In no other industry are alliances seen as more critical to innovation and success than in pharmaceuticals. Of the top 25 drugs today, 12 were discovered or developed by a company other than the one that launched them. The trend is likely to continue: in our survey of senior business-development managers in the pharmaceutical industry, 85 percent expected the number of alliances to increase over the next five years.

But the alliance landscape is evolving, particularly at large pharma corporations looking for the next blockbuster. As their R&D productivity continues to decline, smaller companies with attractive products have taken advantage of the seller’s market for new compounds. Businesses that only a decade ago would have been happy to sell marketing rights are now equally interested in acquiring new capabilities. These companies demand participation in the design of clinical trials and the formulation of marketing campaigns, to say nothing of a larger share of the profits. It’s no surprise that pharma alliances are becoming increasingly complex—and costly—to manage. Certainly, the average price (including up-front fees, milestone payments, and royalties) has continued to rise. In 2002, the industry experienced an unprecedented number of megadeals, with at least seven worth upward of $250 million and four exceeding $400 million.¹ And there was no discernible slowdown in 2003: GlaxoSmithKline and Theravance, for example, struck a deal potentially worth $545 million plus royalties.

Perhaps more ominous is the rapid escalation of largely hidden outlays as a result of complexity—not the direct expense of producing a drug but rather the management time needed to supervise hundreds of people making thousands of decisions as well as the delays that accompany any partnership with a high level of collaboration and interdependence. Simple things such as selecting the members of the steering committee or approving the decision-making process can sometimes take months to iron out, at a cost of millions of dollars in lost revenues.

In the near future, alliances will probably become even more complicated: upward of 65 percent of the senior managers in our survey identified complexity as the aspect of deal making most likely to change over the next two to five years (exhibit). Respondents specifically mentioned two especially important and difficult areas for deals. The first was their content, such as the time frame and scope of an alliance (for example, research, develop-ment, and copromotion). The second was the complexity of working relation-ships, including the problems of codevelopment, coordinating sales forces, and aligning territories.

These alliances are here to stay, however, so the parties must be more vigilant about when and how they collaborate. The first step, even before the contract is signed, is for companies to anticipate the potential costs of complexity and to build them into a deal’s valuation, thereby avoiding the winner’s curse: outbidding rivals for a deal that turns out to be far more complex and ultimately less valuable than anticipated. For many large pharmaceu-tical companies, this better approach will require a closer alignment between the business-development team that signs the deal and the research and development or commercial teams charged with managing the resulting alliance.

Next, large companies should assess what the smaller partners really want from their joint ventures and consider alternative ways, unrelated to a particular deal, of satisfying them. If a biotech company wants copromotion rights on a compound in order to build a marketing capability, for example, the larger partner could offer rights on one of its own more established compounds instead. In this way, the partner satisfies its need to acquire marketing skills while the deal becomes significantly less complex.

More obviously, companies need to do a better job of anticipating potential issues before they arise. Both parties should walk through potential events and outcomes—for instance, disappointing outcomes in clinical trials—and clearly define each partner’s operating freedom, the specific decision-making processes, and the thresholds for increased or decreased participation. Few of the companies in our survey now approach planning with the requisite pragmatism and business rigor.

Finally, companies should simplify the management of their alliances by streamlining decision making and governance. Each partner’s roles and responsibilities should be defined to avoid the pervasive "let’s do everything together" mentality. Rather than having both parties jointly manage a drug’s marketing campaign, for example, one company could take the lead on promoting the product to consumers while the other focuses on the medical community.

Launching new drugs is hard enough; doing so when two or more companies have the final say over some decisions can be disastrous. Over the next decade, the winners in the pharmaceutical-alliance sweepstakes will be companies that understand the costs of complexity and manage to forge alliances in which less collaboration and greater division of labor create more value for all of the parties involved in the deal.