1. Which offer should Abgenix take? You must choose between Pharmacol and BioPart.

You cannot choose the option of “Do Phase II and then decide.”

Abgenix should go with BioPart as a partner for the product development. This is because
BioPart offers better returns on multiple dimensions. The BioPart offer is more attractive
financially as outlined in appendix 1. The net present value from the year of sales turns out
to be $446.25 million in case of BioPart as compared to Pharmacol which returns $343.27
million. There are some costs incurred during the development phase, but that can be
accounted for building domain expertise in other phases of the product development.

2. What are the advantages and disadvantages of each choice? How can the
disadvantages of the option you chose be managed?

The main differences between joint venture and licensing are as follows:

Financial:

In the short term, Abgenix needs cash infusion. Both collaboration modes would provide
that financial support.

Pharmacol advantage: By licensing out, however, Abgenix would not have to incur costs for
further developments, testing, regulatory, manufacturing and marketing of the ABX-EGF
product, whereas in the BioPart option, Abgenix will incur 50% of the cost to develop and
test the EGF product, which would be about 35 million, after FDA approval is achieved.
BioPart advantage: Immediately after the launch year, BioPart revenue is expected to be
higher than Pharmacol. Appendix 3 outlines the revenue per year and appendix 2 shows the
long term cumulative income in both cases. After 7th year, the gains achieved in BioPart will
be higher than Pharmacol in spite of initial costs incurred in the joint venture option. In the
short term, Pharmacol was generating more cumulative income.

Time to Market and Level of Risk:

Abgenix’s competitors are already developing drugs targeting EGF receptor therapy. In the
small molecule category of competitors, AstraZeneca was making good progress in
developing IRESSA and was planning to phase III trial by the end of 2000. OSI was in phase II
trial. Small molecule category had some side effects and but was easier to administer. In the
antibody category of competitors, ImClone had a product that was potentially a direct
competitor but had the disadvantage of not having the fully humanized antibody. If these
competitors got their products out in the market first, they would probably obtain first
mover advantage.

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 Pharmacol advantage: Time to market in both cases (Pharmacol and BioPart) was the
same, about 5 years. In the case of Pharmacol, the advantage was the hand off approach
where Abgenix can rely on the commercialization expertise of Pharmacol. The level of risk is
higher in case of collaboration with BioPart as Abgenix does not have any domain expertise
in developing and manufacturing products after the antibody creation stage.
BioPart advantage: With BioPart, Abgenix will need to develop the commercialization skills
but will have better control over the development effort. This may prove useful to quickly
react to the changing market conditions and develop strategies based on the technical
expertise in developing the fully humanized antibodies. So, essentially Abgenix can turn the
disadvantage of not having domain expertize by offsetting it with more agile approach in
product development by having more control over the entire process.

Learning and Organizational development:

Pharmacol advantage: In the hands off approach Pharmacol did not provide any advantages
to Abgenix in building expertise. BioPart
advantage: BioPart however provided more autonomous business model where Abgenix
would benefit from the learning and probably would be able to launch new products on its
own. This is in alignment with Abgenix's desire to maintain control of the ABX-EGF
technology and reap bigger potential benefits. The collaboration strategy of collaboration
through joint venture would give Abgenix a better chance to develop its own capabilities in
the testing, regulatory, manufacturing and marketing areas.

3. Analyze the economics of the Pharmacol and BioPart offers. What do the numbers tell
you?

Comparative analysis of Pharmacol and BioPart cash flow is provided in appendix 1. Based
on the analysis on the sales data provided, expected sales was 700 million per year after the
market is fully developed. 10% royalty in case of Pharmacol would mean 70 million per year.
Initial payment would be 28 million.

BioPart sales were expected to be 20% less than Pharmacol, since the latter had a large sales
force. This would mean 560 million per year. 35% of this would be spent yearly on sales and
S, G, & A. Also, the initial cost of drug development would be 35 million, and an additional
15 million for pre-sales costs. BioPart would give Abgenix 10 million initially for the
XenoMouse technology.

After analyzing the data provided and taking the discount rate of 0.12 for net present value
calculation, in the long term Abgenix will make more money by collaborating with BioPart.

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 4. What factors would you focus on in choosing a partner? Which of these factors are
most important? Why?

The factors that may be considered in determining the correct partner are

Strategic fit: The choice of partner can be based on the how firms align with respect to
objectives and styles. In the ideal partnership these have to be compatible.

Resource fit: Furthermore, classifying the resources as complementary or supplementary

Impact on Opportunities and Threats: Determining how the collaboration will impact the
bargaining power of customers and suppliers, degree of rivalry and threat of entry and
substitutes.

Impact on Internal Strengths and Weaknesses: The choice of partner can impact the
development of firm’s strengths. It could provide learning opportunities and overcome
weaknesses.

Impact on Strategic Direction: Determining the impact of collaboration on the firm’s

The most critical factor in selecting a partner is the impact on the strategic and resource
fitness of partner. In choosing a collaboration partner, the firm needs to consider whether it
suits its potential collaboration partner and vice versa and the degree to which potential
partners have resources that can be effectively integrated into a strategy that creates value.
Creating, communicating and delivering unique value is the ultimate objective of any
organization.

5. Should Abgenix change its strategy going forward? Why or why not?

In the long term, Abgenix would need to either develop, or access the competencies that it
lacks in testing and regulatory process, commercially launching and marketing of drugs. Joint
venture will provide such need to access the other firm's capabilities better than the
alternative strategy of licensing out to the pharmaceutical firm. Abgenix should revisit its
strategy and try to position itself as a value creator in the downstream phases of product
development. This will allow Abgenix to have better bargaining power in any future
partnership and it should utilize this opportunity with BioPart to formulate a new strategy
and redefine its value in the product development chain.

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 Appendix 1: Cash Flow Analysis

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 Appendix 2: Cumulative revenue growth

1000

BioPart Revenue
800
Pharmacol Revenue

600

400

200

0
1 2 3 4 5 6 7 8 9 10

-200

Appendix 3: Revenue per year

200

180
BioPart Income
160
Pharmacol Income
140

120

100

80

60

40

20

0
1 2 3 4 5 6 7 8 9 10

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