Essay, 2002, 14 Pages
2. Business-to-Business Relations in the Biotech-Sector
2.1 Biotechnical companies and inter-organizational linkages
2.2 Biotech companies and Venture Capitalist Partnerships
2.3 Relationship Strength
2.4 The role of relationships to reduce complexity
2.5 Performance of the partnership
3. Example of a German biotech-company
3.1 History and Profile of the company
3.2 Partnerships of the company
3.2.1 MorpoSys AG & Bayer AG
3.2.2 MorphoSys & Roche AG
3.2.3 MorphoSys & Schering AG
4. Summary and Conclusion
Relationships in the Business-to-Business sector can be viewed as simply dyadic relationships or as a cluster of relationships imbedded in a network. Relationships are valuable resources, which, although they do not appear on the balance sheet, provide considerable returns on the investment of time and money devoted to their development. Therefore, relationships can also be the source of value creation for the firm, its shareholders, employees, customers, partners and suppliers. The nature or the atmosphere of the relationship is important for value creation .Relationship strength as assessed by relational norms such as flexibility, communication and solidarity has been shown to be an important factor in determining the effectiveness of Business-to-Business relationships. According to the Boston Consulting Group (2001), approximately 40 biotech-clusters, in different developmental stages, have emerged worldwide. Clusters can be defined as "thematically focused collections of scientific institutes and companies of different size on a limited space with high attractiveness to third parties". In addition, the convergence of modern biotechnology with information and communication technology and the application of robotics and automation techniques catalyze these developments even more. The cluster speeds up the company’s capability to innovate. This rapid growth of knowledge and the dispersion of expertise open up new business. The highly specific knowledge and skills fosters the formation of yet more specialized companies and value creation.
In this essay, I would like to illustrate two types of partnerships within clusters of emerging biotechnology companies. Firstly, relationships between emerging biotech companies and their most important non-financial business partner. Secondly, relationships between emerging biotech companies and their lead investor, which I would like to describe by using Venture Capital investments. My purpose was to evaluate the strength of the relationship in the two types of partnerships in general, and afterwards with the help of an example of a biotech company, called MorphoSys, located in my home country, Germany.
The biotechnical sector is characterized by an environment of high risk and uncertainty and extremely high costs for research and product development before the product is viable on the market. To compete in this global "learning race", companies have to form a variety of inter-organizational linkages that can be formal, in the form of contractual agreements like strategic alliances, research, licensing, co-production or co-marketing agreements or they can be informal, like the participation in research networks. Powell (1998) sees it as a key challenge and success factor for emerging biotechnology firms to establish a broad portfolio of cooperation partners. He views the effective management of these distinct partnerships as "key drivers of a new logic of organizing". Besides offering access to resources, speeding up innovation, raising entry barriers to competitors and distributing risk, they can also send positive signals to other parties such as potential business partners or investors.
One important success factor for biotechnology clusters is the availability of venture capital, important source for financing start-up companies. Venture capital can be defined as funds made available for start-up firms and small businesses with exceptional growth potential. Sources of venture capital include wealthy individual investors; groups of investment banks and other financing sources who pool investments in venture capital funds or small business labour-sponsored Venture Capital Corporations. Venture capital financing supplements other personal or external funds that an Entrepreneur is able to tap, or takes the place of loans of other funds that conventional financial institutions are unable or unwilling to risk. Therefore, it is also called risk capital. Venture capitalists can provide additional value besides financing. The lead investor usually gives management support and access to his network contacts, a crucial element because the founders or managers of these emerging companies often come from academia and lack a long track record of business experience.
It should be in the interest of start-up companies to establish effective relationships with their lead investors in order to profit from value-added services and also because companies will usually be in need of additional rounds of financing. Very often the venture capitalists of the current financing round will be the source of additional funds. In addition, it is much more difficult to find new investors, when the initial source of money is not willing to invest more. For the venture capitalist, the development of effective relationships is equally important, as it is much easier for the venture capitalist to have a positive influence on the development of a company, if the relationship to its management is strong. In this respect Fried and Hisrich (1995) underline the importance of personal relationships between venture capitalists and managers. It seems that a strong and effective relationship can be built, when the venture capitalist can add real value through his expertise to the company and is respected by the managers because of that. An additional factor that seems to influence the quality of the relationship is a strong commitment to the success of the company and a very open and clear communication.
According to the European Venture Capital Journal, Biotechnology is attracting unprecedented venture capital attention and especially the health and life science sectors are showing signs of robust growth. Venture capital backing for the sector remained strong with about EURO 565 million invested in 42 biotech companies in the first half of this year. The capital invested in the sector exceeded EURO 1 billion in both 2000 and 2001 and is on track to reach this level again in 2002. The Journal also illustrates, that venture capital is not being used to create new companies, but that larger chunks are being invested in a reduced number of pre-existing businesses. Increasingly companies that raised seed finance are facing difficulties finding early stage venture capital. Venture Capitals appear to be prepared to back companies that have put their Initial Public Offering plans on ice. It was shown, that although a degree of correlation is to be expected, the biotech sector so far seems to be relatively immune to the drop in company valuations on the public markets. However, negative indicators include some companies raising new rounds of funding at lower valuations than previous rounds.
The nature of the atmosphere of the relationship in Business-to-Business companies is significantly important for value creation. Relational attributes such as the strength of relational norms and the level of commitment and trust are important for exchange relationships to create value for the parties involved in the process. The transactional-relational continuum is a useful construct for assessing business-to-business exchanges. In Macneil's (1980) relational contract theory, the strength of a business-to-business exchange can be measured along a continuum from the transactional to the relational pole or axis.
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