Are Biotechs Profitable?

Rodolphe Durand, Professor of Strategy and Business Policy - February 15th, 2009
agricultural biotechnology

Key ideas

• The “Silicon Valley” model of American development is not applicable when indiscriminately applied to French biotechnology firms.

• The strategic orientations of bio techs (business models, the choice of being involved in strategic alliances and the desire to diversify into multiple fields) have different effects on their capacity to generate profit-making assets and then appropriate these short-term profits. 

Rodolphe Durand ©HEC Paris

Professor of Strategy, Rodolphe Durand joined HEC Paris in 2004. With an MSc and Ph.D from HEC and a Master of Philosophy from Sorbonne, Rodolphe Durand is also qualified to (...)

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When Rodolphe Durand returned to France after two years of research and teaching in the United States, he chose to focus his research on industries where intellectual capital and creativity matter (business schools, French “haute cuisine” and industrial design). By choosing to study biotechnology companies using a sociological approach, Rodolphe Durand, Olga Bruyaka and Vincent Mangematin demonstrate in their article that the American model cannot be transposed to the French biotechnology sector. They highlight three specific strategic dilemmas faced by companies wishing to transform their revenue potential into real profit:

• the specialization and diversity of the fields;

• the decision to form or not to form a strategic alliance;

• the decision to focus on research or the supplying of services to actors actively involved in research.


FRENCH BIOTECHS AND THE AMERICAN MODEL

The most commonly cited development model in the biotech industry is that of the American clusters, such as Silicon Valley: firms involved in active research, i.e., engaged in the competition for patents and publication of their findings, financed by venture capital and then introduced on to the stock market. Although this model works very well in the United States, the same formula cannot be applied to the European biotechnology sector: the legal, institutional and economic contexts are not the same. For example, the biotechnology sector in France remains very limited and is comprised of few listed companies. Because of their size, they cannot create many jobs, and even partnerships with other bio techs (and especially with partners, i.e. major corporations in the pharmaceutical industry) in competitiveness clusters do not enable them to grow sufficiently. Consequently, the American model of development cannot be applied to France. However, some French bio techs that have their own development models function perfectly well. This is especially true for small bio techs that provide services to large laboratories. “

 

RENT GENERATION” AND “RENT APPROPRIATION”

For biotechnology companies, patents and the publication of articles in scientific reviews* are strategic resources that signal rent potential. In order for the company to be profitable, however, it must be able to appropriate rent from its findings and generate income from them. Yet, patenting is costly, and a good patent often does not generate much of revenue for the company applying for it. Setting up a development model is therefore very complex, because factors such as the company’s strategic orientation, its choice of partnerships with major players in the industry and the diversification of its fields of activity do not have the same influence on rent generation and appropriation.


ALLIANCE BETWEEN FRENCH BIOTECHS AND MAJOR ESTABLISHED COMPANIES

Biotechnology companies are very often founded by university researchers, or result from the breakup of a private laboratory. In order to develop, they may need to find specialized forms of finance, or choose to form a partnership with a bigger firm. Thus, large laboratories and established firms implement portfolio strategies by forming alliances with various biotech companies. This type of alliance is advantageous for both parties:

• small bio techs gain a stable source of finance with which to develop their activities and diversify into multiple fields for their discoveries;

• large laboratories acquire the means to focus on niche markets that would normally have been overlooked. However, the effects of an alliance on companies’ profitability varies according to the size and strategic orientation of the biotech: the effect on rent generation is generally positive for bio techs involved in active research, and the effect on rent appropriation is more positive for large organizations than biotech companies.


WHAT IS THE RIGHT STRATEGY FOR A BIOTECHNOLOGY FIRM?

There is no universal development model that can be transposed to the French biotech firms: the study indicates that it is impossible to win on all fronts and that it is necessary to chose between long- and short term profit generation. The choice depends on the firm’s different strategic orientations:

• The business model adopted by the biotech: is it oriented towards active research or service provision, as the latter is much more profitable in the short term?

• The choice of a strategic alliance: at what point is it important to be attached to a larger laboratory, considering that the alliance is beneficial to the generation of resources that have rent potential but less favorable for appropriating short-term profits?

• The diversification of its technological applications, meaning its fields: does it choose to achieve a number of targets or focus on a single market with the knowledge that this specialization is more profitable in the short term?


* Legally, the publication of a scientific article provides a trace of the anteriority of the discovery and, consequently, the subject of an article cannot be patented after publication.


Based on an interview with Rodolphe Durand and his article “Do science and money go together? The case of the French biotech industry” (Strategic Management Journal , April 2008), co-written with Olga Bruyaka (Virginia Tech, United States) and Vincent Mangematin (Grenoble Management School, France). 

FROM THE LAB TO THE WORKPLACE
FROM THE LAB TO THE WORKPLACE

The study conducted by Rodolphe Durand, Olga Bruyaka and Vincent Mangematin raises two important issues. Firstly, it advises actors in the biotechnology sector to fully evaluate the consequences of their strategic decisions, particularly those concerning alliances and the level of diversity of technological applications. Secondly, the study invites a review of the national and sectoral ambitions of the French biotech industry. By questioning whether the American model can be transposed to France, the researchers play an active role in the debate on French industrial policy and encourage a review of the measures needed to boost this sector. This strategic issue must hinge on the choice between active research and service provision— a choice that will ultimately lead to the development of the most appropriate model for the bio techs. 

METHODOLOGY
METHODOLOGY

To study biotechnology companies’ development models, the researchers used a sample panel comprising 1,624 observations relating to 313 French firms over nine years (1994–2002). The sample consisted of listed and unlisted companies. The inclusion of many firms involved in agricultural and veterinary biotech sectors corrects the methodological bias that consists in focusing research only on pharmaceutical companies.