Can Less Opportunity Equal More Success?

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; 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.

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 Manufacturers
Relying 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.

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.