Co-development
Licensing-out
Co-development
Licensing-out
Licensing-out Co-promotion Co-promotion
Co-promotion Co-marketing Co-marketing
Co-marketing
Licensing agreements in the pharmaceutical industry
Henry Stewart Publications 1469–7025 (2002) Vol. 2, 4 329–341 International Journal of Medical Marketing 337

the US market, which was a segment that
Amgen Inc kept for itself.
.In the case of geographic segments, every
laboratory brings its product to the network
in the geographic areas where it is most
effective. Maximum efficiency can be
achieved through better training, superior
planning, economies of scope, market share
or extended market coverage per salesman
(Figure 2).
.A notable agreement was concluded
between Solvay Pharmaceuticals Inc and
Upjohn Inc in the field of the central
nervous system. Solvay Pharmaceuticals
Inc and Upjohn Inc had an antidepressant,
Solvay’s Luvox (Fluvoxamine Maleate),
with important potential, and a major
anxiolytic, Upjohn’s Xanax. Within the
framework of the agreement, every
laboratory markets the product of its ally
in the geographic zone it covers best. In
this case, the alliance allowed for
optimisation of the commercial efficiency
of the product, all the more as the
medical target was identical. Also,
Johnson & Johnson was allowed to
market (through its subsidiary
Ortho Biotech Inc) the recombinant
human erythropoietin under the
tradename PROCRIT
1
(Epoetinalfa –
EPO) for all indications outside the USA,
with the exclusion of Japan and China
where EPO was marketed as Espo by the
Kirin-Amgen joint venture.
MISTRUST AND PURSUIT OF
COMPETITION
Those who participate in an alliance face
certain risks. Indeed, sharing a product
with another laboratory which is probably
a competitor in other segments creates
major difficulties. The ‘Not Invented Here’
(NIH) syndrome, which corresponds to
the fact that a laboratory succeeds only
with difficulty in appropriating the
product of its partner, stemmed from a
development effort that primarily benefits
substances discovered by its own R&D
department, to the detriment of products
acquired under license from an external
entity. Thus the team that should develop
a substance acquired under license
considers it to be ‘foreign’ and does not
invest enough to value the product of its
partner. This phenomenon, which was
thought to be limited to development
activities, has also extended to commercial
agreements, which can suffer from the
weak implication of the partner: the
commercial workforce experiences
difficulties in implementing a cooperation
strategy with a network of medical
representatives of a competing drug
manufacturer. In every case, the license has
to find the means to limit these risks.
Various solutions can be implemented. For
Laggard
Heavy spenders
Undecided
(withdraw or
invest more?)
Maximising
efficiency
Number of reps
Weak Strong
High
Average
Low
Company’s competitive size (Sales, Market share)
Figure 2 The competitive mass needed to provide adequate market coverage
Source: adapted from the ‘McKinsey Quarterly’
Simonet
International Journal of Medical Marketing Vol. 2, 4 329–341 Henry Stewart Publications 1469–7025 (2002)338

instance, Lipha SA (France) proposed a
duplication of the structures: every team
developed a product invented by its
internal R&D team and another one, from
the partner company. A stronger
customer–supplier relationship can then be
established and the rise of the NIH
syndrome is curtailed. Other companies
opt for the creation of task forces which,
benefiting from a strong autonomy, ensure
that all operations required by the
conclusion of a licensing agreement are
fully implemented. The licensor can also
opt for a ‘best effort’ clause to ensure that
time and money will be devoted to the
product. Objective targets or milestones
have to be set (minimum marketing and
advertising expenditures, training, sales
forces, sales objectives, quality standards
etc.).
Studies on the internal functioning of
these alliances examine the preservation of
the rivalry within the alliance as well as
the factors of asymmetry that hamper the
stability of the cooperation. Indeed, unlike
vertical partnerships between customers
and suppliers, strategic alliances are marked
by the ambiguity of the relationship.
51–53
Jacquemin analysed the risks of one
partner developing a strategy against the
interests of the other.
54
More generally,
the access and the appropriation of the
capabilities of one or several partners
constitute a major source of conflict. Turq
considers that alliances can be the stage of
aggressive behaviour between partners:
55
a
joint venture can allow one of them to
acquire a specific know-how that was,
until then, the exclusive property of its
partner. The signature of an agreement
with a competing company is another
illustration of opportunistic behaviour.
The exchange, even if it is real, can be
uneven: the research activity of one of the
associated drug manufacturing companies
can prove to be far less productive than
that of its partner. Finally, a product may
not reach expectations. In the Genentech’s
deal with Alteon Inc, both companies
struggled to develop Alteon’s Pimagedine
for treating diabetic kidney failure.
Unfortunately, the product could not go
through the clinical trials, which ended in
a subsequent termination of the alliance
(all product rights were returned to
Alteon). Finally the agreements of R&D
introduce a risk of technological
dependence, for example when a biotech
company acquires a disproportionate
amount of power over an allied drug
manufacturing company.
CONCLUSION
In the pharmaceutical sector, cooperation,
which is not limited to R&D activities,
also benefits doctors and patients, by
ensuring the widest availability of a
product. The cited cases show that
relational strategies can improve the
efficiency of distribution networks. They
also however, underline that laboratories
must sign agreements that stipulate the
conditions under which every producer
can accept in his networks, products
created by others, in order to avoid any
risk of competition with his own products
or sales networks. Besides, the increasing
importance of inter-firm cooperation is,
along with acquisitions, and vertical
integrations, one of the major elements of
the reorganisation of the pharmaceutical
landscape. The agreements of license
represent a particularly interesting example
of both technological and commercial
efficiency. They define inter-industrial
exchange interests where interdependences
are strong, while preserving competition
and strengthening partners’ international
dimensions.
Acknowledgments
The author would like to thank Michael
Daniel Connor, Elizabeth Lim and John
Edward Beck for their critical comments
on an earlier draft of this paper.
Licensing agreements in the pharmaceutical industry
Henry Stewart Publications 1469–7025 (2002) Vol. 2, 4 329–341 International Journal of Medical Marketing 339

#Revue des Sciences de Gestion
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