Chris Angelis looked at his watch – he would have enough time. At this point in his career, he knew about Washington, DC, traffic, and how to leave enough time so that he was never late. He hoped the guy he was meeting – Charlie Peters – was equally conscientious. Chris was the founder and Chief Executive Officer (CEO) of two companies that dealt in respiratory health, and Charlie was an entrepreneur who had developed a homeopathic product that might be lucrative for a business partnership. Chris was on his way to meet Charlie to structure a deal.

History

Chris Angelis had originally practiced and taught in the field of Respiratory Care and Extracorporeal Circulation before joining a major pharmaceutical company in New England in 1985. From 1985–1990, Chris held six positions of successive responsibility wherein he oversaw the successful launch of three new products in the US, and the development of the global strategy that salvaged the company’s failing flagship product. His activities attracted the attention of a Maryland-based pharmaceutical start-up that recruited him as the company’s Senior Director of Marketing. While his tenure in the new company started out very promisingly, he quickly became concerned when management’s demands started to call his ethics into question. In April 1991, Chris, who was a new homeowner, the father of a 3-year-old daughter, and the sole bread-winner of his family chose to tender his resignation rather than stay in a position that was certain to tarnish his reputation or worse implicate him in activities that were unethical and possibly illegal. His president rejected his resignation and fired him on the spot. With the pressing need to earn income to support his family, Chris chose to take his experience and offer his services under his own banner. He founded his first company, Strategic Implications International (SII), which provided strategic consultancy and marketing support to healthcare organizations. SII quickly became phenomenally successful through organic growth, mergers, and acquisitions before it was acquired in 1998 by a company which is now a division of Cardinal Health Inc.

In 1992, Chris met physicians Dr. Mike Kale and Dr. Bill Sager – they had served as faculty and consultants to SII while it was producing educational programming for pharmaceutical giant Glaxo Inc. (now GSK). Mike and Bill believed, based on their experience, that they could improve the way doctors are educated about new medicines and treatment, and that this education could be supported by the pharmaceutical industry because it would be beneficial for pharmaceutical products. Such education had to appeal to doctors – it could not merely be marketing, it had to illustrate the way these solutions helped patients, be inclusive of all available products and fairly balanced. The idea was to create innovative and relevant educational content using novel yet appropriate formats delivered by and to a network of doctors. Mike and Bill Sager were specialists in allergy and asthma, and they started to implement their vision in that niche.

Mike and Bill had sought Chris out based on his reputation and expertise, and because they “needed a business guy” to run the operation. In late 2003 as Chris was finishing his non-compete agreement with his former employer, he agreed to join them and to form SMA (SMA). Chris would serve as the new company’s CEO. SMA was incorporated in 2004, and uses the original concept of education created for physicians by physicians to grow and expand. The organization now encompasses multiple therapeutic specialties and an ever-expanding network of physician advisors spanning the globe. Chris Angelis continues to serve as the CEO of SMA and oversees this continued growth while Mike Kale and Bill Sager maintain their strong link to clinical practice and serve as independent consultants to SMA.

In 2006, Chris formed PharmaSciences in partnership with a Hong Kong-based concern that owned the patent to a promising compound with many possible applications in the pharmaceutical industry worldwide. Chris would serve as CEO. PharmaSciences’ main product was a chemical compound that was designed to provide more effective delivery of medicines to mucous membrane surfaces (e.g., nose and mouth). Their product, MuAd™, is a patented muco-adhesive pharmaceutical composition, developed on the basis of a synthetic polymer. Muco-adhesive solutions, in general, establish reversible contact with the mucosal surface, which enhances the effect of drugs dissolved in them. Unlike other bioadhesive drug delivery systems (gels, powders, microparticles, and liposomes) muco-adhesive solutions possess the property of fluidity, which enables them to cover maximal mucosal area when placed on its surface. MuAd™ offers a means to achieve an optimal adhesiveness to fluidity ratio for whatever drug or substance is being delivered using MuAd™. This is done in production using the patented processing methods of PharmaSciences.

The Companies SMA

SMA was in the business of knowledge and education. In the highly regulated and highly complex world of pharmaceutical marketing, SMA had a team of in-house experts and key opinion leaders across a variety of medical domains. These were people who understood what clinicians want and need because they were clinicians themselves. It also meant that they knew about the pressures and values of clinicians, and could therefore “speak to them in their own language.” This enhanced the message credibility, and as such the impact of any educational programs SMA created.

Since medicinal development is something that involves many constituencies over a long life- cycle, SMA also had knowledge that went beyond the needs of patients at a specific point in time. Products have different marketing needs from pre-launch planning to mature product life-cycle management, and so SMA positioned itself to possess knowledge appropriate to each stage and for each stakeholder. For example, for newer products SMA had in-house experts and clinical advisors to help with the design of the actual clinical development programs. As a product became viable, more interaction had to happen with regulatory bodies. This was a particularly nuanced issue, and so SMA’s clinical advisors also had to be knowledgeable about regulatory strategy. They provided guidance for New Drug Application and Investigational New Drug submissions, and could deliver expert testimony as necessary for the US Food and Drug Administration (FDA) and other regulatory authorities. This was another reason that it was critical that members of the SMA advisory team be made up of highly respected, practicing clinicians.

PharmaSciences

Whereas SMA had marketing expertise, PharmaSciences had a patented product that was proven effective as a medicine delivery vehicle using clinical trials. Their product, MuAd™ had been clinically tested with different respiratory medicines, and studies reinforced the product’s effectiveness. It was found to qualify for a Class I designation, which means that it is well tolerated and virtually devoid of any mucosal irritation. The legitimacy of the product was bolstered by the rigorous research behind it. Another important finding was that MuAd™ increased the potency of certain drugs. This finding was important for drugs where the efficacy could change over time and continual use. By pairing these medicines with MuAd™, patients were effectively able to have longer congestion-free periods using the compound because smaller and less frequent doses would yield a similar clinical effect

. In sum, in vitro and in vivo studies have shown that MuAd™ was a useful and usable product. But there were two additional advantages of the MuAd™ compound. The company’s patented technology includes the methodology and devices required to assess and adjust the optimal muco-adhesive properties. This would allow fine tuning of drug delivery. In addition, the significant advantage to licensees is that MuAd™ has been developed for existing pharmaceutical compounds. Securing drug approvals based on existing data of older drugs is easier than those of new compounds. In addition, licensees are afforded new patents to drugs with expired or expiring patents, helping them with their life-cycle management strategies.

Nose-Clear

Charlie Peters had inherited a nasal clearing formula from his grandmother. It was basically a mixture of hot peppers that was minimally irritating but very effective for sinus congestion and headache. It was one of two homeopathic products with similar ingredients targeting the same market.

Nose-Clear had launched in 2005, and had been praised for its effectiveness. By 2007 it had cumulative US sales of $1.3 million, largely due to direct-to-consumer magazine and commercial radio advertising campaigns. But by 2008 the sales had fallen below $100,000 for that year. There was no advertising or promotion, and a minimal retail presence. Most sales came from on-line purchases. Clearly this was a company in need of help

Nose-Clear was effectively a mom and pop shop running on a shoestring budget that contracted all manufacturing and related expertise to third parties. It had tried unsuccessfully to attract partners and/or capital to fund the operation, but so far had been unable to do so.

Deal or No deal?

The way Chris saw it, investment in Nose-Clear had a lot of potentials. Seventy-two million people use headache and sinus/allergy medications, with an estimated $13 billion market in the US and $20 billion market worldwide. Right now, Nose-Clear was one of hundreds of branded and generic over-the-counter products for relief of sinus congestion and headache. But the treatment was homeopathic, which is in certain demographics a more appealing asset for minor medicinal treatment. This trait also made it cheaper and easier to manufacture, and free of regulatory entanglements. However, this strength was also a liability.

The first problem had to do with the nature and strength of the claims one could make about Nose-Clear’s effectiveness. People are naturally (and legitimately) suspicious of inflated effectiveness claims in homeopathic products because there is no third-party scrutiny or review. The second is that because Nose-Clear was homeopathic, it was not patentable. Nothing that you can make from natural ingredients is patentable.

But MuAd™ was patented. By combining Nose-Clear with MuAd™ you would have a new, patentable, product. The way the law works, if you add something to your patented compound, the entire formulation is now patentable. As Chris liked to say, it was like traffic laws. People are not subject to most traffic laws, but buses are. If you put people on the bus, suddenly they are subject to those laws. Strategic BioSciences had the bus, Nose-ClearNose-Clear had the people. SMA knew how to drive the bus and where to go.

But what kind of deal should be structured? There were many options. The simplest deal would be just to buy Charlie out. Give him $X for the formula and be done with it. It would require some market analysis to figure out what a reasonable valuation of this product could be. At the same time, Chris already had two companies; did he want to run a third? There would need to be a good reason to do that. There was also the question of whether Charlie was just in it for the money. This was his grandmother’s recipe, and so maybe he was attached to the idea of making it into a product himself. Or maybe he wanted to be CEO. In talking to Charlie, he definitely seemed to have ambitions and aspirations

If Charlie really wanted to be in control, then they could set up his company as a wholly owned subsidiary company. Here again the parent company (whether SMA or PharmaSciences) would be in a position to extract all the value from this product. Again, there was risk. Both of Chris’s companies had reputations to uphold, and Charlie was a bit of an unknown in terms of his management competence. But Chris would really hold all the cards if one of his companies owned Nose-Clear; and maybe Charlie could be groomed. Or maybe Charlie was not looking to be groomed, and would not be okay with being “CEO junior.”

Charlie could be given more autonomy if instead of a wholly owned subsidiary, they formed a joint venture. This would almost certainly be more attractive to Charlie as it would make him more of an equal partner. Of course, there was a huge cost to that, for what was Charlie really bringing to the table? Chris had the contacts, the know-how, and the capital resources to make this venture work. With a joint venture, he would almost surely get less of the profits for lack of control of the process. But maybe that risk could be mitigated.

Of course, they could just establish a buyer–supplier relationship. Chris provides access to marketing, branding, clinical tests, and production services, and Charlie pays for it. This could be straightforward, but the upfront work was daunting. How was Charlie going to pay for anything given his meager earnings from this product? They could charge royalties on the back end, but then how would Charlie get his operation up and running?  

PLEASE HELP

1. Based on the case, what are the identified risks and rewards for Chris in terms of working with Nose-Clear?

2. What are the risks and rewards for Charlie in terms of working with Chris?

3. Below is a list of possible negotiable issues that can be used to structure a deal. Use these to create potential offerings for Charlie under each of the business structures (buyout, wholly owned subsidiary, joint venture, and buyer–supplier).

a. Be sure to articulate an ideal but realistic deal (your goal) and a minimally acceptable deal (your resistance point).

b. Are there any other issues that you could add to expand the pie?

c. Having looked at the different business structures, which one would you advocate and why?

d. Could you develop a hybrid structure for this partnership?

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Answer 1 Based on the case what are the identified risks and rewards for Chris in terms of working with NoseClear The risks for Chris in working with ... View the full answer