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Can
Less Opportunity Equal More
Success?
By Peter Meyer - Business & Economic
Review, October 2001
Creating and dominating markets is a
high-reward, high-risk game. Where you
choose or choose not to invest in
opportunities can be critical to your
chances for success.
For example, one of the highest-risk,
highest-reward opportunities in the world
is the market for HIV vaccines. The
company that is first to market will have
enormous opportunities, but the risk is
equally large. Some companies share risk
by investing in multiple opportunities.
VaxGen, the company that may be closest to
success, got there by opportunities.
VaxGen's founders formed the company
solely to create the vaccine AIDSVAX. The
effort has been costly. (See Chart
1)1. VaxGen will spend $132
million and seven years to bring AIDSVAX
through the tests that will prove whether
it works on two strains of the virus. This
is on top of $50 million that parent
company Genentech invested and 80 VaxGen
employees dedicated to the
effort2.
Raising this much money for a highly
speculative venture is difficult, but when
VaxGen's management talks to investors
they stress the investments in time, not
just money. The company has laid out a
time line of more than seven years from
the inception of the project in 1995 to
the first application for regulatory
approval. This timeline does not include
product development which took place
earlier between 1992 and 1995. Nor do the
seven years include time to get regulatory
permissions to market the product, or time
to market the product and gain acceptance.
Those could add several more years. Seven
years may seem luxuriously slow to some,
but VaxGen has no slack time in the
schedule. An increase of only 10 percent
to that schedule might be enough for other
companies to catch and pass AIDSVAX.
VaxGen is living, effectively without
revenue, on a consumption rate of $20
million to $25 million per year. The
company is working at high speed, with
highly trained employees who could find
work in profitable companies. The company
and the employees are paying an
opportunity cost to be there.
The Risk of Missed
Opportunities
Every time you invest a resource, you make
a decision not to invest it somewhere else
-- a decision that carries two risks. The
most obvious is that if you invest in
market A you may miss a bigger opportunity
in market B. The second cost is less
intuitive, but even more dangerous to your
success in new markets. The less obvious
risk is that you will invest in
opportunities. That can cost you success
in all of the new markets.
One popular way to reduce the risk is to
share the investment among many
opportunities, spreading the risk. Many
CEOs do this by being accidentally or
intentionally opportunistic. These
executives may move quickly from one
opportunity to a better one; they look for
and jump to the next big thing. The
question is: Will that disposition hurt or
help?
In 1995, VaxGen had many opportunities.
Besides HIV, AIDSVAX techniques may be
beneficial in the treatment of Hepatitis
B, Herpes, and perhaps even breast cancer.
For many CEOs, the temptation would be to
allocate time, people, and money to
several different diseases -- to share the
risk of investing in an HIV vaccine with
perhaps a breast cancer vaccine. When Drs.
Donald Francis and Robert
Nowinski3 founded VaxGen, they
consciously passed up the option of acting
opportunistically. This was not a
technical choice. It was a business
decision. Dr. Francis explained, "If you
look at different opportunities&emdash;
this was such a huge endeavor that if we
diluted this [we faced the real
possibility of failure.] Why? The
immensity of this job." Conducting a trial
of 8,000 patients on three continents is a
major undertaking, and for any company
there are only so many good people and
only so much time to invest. For VaxGen,
stretching too thin creates the
substantial risk of losing the opportunity
to a larger and more focused
competitor.
A second reason to walk away from other
opportunities was "the financial support.
When it came to financing we went to
simplicity." Most of the people and firms
Drs. Francis and Nowinski approached for
funding felt more comfortable if there was
only one area of attention. Adding other
diseases to the research efforts increases
the risk of failing in all areas, so many
financial sources argued for a single
effort. The funders' reasoning? If the
management and development teams put all
their eggs in one basket, the risk is
easier to manage. It also makes the teams
less likely to lose focus.
The opportunity cost with vaccines is even
higher than with most products. "The
downside is the binary nature of this
work. Vaccines are much riskier than
treatments," said Dr. Francis. "The reason
is that when you test a treatment for an
illness, you use sick patients and you get
quick feedback. "With HIV treatments, you
can measure (changes in) T-cells or viral
load in a few weeks."
With a vaccine, you are testing healthy
patients, waiting for them to get
infected. If you are successful, you don't
know it for months or years. You also need
to enroll many more patients. For an
anti-HIV treatment, pharmaceutical
companies might check the compound on a
few hundred people. To test AIDSVAX, Dr.
Francis notes, "I have to go to 8,000
people."
On the positive side, having one focus can
attract a higher quality research and
development team. When you ask Dr. Francis
what drove this focus on AIDS from the
beginning, he will tell you, "More
importantly, this is what we to do. We
wanted to it.[Stopping] HIV is the
big gun." The VaxGen team has a sense of
mission, and that sense of mission can be
critical to attracting great candidates.
Diffusing the mission with multiple goals
can make you less desirable as an
employer. In a tight labor market, VaxGen
gets the right candidates calling the
company.
"Market Failure"
The best employees and mission do not
overcome a lack of a market. In January,
Bill Gates suggested that "HIV vaccine is
a market failure." The supply and demand
forces are disconnected. A product that
costs dollars per dose, even if it only
requires a few doses, is out of the price
range of many countries. Creating a
product that your customer cannot afford
is a risky proposition.
VaxGen plans to create a market with a
form of channel strategy. In this model,
non-governmental organizations become the
customer and reseller. Nonprofit
organizations such as the Bill &
Melinda Gates Foundation would buy the
vaccine at dollars per dose and provide
them to impacted countries at a cost of
pennies per dose or less. The foundation
accepts the losses.
Even that does not fix the market failure.
The glib comment is that selling a vaccine
to sub-Saharan Africa is like selling food
in Ethiopia. This analogy is unfortunately
accurate. During the famine, the
infrastructure to move food to Ethiopians
was inadequate for the task. The
infrastructure to move vaccine dosages to
needy people may also be inadequate. It
can come to as simple a question as
needles. AIDSVAX is injected. In some
countries, there are often not enough
syringes. To inject the vaccine, health
care workers may have to share needles.
Every case of needle-sharing increases the
risk of transmitting a multitude of
diseases and can create more damage than
the vaccine would avoid. If the vaccine is
effective, but there are no needles,
VaxGen does not have a market. The company
will have to help create an infrastructure
to make the new market workable.
Profit vs. Philanthropy
So, why bother to take the risks and
bypass all the opportunities? Dr. Francis
suggests two logical answers, which he
graphed in an x:y chart. (Please see Chart
3.)
For some supporters, what matters is the
inestimably important mission of creating
a vaccine that can help stop AIDS from
destroying countries and destabilizing the
power structure of continents4.
The team that succeeds here will have done
a great deed. For other supporters, the
attraction is that the company that
succeeds may be able to create new and
highly lucrative markets.
In the early stages of getting support for
VaxGen, Dr. Francis would talk about both
altruism and greed as reasons to develop
the vaccine. As he drew the chart, Dr.
Francis would say that he did not care
which brought an investment in VaxGen, as
long as the investment occurred. He
modified this after a banker pointed to
the altruism axis and said, "I don't know
anybody here." Investors have been willing
to bet on this opportunity to get access
to that horizontal axis. AIDSVAX has real
opportunity for altruism, an opportunity
that makes some financial investors
nervous.
Conclusion
Every moment, person, and dollar that you
invest in a new market is unavailable for
other opportunities. That same phenomenon
happens with much larger companies than
VaxGen. When Merck or GlaxoSmithKline
invests in the HIV vaccine opportunity,
they have to bypass investments in other
new markets for pharmaceuticals. If VaxGen
gets to the market first and can dominate
it, those other treatment opportunities
may also be gone. The risk? These
companies will have missed both the HIV
vaccine market and the other markets.
The potential rewards are quite large,
however. The opportunity is to create and
dominate a market of a half billion
dosages per year or more. If the average
price per dose is only ten dollars, the
winner of this market quickly has sales of
$5 billion. To get to that level, VaxGen
has spent seven years, hundreds of
millions of dollars, and a number of
intentionally missed opportunities. This
game is high-reward, high-risk. For VaxGen
and maybe for you, it may be smarter to
limit your opportunities to help get the
rewards.
Sidebar - Why Vaccines May Be Riskier
for ManufacturersRelying on developing
nations to be a new market is very risky,
but the richer nations have their own risk
from economic imbalance. In the United
States and other wealthy nations,
insurance companies and government
programs will pay for coverage for sick
people. However, they often won't pay for
the vaccine that would prevent the
sickness. If there are no payments,
pharmaceutical companies are more
reluctant to support a project.
When drug companies compare two internal
projects, one treatment and one vaccine,
time also becomes a critical factor.
Because of the test cycles, a new drug for
HIV can come to market a year or two
faster than a vaccine.
These two factors have a chilling effect
on all vaccine markets. For the drug
companies, it is easier to sell products
that treat or cure a few people instead of
products that prevent the illness in a
large number. Since treatments have a
shorter approval cycle and are easier to
sell, they get a greater share of company
resources. Companies measure vaccine
projects against opportunity costs, and
vaccines often lose.
When a pharmaceutical company compares
opportunity costs, championing new markets
may be difficult for an internal manager.
For the time, people, and money to create
a new market, the company could test
several new treatments in existing
markets.
Opportunity cost is part of why Genentech
created VaxGen as a separate company. As
Dr. Francis put it, "Why spin out of
Genentech? Because internally I could not
compete with (Genentech's) products." For
the pharmaceutical companies, it is better
to create a product that you know will
sell and go into a market that you
understand. If you invest in an HIV
vaccine, you may be unable to support
other, easier-to-sell treatments and
drugs. Many pharmaceutical companies
decide to go with the surer path.
Copr. 2001 by the Meyer Group, all rights
reserved.
1.
These numbers reflect the investments made
by VaxGen. Other companies and groups have
projected similar costs for HIV vaccines.
Source: VaxGen corporate files.
2.
VaxGen was started by Genentech and then
spun off as a separate company in November
1995. Genentech still has some rights for
manufacturing and distribution of
AIDSVAX.
3.
Paul Geitner, "Bill Gates Pledges $100
Million to Search for AIDS Vaccine,"
Associated Press, Jan. 27, 2001; and Naomi
Koppel, "Agencies and Companies Work
Together to Beat AIDS," Associated Press,
Jan. 29, 2001.
4.
For more detail on the threat to the
security of developed countries, please
see the CIA report on"The Global
Infectious Disease Threat and Its
Implications for the United States,"
document NIE 99-17D, published in January
2000.
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