Critical Success Factors inBiopharmaceutical BusinessA Comparison Between Finnish and Californian Businesses

Tanja Rautiainen

Technology Review 113/2001

Critical Success Factorsin Biopharmaceutical Business:

A Comparison Between Finnish andCalifornian Businesses

Technology Review 113/2001Helsinki 2001

Tekes – your contact for Finnish technology

Tekes, the National Technology Agency of Finland, is the main financing or-ganisation for applied and industrial R&D in Finland. Funding is granted fromthe state budget.

Tekes’ primary objective is to promote the competitiveness of Finnish indus-try and the service sector by technological means. Activities aim to diversifyproduction structures, increase productivity and exports, and create a foun-dation for employment and social well-being. Tekes supports applied andindustrial R&D in Finland to the extent of some EUR 390 million, annually.The Tekes network in Finland and overseas offers excellent channels for co-operation with Finnish companies, universities and research institutes.

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Foreword

This paper is based on the author’s Master’s thesis “Critical Success Factors in BiopharmaceuticalBusiness: Finland vs. California” published in 2000. Since the thesis is written in an academic formand comprises of a total of over hundred pages, this second version was written for a lighter, moreenjoyable reading experience.

I would like to thank Tekes, especially Solveig Nylund and Jari Kauppila for extending this greatopportunity to me to study the biopharmaceutical business in Finland and California. Specialthanks go to all the 25 interviewees who remain anonymous throughout the study.

I have been impressed by the high quality of biotechnology research and the effectiveness of thebusiness environment in Finland. I hope that this study brings new valuable information to all itsreaders, and I also hope to contribute to the strengthening of the industry in the coming years.

Helsinki, May 2001

Tanja Rautiainen

Contents

Foreword

1 Introduction · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 1

2 Critical Success Factors · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 52.1 Human Resources · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 5

2.1.1 Commitment · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 62.1.2 Entrepreneurism · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 62.1.3 Teamworking Skills · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 62.1.4 Management Skills · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 7

2.2 Products · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 72.2.1 Number of Products · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 72.2.2 Strong Technology Platform · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 72.2.3 Unmet Needs· · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 82.2.4 Early Marketing · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 8

2.3 Networking· · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 82.3.1 Academia· · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 92.3.2 Big Pharma · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 92.3.3 Foreign Partners · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 9

2.4 Company Climate · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 102.5 Clustering· · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 10

2.5.1 Labor Pools · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 112.5.2 Knowledge Spillovers · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 112.5.3 Specialized Services · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 11

2.6 General Infrastructure · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 112.7 National Policies · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 12

2.7.1 Government Funding· · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 122.7.2 Government Support for Start-ups · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 122.7.3 Tax Reductions · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 13

3 Pharmaceutical R&D Industry in Finland and California · · · · · · · · · · · · · · · · · · · · 153.1 Finland: Strengths and Weaknesses · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 153.2 California: Strengths and Weaknesses · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 163.3 Pharmaceutical R&D Industry in Finland · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 16

3.3.1 Development of the Industry · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 163.4 Pharmaceutical R&D Industry in California · · · · · · · · · · · · · · · · · · · · · · · · · · · · 17

3.4.1 Development of the Industry · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 18

4 Conclusions · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 19

References · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 21

Technology Reviews from Tekes · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 23

1 Introduction

Most biopharmaceutical companies today are in their de-velopment stage by all measures. Hardly any of them aremaking a profit, but are nevertheless in a capital spendingrace to build superior technology platforms, capture first-mover advantage, and accumulate intellectual property(IP) rights. They are all facing long product developmentcycles and years of business development before, if at all,becoming sustainable operating companies. However,some of the biopharmaceutical companies of today will be-come the Amgens or Genentechs of tomorrow.

The business angels, venture capitalists, equity analysts,and business managers are all asking the same questions:Which companies will succeed? What are the signs of suc-cess? Many biopharmaceutical success stories have origi-nated from California, where biotechnological research hasbeen actively turned into business since the early 1980s.Generally, Europe has lagged behind the USA, and nowEuropean newcomers are facing a tough challenge; the in-ternational market for biotech products is already very con-solidated, and the entry barrier is much higher today thanwhen the American biopharmaceutical business was in itsinfancy. The newcomers must conquer their niches strate-gically.

Critical success factors (CSFs) for a product developmentcompany have been a popular research topic among econo-mists for the past two decades. Most of the research is fo-

cused on information technology (IT) companies or prod-uct development processes in general, and biopharma-ceutical companies have very seldom been studied as a ho-mogenous group.

The aim of the present study was to determine those CSFsthat are specific for biopharmaceutical companies. First, anextensive literature review was conducted to find the majorCSFs and to form a hypothesis. Seven CSF groups wereidentified, and the hypothesis was then tested for bio-pharmaceutical companies by interviewing 25 industry ex-perts with a technique referred to as theme interview.While 15 of the total 25 interviewees were Finnish, 10 ofthe interviewees were Californians. This led to an interest-ing setting – Finland as the world’s mobile IT forerunnerand a biotechnology challenger vs. California, the birth-place of modern hi-tech business and the indisputable num-ber-one biobusiness hotbed in the world.

The CSFs were thus also used to compare the Finnish andCalifornian biopharmaceutical businesses (see Figure 1):what seemed to be critical in California was not necessarilyconsidered critical in Finland and vice versa. Most CSFdifferences found could easily be explained by differencesin the infrastructure and business culture of these two geo-graphically distant areas. And the differences are very im-portant to remember when planning overseas business op-erations.

1

WHAT MAKES A BIOPHARMACEUTICALCOMPANY SUCCESSFUL?

IN FINLAND?

IN CALIFORNIA?

Critical Success Factors

Differencesbetween Finnishand Californianbiopharmaceuticalbusinesses

Figure 1. The question setting of the present study.

Pharmaceuticals are a USD300 billion business. The man-ufacturing and marketing of drugs are well covered bylarge pharmaceutical companies, the big pharmas. Mostbig pharmas today were restructured during the late 1980sas the result of a strong consolidation trend in the industry.The consolidation generated ever fewer and larger compa-nies, which eventually became too large to fill their ownproduct pipelines. This in turn led to the emergence of anew, fast-growing industry sector in the 1990s: the phar-maceutical R&D industry.

At the core of the pharmaceutical R&D industry are thebiopharmaceutical companies: small to medium-sizedcompanies (SMEs) focusing on the development of new in-novative drugs, using modern biotechnology as a tool. Thebiopharmaceutical companies operate in close cooperationwith academic research, directing the research from the labtoward a clinically approved drug. At some point in the tri-als, the product is often licensed to a big pharma. In addi-tion to the pharmaceutical industry consolidation creating amarket for these companies, the advances in biotechnologyoffered them a technology push.

The terminology used in the pharmaceutical R&D industryis relatively young. In some 25 years of its existence, theindustry has grown from a couple of ventures into severalthousand companies around the world. Biotechnology ap-pears to be a fashionable term and is often used, also in the

form of bio or biotech, to give the impression of being amodern high-potency business. In order to avoid confu-sion, the terms used in this study are defined below. Itshould be noted however, that the definitions refer specifi-cally to the present study; the terms do not represent a strictconsensus, and other interpretations of the terms may occurin the literature.

Biotechnology – a biological science that is appliedespecially in genetic engineering and recombinantDNA technology. Biochemical applications, such asprotein engineering and applied microbiology are alsooften considered to be biotechnological sciences.

The slang word biotech has become a frequent expres-sion even in academic articles and communications. Itis used in two different senses, as a shortening of just theword ‘biotechnology’, or as a shortening of the expres-sion ‘biotechnology company’. In the present study thelatter interpretation is used, i.e. biotech stands for acompany developing biotechnological tools or prod-ucts. Biotechs operate vertically in several sectors:pharmaceuticals, diagnostics, agriculture, and foods.

Pharmaceutical is a medicinal drug. It is also an ad-jective that implies something that is of, relating to, orengaged in pharmacy or the manufacture and sale ofpharmaceuticals. Furthermore, it is easy to define a

2

BIG PHARMA

ACADEMIA

Financing:– Angels– Vcs– Government

agencies– IPO– etc.

Serviceproviders– Test labs– CROs– Manufacturers– Lawyers

Bio-pharmaceutical

companies

INNOVATIONS

PRODUCT DEVELOPMENT PROJECTS

Figure 2. Structure of the pharmaceutical R&D industry.

pharmaceutical company: a company engaged in thedevelopment, manufacture, and sale of drugs. It shouldbe noted that drugs are pharmaceuticals in a generalsense, as used in American terminology. No referenceis made to narcotics.

Big pharma is derived from the term ‘big pharmaceu-tical company’. The expression does not only indicatethe large size of the company, but also contains anotherimplication. Big pharmas are full-spectrum compa-nies: able to run all the operations from basic appliedresearch to clinical studies to marketing of the endproduct. Today, big pharmas are represented by ahandful of multinational enterprises (MNEs) such asNovartis, Merck, or Pfizer.

Full-spectrum refers to a company that is able to con-duct all the operations internally, using in-house re-sources. Thus the company can also be referred to as afully integrated pharmaceutical company (FIPCO).On the other hand, when a company outsources mostof those operations, i.e. uses outside service companiesand partners but still manages the chain of operationsinternally, it is called a virtually integrated pharma-ceutical company (VIPCO).

The manufacture and sale of drugs are mostly coveredby big pharmas, but the drug development segment isvivid with young companies and new business models.This segment is called the pharmaceutical R&D in-dustry, or pharmaceutical discovery industry. Phar-maceutical R&D industry includes all the organiza-tions involved in the research and development ofdrugs: research institutions, drug development compa-nies, technology providers, contract service firms, andagencies.

As mentioned earlier, biotechs operate vertically inseveral sectors. Two of the subsectors are involved inthe medical arena: diagnostics and pharmaceuticals. Inthe present study, those biotechs involved in the phar-maceutical R&D industry fall into a group calledbiopharmaceutical companies: high-tech SMEs op-erating in the pharmaceutical R&D industry, with thedevelopment of a new drug as their primary focus. Thefinal end product may be a small-molecule drug syn-thesized by chemical means, but the development ofthe drug includes extensive utilization of modern bio-technology applications. This definition may be dis-puted by some readers, since the original meaning ofbiopharmaceutical is strictly a protein drug manufac-tured by genetically engineered cells or, in a somewhatbroader sense, includes gene therapy and monoclonalantibodies. However, the expression ‘biopharmaceuti-cal company’ has become a concept of its own in theEnglish-speaking business world with the definitionexplained above, and thus is used in that sense in thepresent study.

3

2 Critical Success Factors

Let us first see how a dictionary defines the term CSF:“Critical success factors are those primary process perfor-mance measures that most closely define and track how theprocess must perform to be considered successful. CSFsare directly related to strategic and business plan objectivesand goals. For each critical success factor there must be anassociated key indicator that provides the measure, and astandard of performance or allowable variance fromplanned performance. The most effective key indicatorsare those designed into the process in such a way as to pro-vide a readily available or continuous reading of perfor-mance. Many of the instruments on a car dashboard can beconsidered examples of key indicators” (Anon., 2000).

In other words, to identify the criticality of a success factor,measuring the performance of a company is needed. In thebiopharmaceutical R&D business, it is difficult to measureperformance. In an early phase when prediction whether acompany will survive and do well in the global competitionis desired, there are usually no products in the market andlittle if any positive cash flow for years to come. However,some benchmarks for successful performance have beenlisted by Greetham (1998): Receiving venture capital (VC)funding, collaborating with a partner, conducting a suc-cessful initial public offering (IPO), having a product can-didate complete a successful clinical trial, or finallylaunching a product into the market: the point where thescale of measure changes.

Then again, collaborating with a partner can be both a mea-sure of performance and a CSF. It measures performance inthe sense that the partner has considered the company to be avaluable ally and the coproject to be worth the risk. Or, it canbe a CSF in the sense of gaining resources and experienceessential to making the project under collaboration succeedand at the same time making the company succeed. There isonly a thin line between the cause and the effect.

A successful IPO indicates a good company in the sense ofpublic evaluation. At the same time it creates cash inflowimportant for the company. Is money a success factor? Itsurely is critical for the company’s existence, but this iswhere the line is drawn here. Capital from VCs or IPOs andcash inflow from product sales are considered to be conse-quences of having the right success factors in the company,not merely success factors per se.

The outcome of a CSF analysis often includes results suchas “organizational structure and process that support the

venture”, “project management able to focus on reducinguncertainties” (Lester, 1998), or “a high-quality new prod-uct process” and “a clearly defined new product strategyfor the business unit” (Cooper and Kleinschmidt, 1996).Here, more concrete success factors were sought however.

In the present study, the CSFs were first categorized undertwo main groups: internal and external success factors. In-ternal factors are those that a company can affect them-selves. External factors are independent of company activi-ties and are often dependent on the geographical location ofthe company. Second, the internal CSFs were grouped un-der four topics: human resources, products, networking,and company climate, and the external factors weregrouped under three topics: clusters, general infrastructure,and national policies. Table 1 demonstrates the categoriza-tion. In the following chapters each success factor group isdiscussed into more detail.

2.1 Human Resources

Weisbach and Moos (1995) listed the general characteris-tics of desirable biotech employees as follows:

• Flexible

• Resourceful (‘whatever it takes to get things done’)

• Entrepreneurial (finding and making something outof things that others miss)

• Open-minded

5

Success Factor Categorization

Internal SuccessFactors

Human resources

Products

Networking

Company climate

External SuccessFactors

Clusters

Infrastructure

National policies

Table 1. Critical success factors of a biopharmaceuticalcompany. The seven success factor groups.

• Quick study

• Focused

• Mentor-derived ‘success traits’

• Broad grounding in physical and life sciences

• ‘Ownership’ (taking special pride in having an impact)

In addition to having an adequate amount of personnel, orpeople with a certain education, there were four majorqualities that were mentioned repeatedly in the literature:commitment, entrepreneurism, teamworking skills,and management skills. These key factors did not differ-entiate scientists from chief executive officers (CEOs) orfinancial managers, but were considered to be importantthroughout the senior personnel if not all the personnel ofan SME.

In the following chapters the interviewed experts are oftenreferred to as “F2” or “C6”. This is due to the confidential-ity of the interviews. The interviewees remain anonymousthroughout the study.

2.1.1 Commitment

For any company to be successful it is critical to have com-mitted key personnel. Lester (1998) and Cooper and Klein-schmidt (1996) studied product development processes ingeneral and ranked senior management commitment as thefirst and sixth CSF. In biopharmaceutical companies com-mitment of the key personnel is usually maintained throughcompany stock option programs.

According to the interviews, commitment was consideredeasier to maintain in a small biopharmaceutical companythan a large one. Commitment as a CSF was supported byonly a couple of experts. This was a surprising result, butafter a brief look into the interviews, an explanation couldbe found.

The key management’s commitment is usually ensuredwith shares of the company, and according to Finnish ex-perts it is easy to find committed personnel in Finland: firstof all, it is a question of national character and second,there are not that many alternative companies in Finland. In

California, the labor pool is very mobile: people move fastfrom one company to another. Californian experts did notsee it as a problem. This is probably due to the Americanculture in general – it is normal to change jobs severaltimes in a lifetime.

2.1.2 Entrepreneurism

Entrepreneurism is a characteristic difficult to define. In asense, commitment, teamworking, and management skillscould be understood to be characteristics of entrepre-neurism. Steinmetz (1998) described entrepreneurial per-sonnel as individuals who can succeed in different environ-ments, show tenacity, have a sense of urgency, and who arepragmatic and can identify the nonobvious. Steinmetz alsoemphasized that every scientist who joins a biotech com-pany should realize that it is not all about the excitement ofscience and technology, but about sustaining a profitablebusiness.

The entrepreneurial characteristic of the people was sup-ported among Californian experts more than in Finland.Expert C2 described the desired quality of a biopharma-ceutical company recruit as “people who are generalists,who are able to do many things – whatever it takes, driv-ers”. Expert F6 called for people who have the ability tomaintain enthusiasm and speed in business development.

2.1.3 Teamworking Skills

The use of project teams was mentioned in a number ofstudies on product development processes. Steinmetz’s(1998) list of desired personnel quality included the abilityto work in a team. Lester (1998) approached the teamworksubject by stating that a good team has a diversity of skillsand expertise, members have an ability to function effec-tively as part of a team, are motivated by personal rewards,and last but not least, the team has an experienced, skilledleader.

Teamworking skills had a surprising outcome in the inter-views. In Finland it was supported as being critical for acompany’s success, but in California not one expert men-

6

Success Factor FIN CA Key factors FIN CA

Human resources + +

Commitment

Entrepreneurism +

Teamworking skills +

Management skills + +

Table 2. Result of the analysis of human resources as a critical success factor. Finnish biopharmaceutical companiescompared with Californian companies.

tioned it. Expressions such as ‘ability to work in a team’surfaced several times in interviews in Finland. The inter-nal communications of a company was also brought upduring several interviews. Why was it not emphasized inthe Californian companies? Again, the only obvious expla-nation is the cultural differences. Americans may not seeemployees’ ability to work as part of a team to be a successfactor because it is too obvious; in American business cul-ture teamworking is more a natural way of working.

2.1.4 Management Skills

Management of a company is more important than thetechnology: there are no biotechnology companies in thestock market that have become successful by virtue of theirfirst products. Biopharmaceutical start-ups are usuallyfounded by a research scientist. A key success factor in along-term spectrum is whether the scientist has the abilityto grow into a business leader and whether she/he under-stands the process enough to step aside and let a more expe-rienced venture management take over if needed.

Expert C4’s opinion was commonly shared among all in-terviewees: ”the management skills are more importantthan scientific skills even in a research-based company”.Some interviewed experts defined the management skillsfurther: “A good manager hires people who are smarterthan her/him”, or even more concretely “A good managerhas more than 10 years of experience in the industry”. Aslight difference was observed in attitudes: experts in Fin-land emphasized the importance of assembling the man-agement team from a set of talents – people with differentbackgrounds and different areas of expertise, whereas ex-perts in California emphasized the management of the set.

2.2 Products

A successful product strategy is the baseline for abiopharmaceutical company. The literature lists four gen-eral factors that affect company performance: number ofproducts, well-protected platform, markets with an un-met need, and early marketing.

2.2.1 Number of Products

The number of drugs in the development pipeline indicatesthe competency of a company in the pharmaceutical R&Dindustry. The hit-or-miss strategy of solely one product in acompany poses a great risk, since only about one in fiveproducts in the clinical trials reaches the market. Newproducts are evidence of the potential worth of a company.The number of new products in a biotechnology firm pipe-line has a significant positive impact on firm performance.

The essence of a fat product pipeline in an IPO is inevita-ble. A biotechnology company going public must havesubstance, not just future promise. The candidate for a suc-cessful offering must demonstrate the ability to generatecontract and royalty revenue, have products close to mar-ket introduction, and have a full research and regulatorypipeline. The products should also be validated by partnersor VCs. A successful company has validations for morethan one of its products.

Surprisingly, the number of products in the pipeline wasonly slightly supported by both expert groups. Maybe itwas too obvious? Expert F8 measured a successful com-pany’s pipeline as having at least five or six products in thedevelopment pipeline.

2.2.2 Strong Technology Platform

A high-quality new product process is one of the strongestcommon features of high-performance businesses. It issomewhat difficult to differentiate the impact of the num-ber of products in the pipeline from the strong platform: thenovelty and quality of the platform (patents, technologies)are essential to keep the product pipeline saturated. It is theinnovativeness and therapeutic superiority of products thatattracts investments to the company.

Californian interviewees supported strong platform as akey to success more strongly than their Finnish colleagues.A strong platform was understood to constitute possessionof wide immaterial rights. The importance of a strong plat-form in the modern virtual business structure was stressedby a Californian expert: the expert’s company had recently

7

Success Factor FIN CA Key factors FIN CA

Products + +

Number of products in the pipeline

Strong platform +

Unmet needs +

Marketing +

Table 3. Result of the analysis of products as a critical success factor. Finnish biopharmaceutical companies comparedwith Californian companies.

experienced disappointment in phase III of clinical trials.The company laid off 75% of the employees and sold offthe development division. Thanks to still owning a broadIP portfolio, the company has been able to raise the value ofits shares again – over 40-fold two years after the incident.

2.2.3 Unmet Needs

The market for pharmaceutical discovery companies canbe divided into two parts: in the first market are the inves-tors and potential partners to whom a discovery companymust market its profit potential and development projects,and those in the end market are the doctors and patients.These two markets are closely linked together. To succeedin the first market, reimbursement issues must be consid-ered: Who will be paying for the end product? Successfulproduct strategy involves a market with unmet needs.

To find unmet need among the first market (large pharma-ceutical companies and investors) needs careful marketanalysis. Knowing that real competition should be focusedon, the successful strategy here is to pay attention to thelarger pharmaceutical firms that may have an interest in theproduct under development. These well-established firmshave little need to trumpet their own research, and at thesame time they are able to invest the resources needed tobring their products all the way to the market. To competewith a well-established full-spectrum company or a bigpharma is quite difficult.

The emphasis of unmet needs as a key success factor wassupported more strongly in Finland than in California. Thegeographical location of Finland puts extra pressure ongaining visibility for a company. This explains why inFinnish experts’ opinions unmet needs rated so high on theimportance scale. Gaining global visibility and credibilityis easier when a company targets a very specialized sectorwith clearly unmet needs.

2.2.4 Early Marketing

Thus far the product pipeline, platform, and unmet-needmarket have been mentioned as key factors for a successfulcompany’s products. A very important factor is still miss-ing: marketing. Again, there are two target groups: the firstmarket (big pharmas and VCs) and the end users of thedrugs (doctors and patients). It may even be that the prod-uct must be marketed to insurance companies, opinionleaders, and public health agencies. Planning rapid marketpenetration is essential to any company’s success.

Marketing should begin early in the product developmentcycle, and there are a few questions to be asked: First, howwill the product be positioned in the market? This shouldbe expressed in terms of product value and use, and itshould be borne in mind that the end-product customers are

primarily doctors and medical personnel. Second, how willthe product be distributed and sold in both domestic andforeign markets? The strategy of the majority of smallfirms is to form alliances with larger pharmaceutical com-panies, but as companies mature and grow their productportfolios, their own sales channels should be reevaluated.

In the interviews marketing of the company as a whole wasoften brought up. The role of marketing in the success of aproduct was supported more often in Finland than in Cali-fornia. Expert F4 saw the analysis of market positioningand profile of the products in every phase of the develop-ment as a success factor, while expert F6 described the en-tire product development process as the initial phase ofmarketing. Finally, expert C2 emphasized the building of arelationship with the potential partners early on “to get peo-ple interested in what you are doing” as part of a successfulproduct strategy. Again, gaining global visibility is harderwhen a company is located in Finland instead of California– this may explain why marketing as part of product strat-egy gained more support as a key success factor in Finlandthan in California.

2.3 Networking

Generating good ideas for new technologies requires ex-pertise, skills, motivation, appropriate boundaries, andtime. Often it also requires leveraging of expertise outsidethe company. Typically, a biopharmaceutical firm focuseson one or two core competencies and outsources the otherparts of the product development to its allies. Partnershipsare formed to access resources, expertise, and new productideas, or to some extent to share the risks of drug develop-ment. Another main strategy behind partnering is to find away across national borders. Alliances are most usefulwhen the allies are not rivals but are at different points onthe same value chain. A biopharmaceutical seeks its alliesfrom academia, big pharmas, or companies in foreignmarkets.

Networking was proven to be a success factor by bothFinnish and Californian interviewees, but an interestingobservation was made: the two expert groups saw network-ing in a different light. Finnish experts often mentionednetworking when the quality of human resources was un-der discussion; the employees’ ability to network was de-scribed as a success factor. Networking was seen as a toolto access knowledge spillovers, and creation of the net-work was seen to be critical. In California, networking wasnever mentioned as a desired capability of an employee,but was instead seen more as a structural matter; today’svirtual companies operate in a network, point-blank. Net-working was usually seen as a series of on- and off-goingpartnerships.

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2.3.1 Academia

Public science, i.e. universities, research institutes, andgovernment laboratories play an important part in all in-dustries, but a recent study by McMillan et al. (2000) re-vealed that the linkage between the biotechnology industryand public science is much more critical than in any otherindustry. Biotechs rely on public science for very basic sci-entific research, and they rely on academia to a muchgreater extent than big pharmas do. Proximity of researchinstitutions is definitely a CSF.

In California, networking toward academia was seen to bemore important than in Finland. Expert C3 explained theneed to be close to academia as “access to smart people asconsultants” and expert C2 stated that “you have to knowwhat the scientific predators are up to”. Even “access to li-braries”(C3) was mentioned as one of the reasons why acompany should network with academia. The reason whynetworking toward academia was emphasized more in Cal-ifornia than in Finland probably involves the fact that Cali-fornian companies are generally relatively older and larger –not so attached to the original academic research, whereasthe Finnish biopharmaceutical companies are younger andclose to academia anyway. Networking with academia wasseen to be more obvious and natural in Finland.

2.3.2 Big Pharma

Partnering with a big pharma is often thought to be benefi-cial to the biopharmaceutical company in the sense of gain-ing resources. With regard to company-wide performance,validation is even more important. Investors see dealsstruck between a biotech and a large pharmaceutical com-pany as a validation that a technological approach or partic-ular product has credibility. Big pharmas today set aside upto a fifth of their research budget for joint ventures withbiotech firms – and the number of biotech alliances by thetop 20 big pharmas rose from 152 in 1988–1990 to 375 in1997–1998 (Anon., 1999a). Rule et al. (1999) calculatedthat large pharmaceutical companies worldwide are forg-ing alliances with small biotechs at a rate of more than $5billion a year, and forecasted that year 2000 will see asmuch as 30% of big pharma R&D expenditures going toexternal partnerships.

However, small biotechnology companies must realize thata big pharma may not stick around forever. Small biotechsshould have enough cash reserves, so that if a partner pullsout it can fund the project to the next stage itself. Thenagain, if a big pharma pulls out the validation is also lost.Since a significant degree of disappointment is inevitablein drug development projects, small companies must haveseveral products and actively search for partners for each oftheir products.

Although several Finnish experts brought up networkingwith big pharmas as one of the most important success fac-tors for the whole business, it was even more critical in Cal-ifornian experts’ views. “Big pharmas validate your tech-nology and help to build the investors’ confidence in yourcompany” was a common reply to why networking withbig pharmas was so critical. In California companies relysolely on the private sector’s validation and money – inFinland a start-up company may rely on public funding fora longer period of time.

2.3.3 Foreign Partners

Developing a new drug is extremely expensive. Since phar-maceutical discovery companies often have niche products,they cannot create sufficient profits from restricted mar-kets. The market therefore must be global. Entering a newmarket is often initiated by partnering with locals. For aFinnish biopharmaceutical company to sustain growth andbig revenues, it must enter the American market sooner orlater. Since a good dealer is hard to find and opening com-pany operations in the USA can get extremely expensive,forming partnerships or merging with an American com-pany is recommended. According to an article in The Econ-omist (Anon., 1999b), there are about 330 public biotechcompanies in the USA. Almost half of those companieshave less than two years worth of cash left. Therefore, it isinevitable that the sector will have to consolidate, andmerging can work as a profile raiser for many companies.

Networking with foreign partners was rated more impor-tant for Finnish companies than for Californian companies.In fact, only one Californian interviewee saw networkingin Europe and Japan as a key success factor. In Finland theopinions on internationalization varied widely. Expert F6stated that “to gain maximum growth potential, a drug de-

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Success Factor FIN CA Key factors FIN CA

Networking + +

Academia +

Big pharma +

Foreign partners

Table 4. Result of the analysis of networking as a critical success factor. Finnish biopharmaceutical companies comparedwith Californian companies.

velopment company has to be global from the first minuteof existence”. Expert F9 on his behalf considered interna-tional networking to be just as important, but at the sametime emphasized the importance of first settling things inFinland and not rushing abroad too early. Now, it is not acomplex quiz to figure out why international networking ismore important to Finnish companies than the Californianones. Finland is a small country with a small pharmaceuti-cal cluster – it is not even possible to stay inside the bor-ders.

On the other hand, some Californian experts who had beeninterested in foreign companies were troubled – in expertC4’s opinion “it is hard to find out what European therapystart-ups are doing, there are no technology-finance-typeconferences, there are no organizations putting up thesepresentations. The key for Europeans is visibility.” Califor-nian experts also stated that “some European start-ups suf-fer from out-of-line business expectations; they want bigmoney for basically nothing proved, with the royalty-sharetoo small. They should be more aware of the Americanmarket standards, now they are too naïve about the condi-tions.”

2.4 Company Climate

Small corporations possess a quality that cannot easily betransferred into a larger, well-established company: thesmall corporate environment. A small firm can offer theemployees an entrepreneurlike environment, where newproduct ideas are encouraged. New technologies with highrisks may easily be ruled over in a larger company, butsmaller corporate environments have greater freedom todevelop projects with no predictable outcome. Technologyenthusiasm is well nurtured in small firms.

Cooper and Kleinschmidt (1996) mentioned innovativeclimate and culture among the top eight success factors fora successful product development project. Lester (1998)emphasized the importance of intrapreneurial cross-func-tional teams, or venture teams, when developing a newproduct even in a larger company: The teams were found to

be most effective when they were offered favorable owner-ship and entrepreneurial characteristics of speed, agility,and adaptability, i.e. the teams were allowed to operate asthough they were in business for themselves.

The small corporate environment brings yet another advan-tage to the start-ups. According to Weisbach and Moos(1995), the young, bright scientists prefer working in asmall company with an entrepreneurial setting where theycan proceed to key positions quickly, rather than work at abig corporation where the fear is to get stuck at alower-level supporting role for years. This is another factormaking it harder for a big pharma to access new, academicinnovations.

The company climate was supported as a CSF by only fourFinnish and two Californian experts. Expert C1 saw creat-ing a climate of success in the company as a CSF. ExpertC7 linked human resource commitment with the small cor-porate environment: “ After 50 to 100 employees it is hardto keep up the start-up like feeling and it is harder to keepthe people committed.” The Finnish experts who supportedthe small corporate environment as a key factor for a suc-cessful company climate saw the small corporate environ-ment not only as a breeding ground for a certain climate,but as a success factor in itself: virtually operating light or-ganization is a success strategy.

2.5 Clustering

Geographic location can have a significant positive impacton the firm’s performance. A firm located in an area with ahigher concentration of biotechnology firms generally hasa higher market value than those located in areas withlower concentration. An area with a high concentration ofbusinesses also nurtures an entrepreneurial spirit: new en-trepreneurs feel more encouraged to set up and developtheir businesses in the area.

Clustering as a CSF was supported by eight Californian ex-perts, but only four Finnish experts supported it. Clusteringwas considered as an external success factor, and the sub-

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Success Factor FIN CA Key factors FIN CA

Clustering +

Labor pooling +

Knowledge spillovers +

Specialized services

Table 5. Result of the analysis of clustering as a critical success factor. Finnish biopharmaceutical companies comparedwith Californian companies.

ject was approached by looking for the advantages of be-longing to a cluster. Californians saw the advantages of be-ing situated in a cluster area as labor pooling and knowl-edge spillovers, but not so much as having ready access tonearby specialized services.

2.5.1 Labor Pools

A high concentration of biotech companies in an area cre-ates a labor pool, which in turn enables a high rate of em-ployee mobility, and again, this creates an opportunity forinformation exchange. The labor pools do not involve onlypeople with expertise in biotechnology, but also peoplewith experience in raising VC, with management skills andwith marketing and sales experience.

All but one Californian expert mentioned labor pooling as akey success factor – access to talents, easy recruiting andwide variety of expertise were often-used arguments. Itwas very surprising to see that labor pooling was not con-sidered to be a success factor by any Finnish experts. Thereasons may be many. First of all, Finnish business cultureappreciates long-term commitment, employees who themanagement can rely on to also work for the company nextyear. Secondly, one national characteristics of the Finnishpeople is that they are typically not extremely entrepreneur-ial or risk-taking. This combined with the fact that Finlandhas a shortage of persons with biopharmaceutical expertise –there is no pool to be considered as a success factor.

2.5.2 Knowledge Spillovers

Clustering leads to increased knowledge flow: the proxim-ity to competitors and suppliers enables social interactions,both formal and informal, from which a company can ac-cess information about competitor’s plans, development inproduction technologies, and proceedings in academia.Prevezer (1998) called the knowledge flow knowledgespillovers and stated it as a major success factor gainedfrom being part of a biotechnology cluster.

Knowledge spillovers were more important for Californianthan for Finnish companies. In an area with a high concen-tration of biotechs, universities, and research institutes,knowledge spillovers are a part of everyday life; there arenumerous conferences, meetings, poster shows, and exhi-bitions going on every day. The Finnish cluster is typicallysmall and cannot rely on such knowledge spillovers as abuilding block to success. In Finland, active networking ismore important.

2.5.3 Specialized Services

Scott and Love (1999) found specialized services to be oneof the advantages of clustering: clusters create a criticalmass of supporting services and resources, such as lawyers,accountants, and construction firms that understand theneeds of the biotech industry.

However, specialized services were not seen to be an im-portant factor of clustering in either Finland or California.Those who supported specialized services in close proxim-ity mostly talked about VCs specialized in biopharma-ceutical companies. Many interviewees did not even seethis to be very critical. As long as the service provider wasone day away by mail and the time difference did not makecontacting too difficult, the service provider did not have tobe in the cluster area.

2.6 General Infrastructure

In the same way as clustering, general infrastructure inter-acts with the geographic location of a company. Endersby(1999) listed some critical factors in the infrastructure:transportation, telecommunications, energy, and education– thereby maintaining prosperity and high quality of life.To attract people into a company, a reputation for quality oflife in a certain area is critical. For example, there has beenan extraordinary amount of criticism about the extreme in-crease in cost of living in San Francisco affecting busi-nesses’ ability to attract new professionals to move to thearea.

Finnish experts considered the Finnish infrastructure to behighly efficient and pointed to it generally as a success fac-tor. Quality of life was mentioned as a key factor only byexpert F11 who emphasized the good level of education asthe basis for an overall good quality of life. The reason whyFinnish experts did not emphasize quality of life more isprobably due to the fact that the Finnish nation is used tohaving a good infrastructure and a high quality of life auto-matically – schools are free, medical aid is free, and ashortage of clean water or electricity would never even oc-cur to a Finn.

Californian experts supported quality of life as a key exter-nal factor in a biopharmaceutical company’s success.There were two subjects that the Californian experts espe-cially brought up. The first was the sunny, warm Califor-nian climate – it is not too difficult to attract professionalsto move to California. The second common subject was thecost of living and how it affects the quality of life. Northern

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California experts were quite concerned with the rocketingprices of property and houses in the Bay area. An examplewas given by one Californian expert; a house in South SanFrancisco that cost $300 000 three years ago now costs$700 000. Another expert had similar experiences; the costof property is approximately $2–3/sqft in San Francisco,whereas it floats around $1/sqft in the San Diego area. How-ever, recently San Diego prices have been rising as well.

2.7 National Policies

Gilmartin (1998) brought up national policies as an exter-nal success factor in a biopharmaceutical company. Someenabling activities that nations often provide include na-tional, or federal, support of basic biomedical research,support for start-up companies, and tax reductions.

2.7.1 Government Funding

A study by Columbia University concluded that success inthe modern pharmaceutical industry is dependent on acountry’s willingness to adopt certain national policies.These policies include public funding of basic biomedicalresearch, high regulatory standards, and a free market envi-ronment (Gilmartin, 1998). The importance of public fund-ing is easily proved. In 1980, the Bayh-Dole Act waslaunched in the USA. The Act enabled federal agencies andnonprofit organizations to retain ownership of the IP devel-oped through federal funding. During the past 20 years,roughly half of the important medicines introduced world-wide have been discovered and developed in the USA.

The Finnish experts supported the significance of govern-ment funding more strongly than the Californian expertsdid. Tekes, the National Technology Agency of Finland,was mentioned in almost all the Finnish interviews. “Tekesis a significant early-stage source of funding, Tekes forces

the research groups to find partners from industry even be-fore the innovation has been born”. In California, the Na-tional Institutes of Health (NIH) grants were appreciatedhighly, and the fact that research conducted by federalfunding could be commercialized was also rated as highlyimportant.

2.7.2 Government Support for Start-ups

Giesecke (2000) studied the roles of government in devel-opment of the biotechnology industry and concluded thatdirect government intervention aimed at science-basedhigh-tech industries is more likely to failing its goals thanindirect enhancement of the already existing economicstructure connecting academic innovations with marketopportunities. According to Giesecke, successful indirectapproaches include the enhancing of incubator environ-ments that the academic institutions can provide, availabil-ity of venture capital and professional business advice, exitopportunities for early investors, possibilities for diffusionof knowledge, and competence of political bodies to dis-tribute research money where innovations are most proba-ble.

In Fürst’s (1999) opinion there is a limit to which a govern-ment must stop funding and let the free market environ-ment pick the strongest companies. For example, there hasbeen discussion about the State interfering too much inGermany, that German biomanagers do not have to strivehard enough to keep their companies alive, and that lessfunding from the State would create more aggressive man-agement teams similar to their American counterparts.

In Finland government’s financial support for new compa-nies was found to be essential, whereas Californians spokemainly of legislative enhancements: “The Bayh-Dole actand the several bills supporting small research-based com-panies have had a tremendous positive impact on bio-pharmaceutical business” (C6).

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Success Factor FIN CA Key factors FIN CA

National policies + +

Government funding of basic research +

Government support for start-ups +

Tax reductions

Table 6. Result of the analysis of national policies as a critical success factor. Finnish biopharmaceutical companies com-pared with Californian companies.

2.7.3 Tax Reductions

There are a few examples of state/provincial tax reductionarrangements in North America; e.g. in the State of Wash-ington USA, there is no corporate or personal income tax.The state sales tax is 6,5% and some local taxes rangingfrom 0,5% to 1,7%. Capital investments for high-technol-ogy firms, including biotechs, are exempt from the statesales tax. The business and occupation tax (B&O tax), amajor expense for companies in Washington, is also easieron biotechs. High-tech firms receive credit against theB&O tax for their R&D expenditures, up to $2 million peryear (Scott and Love, 1999). Consequently, in the State ofWashington the biotechnology sector experienced an in-crease of 11,6% in employment from 1997 to 1998. Ap-proximately 7100 people were employed by biotechnologyin 1998, two-thirds of them in small companies (50 orfewer employees).

Endersby (1999) introduced the provincial strategy to rein-vigorate the biotechnology business in Ontario, Canada.First, there is the tax incentive: every dollar spent on R&Dearns tax credits. Large, public, or foreign-owned compa-

nies earn a 20% tax credit on Ontario R&D expenditures,and for small Canadian-owned companies the percentageis 35%. Approved R&D conducted in an Ontario universityor research institute earns an additional 20%. There arealso federal funding programs, encouraging private sec-tor-academia relations hips, and creating opportunities andpathways for networking, strategic alliances, and partner-ships, e.g. by distinguishing clusters. Ontario policy alsoincludes educating scientists to commercialize their dis-coveries and last but not least, aggressive global marketingof Ontario’s benefits as a favorable location to do business.

Strangely, tax reductions were supported as a success fac-tor by only one Californian expert and no Finnish experts.There are two possibilities for this outcome: either the taxreductions play a less important role or they were not men-tioned because they do not exist to a significant extent in ei-ther one of the areas studied.

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3 Pharmaceutical R&D Industry in Finland andCalifornia

The table below summarizes the outcome of the CSF anal-ysis. The reasons for the differences between Finnish andCalifornian biopharmaceutical companies were discussedshortly in the previous chapters. In this chapter we will gosome further steps into the background: how do these twomarkets differ from each other? What are the similarities?Generally, the differing can be explained by the culturaldifferences and the different sizes and ages of the businessclusters.

3.1 Finland: Strengths andWeaknesses

In the interviews, three Finnish experts mentioned Finnishnational characteristics as an important feature of operatingin Finland. Finnish people were described as honest, reli-able, perseverant, and having an ingrown desire for highquality in all work. “With Finnish people it is action, notonly talk.” Finnish people have a strong national sense ofself-confidence.

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Success Factors

Internal Success Factors FIN CA Key factors FIN CA

Human resources + +

Commitment

Entrepreneurism +

Teamworking skills +

Management skills + +

Products + +

Number of products in the pipeline

Strong platform +

Unmet needs +

Marketing +

Networking + +

Academia +

Big pharma +

Foreign partners

Company climate Small corporate environment

External Success Factors FIN CA Key factors FIN CA

Clustering +

Labor pooling +

Knowledge spillovers +

Specialized services

Infrastructure + + Quality of life +

National policies + +

Government funding of basic research +

Government support for start-ups +

Tax reductions

Table 7. Outcome of success factor analysis. A (+) was given to a factor that was supported by 50% or more of the inter-viewees.

An excellent university infrastructure and the high level ofeducation and research in biotechnology are the strengthsthat Finland possesses. Innovativeness and the lack ofheavy regulation between university and industry can belinked together and stated as a pro for operating in Finland.The strong IT industry in Finland has also had a positiveimpact on the biopharmaceutical business: success in theIT business has jump-started the entrepreneurial spirit inFinland and developed a basic belief that Finnish compa-nies have the ability to succeed.

The history of the university-industry relationship and thesmall size of the country contribute to the fact that coopera-tion is easy in Finland. Networking in the pharmaceuticalR&D industry can be considered quite efficient. However,the geographical location of Finland also affects business.It is harder to gain global visibility for a company locatedin Finland than for one located in California, which makesmarketing one of the greatest challenges of a company lo-cated in Finland.

The high overall educational level of Finnish people re-flects the confidence in technology and good public accep-tance of genetically modified organisms (GMO). The over-all national infrastructure can be described as being highlyefficient, as can the high-quality IT infrastructure.

There are also weaknesses in operating in Finland. Almostall of the experts interviewed were concerned with theshortage of professional know-how; the number of bio-scientists or experienced managers was feared to be tooscarce. This is a puzzling remark; many studies reveal thatthe concentration of university-educated people and PhDsin Finland is among the highest in the world. Perhaps justnot enough emphasis has been placed on the biosciences.Attracting foreign professionals is hard; the high taxationstructure of Finland as well as the harsh northern climatemay be the reasons.

As one of the Finnish expert interviewees mentioned, thereis a lack of spontaneous entrepreneurship in Finnish cul-ture. This may explain the lack of experienced managers;academic entrepreneurship is quite a new phenomenon inFinland, and the first biomanagers are still in their firstbusinesses. And with the booming Finnish IT business,much of the current business and marketing know-how isused in this sector.

3.2 California: Strengths andWeaknesses

All of the Californian interviewees emphasized the effectsof clustering. The snowball effect is obvious; a criticalmass of innovation, financing, facilities, and medical pro-fessionals has created an environment in which the sectorfeeds itself. It was also noted that in southern California,

organizations such as CONNECT or BioCom have had astrong effect on development of the cluster.

A cluster of companies and organizations involved in bio-technology creates a labor pool that enhances access to tal-ents – in Californian clusters, the labor pool is mobile, andpeople move fast from one company to another. The greatspeed for business activities was also highlighted as a spe-cific feature of operating in California. Californian bio-clusters are larger and have a longer history than in manyother areas. As a consequence there is a greater availabilityof professional managers, people who have also started upseveral companies in the biosector.

A common concern seemed to be the high cost of living innorthern California. The Bay area has become too expen-sive in many experts’ opinions for both the companies andtheir employees. Southern California’s cost of living islower, and some companies have actually moved from theBay area to the San Diego area for this reason. However, itmust be mentioned that the Bay area still has the greatestconcentration of biocompanies in the world.

3.3 Pharmaceutical R&D Industryin Finland

Every tenth European biotechnology company is Finnish.The number of biotechnology companies in Finland is ap-proximately 100 and growing, employing more than 5600individuals. Almost half of all the companies are involvedin diagnostics or pharmaceutical development. There are180 research groups, 19 graduate schools, and several sci-ence parks dedicated to biotechnology. The five biotech-nology-specific centers of excellence are located in Hel-sinki, Turku, Kuopio, Oulu, and Tampere.

The Finnish government has strongly supported the emer-gence of a biotechnology industry. Considerable invest-ments have flowed into the sector through the NationalTechnology Agency of Finland (Tekes), the Academy ofFinland, and the Finnish National Fund for Research andDevelopment (Sitra). Finnish consumers have very posi-tive attitudes toward biotechnology. In a study conductedby Finnish Bioindustries (FIB), an industrial association ofFinnish biotechs, 71% of Finns believe that biotechnologywill improve the quality of life within the next 20 years.Medical applications were considered highly useful,whereas food products received a more conservative atti-tude (Kuusi, 2000).

3.3.1 Development of the Industry

Finland has strong know-how in high-technology areas.Finland is on the forefront of modern technology in IT, es-

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pecially wireless communication has shown that. Nokiahas been one of the leading examples of world-renownedFinnish technology. The public attitude toward technologyin Finland is also noteworthy; more than half of the Finnshave mobile phones and the frequency of Internet connec-tions per capita, both domestic and commercial, is the high-est in the world.

During the early 1980s there were 13 pharmaceutical com-panies in Finland. Through mergers and acquisitions, thenumber of these companies decreased to three in the early1990s. These three still exist: Orion, Leiras (now a subsid-iary of Schering) and Japanese-owned Santen (the formerLeiras/Star). In the process of strategic refocusing severalproduct ideas were left without further development. Theseideas, coming especially from Orion, were the start of sev-eral new ventures in Finland, taken forward by some entre-preneurial individuals with a background mostly in Orion.

Since the entrepreneurial atmosphere in Finland has beengreatly encouraged by national policymakers such asTekes, researchers in universities have also begun to startup their own businesses centering research. Simulta-neously, universities have started to set up their own tech-nology transfer offices. One of the first such technologytransfer offices was Otaniemi International InnovationCenter (oIIc), which is located at the Helsinki University ofTechnology and was founded in 1998. In 2000, five otherorganizations identified themselves as technology transfercompanies in Finland: AboaTech, Finntech Finnish Tech-nology, Helsinki University Licensing, OuluTech, andTamlink.

The significant growth of the biopharmaceutical business-sector in Finland begun in the latter half of the 1990s. Thefirst VC-based biopharmaceutical company conductedIPO in 2000, namely BioTie Therapies Ltd., was foundedin November 1996. Some other examples of companies inthe forefront of the pharmaceutical R&D arena includeHormos Medical, Juvantia Pharma, Contral Pharma, andFibrogen Europe. At present, out of the roughly 100 com-panies in the life science sector in Finland, there are ap-proximately 17 involved in the development of pharma-ceuticals, of which 3 are larger, full-spectrum pharmaceuti-cal companies.

The Finnish biopharmaceutical sector has adapted well tothe virtual trend with increased importance in networking.Biopharmaceutical companies have formed a pharma clus-ter, “Lääkeklusteri” together with the academic research,patenting, marketing, and service parties of Finland. Thebiotechnology community of the City of Turku has playeda central role in initiating nationwide policies. Turku alsohas great visions for its future; by 2010, biotechnology willsupposedly create 3000–4000 new jobs in about 35 compa-nies and attract 500–1000 new researchers to Academia(Haapala, 1999).

3.4 Pharmaceutical R&D Industryin California

Of the top 50 big pharmas, 18 operate in the United States,21 in Europe, and 11 in Japan (Flynn et al., 1998). Approxi-mately 36% of pharmaceutical R&D conducted by compa-nies worldwide is performed in the USA, followed by Ja-pan with 19% of global R&D. In the USA, the core bio-technology areas are California, Washington, and NewEngland.

The USA is the global leader in pharmaceutical businesstrends. A good example is patent expansion: the journeyfrom the laboratory to the market requires 10–15 years fora new medical molecule. Since patents are valid for 20years, the exclusivity time on the market is only a fewyears. This creates pressure to crank up the prices. Tolessen the financial strain, a pharmaceutical that has beengranted a sales permit may also be granted a patent exten-sion of five years (Gilmartin, 1998). This system was firstdeveloped in the USA, and was soon mimicked by Europeand Japan.

A typical American therapeutic biotechnology companyhas been described by Dibner (2000). The median figuresare as follows (the average figure is in brackets):

• Founded in 1992 (1990)

• 33 employees (149)

• $25 million in revenues including product sales,alliance and royalty incomes (49,7)

• $8,5 million in R&D spending (15,8)

It was also noted that for all biotechnology firms (alsoother than therapeutics), IPOs have typically raised about$30 million in the past two years, the employee has in-creased by 20%, and revenues have almost tripled between1995 and 1999.

Finding a definite number of biotechs involved in theAmerican medical arena is difficult. The BiotechnologyGuide U.S.A. (Dibner, 2000) lists 421 therapeutics biotechfirms, 192 diagnostics biotech firms, roughly 40 firms fo-cusing on vaccines, and 30 or less on drug delivery sys-tems, immunological products, and testing services foreach. The number of large pharmaceutical corporationswas stated to be 51. This adds up to about 800 firms in themedical sector throughout the USA. Dibner (2000) alsocalculated that the number of all biotechnology companiesis 1239, of which 408 are publicly traded. Out of those pub-licly traded, 48% are firms focusing on therapeutics.

On the other hand, the California Healthcare Institute statesin its 2000 report (Gollaher, 2000) that there are 2500 bio-medical companies in California. Approximately 75% fo-cus on R&D for medical devices and diagnostics, and 22%focus their efforts on biotechnology and pharmaceuticalR&D. The report also states that 170 000 Californians are

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directly employed by organizations developing therapeu-tics and diagnostics, manufacturing medical devices, pre-paring laboratory instruments and equipment, supplyinglaboratory services, and distributing medical products. Anadditional 41 000 Californians are involved in biomedicaland clinical research in California’s 75 public and privateresearch institutions.

In conclusion, the above data suggest that there are 750biotechs involved in the medicine throughout the USA(Dibner, 2000) and 2500 biomedical companies in Califor-nia (Gollaher, 2000). Here, the terminology is slightly con-fusing, but it can be presumed that in Gollaher has countedthe entire life science sector in the Californian figures.From screening through tens of articles and directories, itcan however be estimated that the number of companiesand organizations involved in the American pharmaceuti-cal R&D sector may well approach several thousand. Fur-thermore, the number of true pharmaceutical developmentSMEs, i.e. biopharmaceutical companies as they are calledin this study, is somewhere between 500 and 600. There isno doubt that the great majority are located in California.

3.4.1 Development of the Industry

The genesis of the biotechnology industry in Californiabenefited from the inheritance of computing industry gene-sis in northern California’s Silicon Valley. A concentrationof VCs experienced in founding and growing high-techfirms created fertile ground in combination with a cultureof high job mobility and fluid communications networks.California also provided another element essential tobiotechs: an excellent scientific community. For example,recombinant DNA technology was discovered and devel-oped in the University of California at San Francisco(UCSF).

The biopharmaceutical business was born along with thefounding of ALZA Corporation (1968), Genentech (1976),and Chiron (1981) in the Bay area, which refers to the re-gion around San Francisco. Genentech has been one of thestrongest role models in the biopharmaceutical business.Genentech created an atmosphere of openness and commu-nication by encouraging employees to maintain their con-tact with the science base, publish papers, and attend con-ferences. By allowing informal dress and flexible workinghours, Genentech designed an academic lifestyle inside thecompany. This was all done to attract the best scientific tal-ents. In 1980, Genentech conducted a highly successfulIPO, thereby raising public knowledge about the biotech-nology industry in the USA. At the same time, Genentechbecame the trailblazer for all biotechs and launched Cali-fornia’s position as a center of biotechnology in the eyes ofthe world.

However, it is not only the Bay area that has contributed toCalifornia’s leading position in the biopharmaceuticalbusiness. In 1985, the University of California at SanDiego (UCSD) in southern California created CONNECT,a network of academia, high-tech entrepreneurs, and tech-nical, managerial, and financial resources. Although thenetwork structure in the San Diego area is more coordi-nated than that of the Bay area, it has proven to be very effi-cient and dynamic. Currently, San Diego hosts the fastestgrowing biomedical cluster in the USA.

Amgen, born in 1980, has also had a strong impact on Cali-fornia’s biopharmaceutical business. Located in ThousandOaks just north of Los Angeles, Amgen has generated asmall biomedical cluster around the area. Currently, Amgenis the world’s largest independent biotechnology companywith well over 5000 employees worldwide. Amgen’s suc-cess has evolved around three products (EPOGEN,NEUPOGEN, and INFERGEN), introduced to the marketin 1989, 1991, and 1997, respectively.

NIH is the major financing body for pharmaceutical basicresearch in the USA. In recent years, California has re-ceived more grants than any other state, and out of the top15 recipients of NIH grants nationwide, five have beenCalifornia organizations. The San Diego area alone ac-counts for ten times more NIH grant dollars per capita thanthe national average, with the San Francisco area followingnot far behind.

Over 50% of California’s biopharmaceutical companieswere founded in the 1980s, and a majority (63%) are pri-vately owned (Gollaher, 2000). To raise capital for thepharmaceutical R&D companies, angel investors and VCsare needed. In the USA there are 270 VC firms that investin biotechnology, with about 30% of them headquarteredin California (Dibner, 2000). Most of the Californianbioindustry-oriented VCs are located in San Francisco. Al-though biotech angel investors are growing in numbertroughout the nation, San Francisco appears to be in theforefront of the trends again: some angels have started toform groups to better focus their investments in the biotechsector. One of the first angel groups has been Tenex, basedin San Francisco.

The biotech industry has still been projected to grow inCalifornia, with about 80% of the companies expecting toexpand their facilities within the next couple of years(Gollaher, 2000). However, Dibner (2000) has forecastedthat half of the existing companies will not survive in theirpresent form, and there will be tremendous consolidationin the industry. Some hope is still left though: regardless ofthe cautious economic climate, good ideas and break-through technologies will always be supported.

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4 Conclusions

The CSFs in the biopharmaceutical business fall into thefollowing groups: human resources, products, and net-working, which are internal success factors; and clustering,infrastructure, and national policies, which are externalsuccess factors.

The following factors were verified as the key success fac-tors in Finnish biopharmaceutical companies:• Human resources: management skills, teamworking

skills• Product strategy: unmet needs, early marketing• National policies: government funding of basic research

and government support for start-ups.

The key success factors in Californian biopharmaceuticalcompanies are:• Human resources: management skills, entrepreneurism• Product strategy: strong platform• Networking: toward academia and big pharmas• Clustering: labor pooling and knowledge spillovers• Infrastructure of the community – quality of life

The Finnish biopharmaceutical business concentratesmore on the substance: people and products. The govern-ment is noted as a great help in the initial stages of develop-ment of a pharmaceutical. The Californian biopharma-ceutical business places more emphasis on what is outsidethe company: networks, clustering, quality of life, and eventhe sunny climate.

The reasons are many. The Californian biopharmaceuticalbusiness is larger and older than its Finnish counterpart.Most of the Californian biopharmaceutical companies arelocated in a geographical cluster of hundreds of companiesand organizations involved in pharmaceutical R&D. As aresult of operating in a cluster area, the advantages of clus-tering, such as labor pooling and knowledge spillovershave been integrated into the business strategies. In Fin-land the pharmaceutical cluster is relatively small and doesnot provide these advantages. In Finland the issue is moreabout networking and an individual’s ability to create na-tional and international networks.

In California, biopharmaceutical companies are often runby professional managers. In Finland, the lack of businessprofessionals was a concern to many industry experts. Onthe other hand, the Californian experts emphasized net-working toward academia more than their Finnish counter-parts. In Finland, the companies still operate close to aca-demia and the information flow is more spontaneous.

There are pros and cons in both the Californian businessstructure and its Finnish countepart: the Californian criticalmass and management experience versus the Finnish dy-namic tech experts.

19

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