CEO Carolyn Cross and her team at Ondine Biopharma had much to feel proud about in the spring of 2007. The Vancouver-based medical-device company was about to cross a major threshold - the commercial launch of its first product, Periowave, a system that dentists could use in the prevention and treatment of gingivitis or, as it’s more commonly known, gum disease.
Periowave was a product loaded with potential, both from a medical and a business point of view. Built around the concept of using laser light in a process known as photodynamic disinfection - or PDD - it would give dentists a pain-free, non-surgical method for destroying gingivitis-causing bacteria left behind by traditional treatments, such as scaling and antibiotics, thus improving patient outcomes. Business-wise, Periowave targeted a market worth $6 billion a year in the U.S., a fact that boded well for the company’s future revenue prospects. Better yet, Ondine’s expertise in PDD technology could be spun out to create innovative products related to a host of medical issues - cancer, HIV, burn treatment and various types of infections.
But for all the positives tilting in Ondine’s favour, Cross was confronted with a dilemma: Should her company’s focus during the next phase of its growth be on developing new marketing and distribution capabilities for Periowave, or should it concentrate on its core strengths in research and development to create more products and enter new markets? It was a challenging problem, and Cross was certain of only one thing: She couldn’t afford to follow both paths. The pull to stay the course with research was strong, given the number of health-care sectors for which Ondine could develop products. But ensuring the commercial success of Periowave - which was poised to enter the final stage of approval for marketing by the U.S. Food and Drug Administration - was critical to the company’s future. Retaining Ondine’s focus on research would mean turning the marketing and distribution of Periowave over to an industry partner. That meant Ondine would risk diluting Periowave’s launch, as the product would be only one in a large portfolio represented by the partner company. On the other hand, hiring and training an in-house sales and marketing staff would be expensive. Ondine would have to make major sacrifices in its research program. For Cross, choosing between these options wouldn’t be easy - and the clock was ticking.
Founded in 1999, Ondine is a public company that trades on the Toronto and London AIM stock exchanges. And as a public company, the business strategy it developed around the launch of Periowave would have a major impact on how it was viewed in the eyes of its shareholders.
Personally, Cross favoured continuing with the company’s R&D focus. But the argument in favour of developing in-house sales and marketing capacity was hard to discount. If Ondine could sell directly to dentists, it would have a better chance of standing out among the 10,000-plus dental products currently on the market in North America, as company representatives would be able to visit individual clinics and provide “product detailing” to prospective clinics. As part of the pitch, the reps would also be able to share information from test-market studies in Canada that showed Periowave would generate incremental revenues of $40,000 a year in clinics that used the treatment daily. Moreover, Ondine’s management team included individuals who had experience in developing distribution companies within the dental industry.
One of the most compelling arguments for following this path, however, lay in what it meant for Ondine’s future. As the company’s revenue streams grew over the next three to five years, it would become a target for a buyout by a major dental company - and typical acquisitions in the dental industry yield two to eight times revenue in cash payments.
Cost-wise, however, building a sales force at Ondine would require a significant capital outlay, as Ondine was new to the field and would have to pay top dollar to hire away sales staff from
established dental companies. An alternative would be to hire less experienced representatives and train them in-house. But that would also be expensive and, given the relationship-based nature of sales in the dental industry, less likely to succeed than hiring established talent. Whatever the approach, however, developing in-house sales capacity would eliminate at least three-quarters of Ondine’s research and development budget, and Cross estimated that it would take at least three years until the investment generated a net profit. Furthermore, there was always a chance that the effort might fail, resulting in significant losses on the financial front and opportunity costs in R&D.
These were among the reasons that led Cross to favour building Ondine’s core competencies in R&D and positioning Ondine as an expert in the PDD field. To maintain the company’s research focus, however, Cross would have to convince investors that this is where its best prospects lay. Key to this task would be generating confidence in the company’s ability to navigate the FDA approval process to ensure it could access the lucrative U.S. market. Success would be defined in terms of the number of products it could help to launch and the cash flows it could derive from working with industry marketing and distribution partners to generate royalties and consulting fees. But just as developing in-house sales capacity carried risks, there were no guarantees in going down the R&D road. Ondine would have to work closely with its distribution partners to maintain the profile of its products and to ensure they didn’t disappear with the distributors’ product portfolios.
The Expert View
Ian Lennox, Chairman & CEO, Ricerca Biosciences
This case study represents a classic strategic dilemma for management and boards in numerous industries. In this situation, Ondine Biopharma Corp. would be best served by a three-point strategy:
Let distributors market Periowave This approach has three main benefits: It provides clarity to employees and capital markets; it accelerates access to key dental practices and, therefore, revenue; and it avoids the cost of building an independent sales force. Remember, the dental distributor network is well established in the U.S. A good distributor relationship should bring cash flow faster, which will, in turn, allow it to develop and commercialize new products.
Don’t lose the R&D focus If Ondine succeeds in achieving FDA approval with Periowave, it will demonstrate its ability to develop and gain regulatory approval of other products or indications. New products will give the firm greater influence with distribution partners. The company should also preserve rights to partner with alternate distributors, so that it can work with partners best suited to market each new product.
Continue to innovate Intellectual property should generate significant market value for Ondine. In the future, it could consider selling off individual products, or even the whole IP portfolio. If it pursues a direct sales force, then its R&D team will be eliminated, or worse, marginalized. Terminating R&D resources removes Ondine’s ability to innovate, which is critical for success in the medical-device field.
The Expert View
Krista Scaldwell, Director of Global Public Policy, Johnson & Johnson Consumer Group of Cos.
Carolyn Cross faces a common dilemma in the field of biopharma - more sales and marketing versus investment in research and development. Making matters more complex are macro factors that may sway its decision: The U.S. economy has begun to slow down, which may affect demand; there is an increased political focus on health care in the U.S., which may work to Ondine’s advantage; and due to current economic conditions, Ondine may have an easier time building a sales and marketing team, should it wish to go direct.
That said, Cross and the management team at Ondine need to focus on what they do best, given the economic uncertainty. I recommend they develop new applications - but not just on their own. Given the potential capabilities in key areas of public health, they should working on gaining support from major organizations, such as the Atlanta-based Centre for Disease Control, and relevant patient groups representing important areas of medical research, such as cancer and HIV. This will help the company build a critical mass of support that will help not only the approval process, but may also help generate funds from public sources for research.
While following this strategy, Ondine can simultaneously seek a commercial partner to lead the sales and marketing strategy. There may be some loss of control over how the product is positioned in the marketplace, But Ondine can protect itself through contract conditions and creating incentives for distribution partners to follow its strategy.
The Outcome
IN TERMS of overall strategy, the company has chosen to focus on research and development, and work with industry partners on marketing, sales and distribution.
“This was a fork in the road for us,” Cross says. “We eventually agreed that we should focus on positioning ourselves as a world leader in light activation and pursue the opportunities arising from the development of a number of product applications in other sectors instead of focusing on just the dental industry.”
Cross adds that the fact that Ondine had between six and 20 months cash on its books when it made its decision helped focus its thinking.
Periowave is now in the final stages of FDA approval. Assuming it gets a green light, Ondine will launch a U.S. marketing program in the near future. Meanwhile, the product is available in Canada and is being carried by top dental distribution companies. It is also available in Europe, where it is sold through small boutique distributors.
Above all - and in spite of where her personal preference might lie - Cross had to keep focused on one issue: Where Ondine’s cash would come from next.
This case study was prepared by Financial Post Magazine and the Pierre L. Morrissette Institute for Entrepreneurship at the Richard Ivey School of Business (University of Western Ontario). The case method is a key learning tool in the cross-enterprise leadership approach used at Ivey. The views represented here are solely those of the case authors. Some details may have been changed to protect privacy.
Comments