What Covid-19 can teach businesses about cooperation

Transcript

Hello and welcome, after a short summer break, to Brain Food for General Counsel. My name is Matthew Magee and I'm a journalist here at Pinsent Masons.

The coronavirus crisis has put one industry firmly in the spotlight: life sciences. The world has paid forensic attention to its efforts in vaccine research, symptom treatment and medical equipment manufacture, and the industry has risen to the challenge.

One of the reasons for that is that companies who would otherwise be fierce competitors have worked closely together in research, manufacture and distribution. Governments in fact have temporarily paused industrial and competition regulations to allow this to happen, and industry figures have relished the chance to work together, describing cooperation on a scale and at a pace not seen before.

So, we're going to take a look at this rare cooperation to see are there lessons that can be learned for more normal times, should we ever experience them. How does it come about? How does it work? What are the benefits?

Companies are reassessing their strategies right now and their priorities in light of major challenges: not just Covid-19, but climate change and, in the UK and Europe, Brexit. Thinking of new ways of working and new perspectives on old issues like competition might help to find a path through an uncertain future.

We'll be hearing from Nicole Jadeja, a life sciences expert at Pinsent Masons, and from business strategy academic Jonathan Baker, but first we'll hear from David Rosenberg, former vice president for IP policy at GlaxoSmithKline and now a consultant to pharmaceutical trade body. He says that pharma has long been collaborative, but we are seeing this now on a new scale.

David Rosenberg:

There has always been a huge amount of collaboration in the pharma sector. Largely, I think between big pharma and smaller pharmaceutical companies and by smaller pharmaceutical companies I am saying small biotechs, universities and include charities. There has been a huge amount of collaboration in that area, particularly in anything biotechnological. The vaccines, I think there has always been collaboration at least in terms of cross licensing rather than necessarily directly scientists working together. So, I think the context is this is an industry that has had a large amount of collaboration for many years, but it has seen two things. I think we have seen more collaboration between big pharma companies. The one I'm thinking of in particular is the one between the vaccine work being done in collaboration between GSK and Sanofi, where as I understand it Sanofi is doing the antibody side of the work and GSK is working with Sanofi on the adjuvant that will be used in that vaccine if it ever comes to be a used. Now the reason that's important is because the adjuvant technology is extraordinary commercially valuable to GSK. It is not something they would give up lightly and I think a partnership in this area is probably unprecedented.

Matthew Magee:

The pharma industry is a good case study because, frankly, if you can manage to work with competitors here you can do it anywhere. It is a truly international industry governed by a latticework of stringent industrial regulations as well as the usual competition laws. As Nicole Jadeja of Pinsent Masons tells us, it is extremely complex, and governments had to make some changes before cooperation on this scale could occur.

Nicole Jadeja:

When you're developing a medicine, you're very often developing it for a global market. So, you've got global supply chains very often, the particular ingredients if you like or the active ingredients that is going into a product come from various places around the globe. You have often got scientists working in different places and then ultimately of course, once you found a vaccine which works, you've then got the challenge of manufacturing it on the scale that is going to be required, especially in this scenario to meet global demand. Very often manufacturing is undertaken in different parts of the world and then of course once you've overcome the challenge of developing a vaccine you have met the challenge of being able to manufacture it on a scale that will be required. You then of course got the challenge of global supply and meeting global demand. So, yes, the life sciences, pharmaceutical industry is by its nature global and there are all the challenges that go with that. The industry is working hard, it's collaborating like never before. That's not new, but various things have been put in place to enable that to happen more effectively. There has been a lot of changes introduced. Central to the issue and what has actually really enabled collaborations is the competition authorities' approach to agreements and collaborations between what would normally be seen as competitors. So for example the Commission has reintroduced the ability to issue comfort letters. So, it has been able to give comfort to companies that are looking to collaborate in a particular way as to whether or not the arrangement or the agreement that they are arranging into would have been breached of competition law. We have seen that really effectively and it comes from the first comfort letter that was introduced was given to Medicines For Europe who were working on a project with industry to look at the demand and supply of ICU equipment and to enable companies to participate in that way. I think the level of engagement between industry and those authorities - it was always there, but it has increased and its been encouraged and its through those active discussions that we have been able to look to some of the very pragmatic and practical solutions that are better coming out of the crisis.

Matthew:

So how has this new cooperation actually worked? David helps us to understand the kind of strategic changes you have to make to how you think about activity, resourcing and your fundamental aims if you're going to engage in this way with competitors, regulators and governments.

David:

I think what we have probably seen due to the pandemic is that companies are entering collaborations that are far less due diligence-based in the sense that they are entering collaborations earlier in the process without necessarily doing the sort of work and doing the sort of agreements to see scientific and commercial viability if there is a chance of working with partner X to get a vaccine. I think companies are more likely to be doing that than they would in normal times and they will take on riskier work and they will take on work that is less likely to be commercially successful in the sense of making profit as opposed to making a vaccine. Companies are willing to undertake scientifically and commercially riskier collaborations than they would in normal times. If the normal risk profile - its a matrix of different things. It is likelihood of success in terms of efficacy, its likelihood of success in terms of safety. its likelihood of success in terms of commercial benefit at the end of the day - and if ordinarily a company had a risk tolerance of let's say we'll call it five - we won't enter a collaboration if these various factors give us a figure of five. I think because of the importance of getting a vaccine or a therapeutic, they are entering into the collaboration if that number is two.

Matthew:

Life sciences is still an enormous business, though, and each of these companies has assets that they have a duty to protect for the long term. So, this is still something they have to think about as Nicole, then David, explain.

Nicole:

They are going to have to think about IP issues, who owns the IP, who controls the IP, who makes every decision in respect of the IP. There is going to be issues around the sharing of data - again not a new issue and one we're increasingly seeing tackled by the industry as it embraces the power of data.

David:

If I was a big pharma company and one of my key commercial assets, I mean key for the company outside the Covid crisis, I would still be very wary of giving that away, I would want to be able to share it in the most controlled way possible. If you say I have got a crown jewel as opposed to I have got a piece of costume jewellery neither of which I would normally be prepared to share openly, normally I would be reluctant to share openly. I think you would see more sharing of the costume jewellery now in the Covid crisis, there is still an enormous hesitancy about sharing the crown jewels in a way that those crown jewels can be used post Covid as competitive assets of people who will become competitors post Covid.

Matthew:

This kind of cooperation changes your organisation's focus – towards solving a global health crisis and away from the usual strategic aims, like profit and successful clinical outcomes.

This changes the very basis for acting and the fundamental nature of decision making, says David. Though he thinks this is a crisis-specific response and it can't last.

David:

There is certainly a number of companies that certainly do not expect to make a profit like GSK have said that any profit we do make will put into to pandemic preparedness in the future. Again, I think this is for the multiple reasons and different companies will have different reasons. One it is the right thing to do and two the companies are accused of price gouging when there is not a crisis, can you imagine what the accusations will be if there is a crisis? And thirdly, more money than usual from the public purse has gone in and there may well be provisions in funding agreements that limit the sort of prices that can be charged, I don't think they are going to be profiting hugely from bringing out a vaccine or a therapeutic.

That is not sustainable as a way of doing business in future. Resources are finite and may have to be directed as to what is regarded by the company as the projects that are most likely to have a successful outcome in terms of getting a product to market and making an amount of money from it. I think what has changed during Covid is they are taking greater risks on products not getting to market for later spending resource on projects that have less chance of success in commercial terms and scientific terms and I just do not think that will particularly be sustainable long term.

Matthew:

We've looked at how cooperation has suddenly emerged in an otherwise highly competitive, highly regulated global industry. It's been quite the transformation, of operating procedure and of fundamental purpose.

This is interesting in itself and I hope you've learned something useful, but I was interested in whether it had happened in more normal times, and was there a pattern in how it worked, or a common thread of what the impact of it was?

Jonathan Baker is a lecturer in international business, strategy and entrepreneurship at Auckland University of Technology and he has researched what he calls market shaping - we'll come to that in a moment - and how it can come about when competitors cooperate.

But he has looked at examples of companies coming together to cooperate where they would usually compete, and the role that crisis can play in that phenomenon.

Jonathan Baker:

A bunch of small boutique wineries here in New Zealand back in 2001 wanted to gain acceptance for the aluminium screw cap as a closure on premium wine and at the time of course, the screw cap was seen as something that you would only put on jug wine or on poor quality wine and so these wineries set about to try and essentially shape all sorts of expectations and behaviours around the world and these different markets so that the sommeliers and the restauranteurs, people in the wine trade, supermarket buyers and so forth, all of these people would accept the fact that an aluminium screw cap was an acceptable closure on a premium bottle of wine. It was a crisis that drove that degree of cooperation between them. They reported to me that they were essentially being severely let down by the quality of the cork that was coming out of Portugal as demand for cork went up around the world and the Portuguese cork industry just could not keep up with producing high quality cork at the rate that was required and they insisted to me well we are all the way down at the bottom of the world so we're hardly going to get the premium cork. So, they were very frustrated by that and a number of these boutique wineries had suffered massive, almost catastrophic financial losses as a result. So, I think a crisis is often a great way to force managers to think differently about what it is that they expect and what their role is and how can they create more resilience for themselves and maybe resilience for their organisations and means that they are partnering with someone else is a good approach. So, I think typically a crisis is quite an effective way to drive some fresh thinking.

Matthew:

This coming together of competitors that Jonathan describes can change the very nature of an area of life or business. He calls it "'market shaping", and he explained what that means.

Jonathan:

Market shaping basically is when you either create a whole new market and that quite often happens around some sort of new technology, but market shaping can also be ,and this I find a bit more interesting, when you improve the current market and of course from a competitive position, improving the current market is not really something that many firms like to do because improving the current market improves the market not just for you but also for your competitors. So, it can be quite anti-intuitive for a lot of senior managers to consider setting about to try and improve setting out market systems in which they operate because you're delivering wins to your competitors as well. So, in the global health sector, we have actually seen several organisations formally adopt market shaping policy or market shaping strategies. The Global Fund, which is an NGO based in Switzerland, has done a great job of overcoming what was a historic issue of trying to incentivise pharmaceutical companies to be producing really basic medicines that maybe are not as profitable as some new treatments for baldness, say, in the western world, and so The Global Fund set about to try and centralise the manufacturing and distribution of basic medicines to the developing world and so they had worked really well at sort of impacting the different layers, if you like, within the market. So, making sure not only their funders, but also the pharmaceutical manufacturers and also distributors of basic medicines are working together towards sharing this common goal of getting these basic medicines to those people that need them.

Matthew:

So this market shaping – changing the regulatory, competitive or demand landscape through coordinated action - might be the consequence of greater cooperation between companies. But how does that cooperation come about in the first place? There was a time when massive conglomerates did everything in-house and they were proud of their self-reliance, but cooperation between companies was the natural consequence of a breakdown in recent decades of that way of doing business, Jonathan says.

Jonathan:

Cooperative strategies between organisations have become a real cornerstone in a lot of businesses, especially in the B2B area, and that started occurring back in the '90s - various researchers notice this explosion in alliances and cooperative networks and so forth. What often drives firms together I think is this need to essentially realise the economies of scale that maybe they cannot under normal circumstances and we saw this happening in the automotive sector, you know starting probably back in the 80s and that is why we have got companies like Fiat Chrysler and so forth, because these smaller companies are trying to realise the same economies of scale that a Toyota or a Volkswagen group can realise in real time.

Matthew:

This chimes with what David Rosenberg has seen: companies getting closer to one another because they have realised they can't do everything themselves. And, first, with what Nicole has found from talking to businesses about how their attitude to collaboration is changing.

Nicole:

People have perhaps some surprisingly been very positive about the level of collaboration and the role it is going to play in the future of all the companies we spoke to and 90% of those believe that greater collaboration between organisations would have a positive impact on the life sciences industry going forward. I think that, I mean that reflects the general trend in any even but I think people have seen or hoping to see the power of the collaboration.

David:

There has been for the last 20-25 years an increasing realisation that actually no one company has the skillset and knowledge set, the IP set that is necessary for particularly more complicated products like biologicals and vaccines and I think it is that realisation that has led to much more collaboration and so much more open innovation, but I think, largely open innovation is the mindset that says we cannot do closed innovation where we do everything from the test tube to the patient on our own. We therefore have to collaborate with others who have skill sets in all sorts of spaces that we needed but we do not have and we are more open to collaborating and therefore compromising than we used to be simply because in many, many cases now it is necessary, but it is more and more without collaboration we will not get products to market. Companies that probably thought they would never work with another company have realised they can do and will do so in the future.

Matthew:

Cooperation, then, has evolved in recent decades and has become a powerful force shaping entire markets. Life sciences companies already had the culture, the mechanisms and the will to cooperate but have stretched it further than ever in the coronavirus crisis.

Nobody expects this unprecedented scale of cooperation to become the norm - and indeed competition regulators would be alarmed if it did - but this way of working has been tested in the fire of a crisis and, so far, been found to be effective. It will be harder than ever for companies to argue that the best way to proceed is to go it alone, and that is quite a legacy.

Thanks for joining us for the latest Brain Food for General Counsel podcast. Remember you can keep up to date with hour by hour coverage of business law news by the Outlaw reporting team at pinsentmasons.com. Do not forget to subscribe to us wherever you get your podcast until next time, goodbye.

Brain Food for General Counsel was produced and presented by Matthew Magee for Pinsent Masons, the international profession services with law at its core.