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Applying Game Theory to Negotiations

Author-Profile-Fallon-Bernard
Bernard Fallon
January 14, 2020

Negotiating successful deals is a critical skill for biopharma companies hoping to bring their medical breakthroughs and treatment options to the patients around the globe who need them.  Along the way emerging biotechs need financial and strategic partners to help support thier efforts. While scientific discovery may come naturally to the founders and scientists of these companies, deal-making may not. That’s where game theory comes in.

An advanced strategy to optimize deal outcomes is to apply principles of game theory  to improve negotiating skills. On February 12, BIO will host a workshop on how negotiators can apply principles of game theory to optimize deal outcomes and accelerate medical innovation. This half-day workshop will be offered in New York, the day after the BIO CEO & Investor Conference. Conference attendance is not required for workshop registration. 

BIOtechNow (BTN) spoke with the instructors about what will be covered.

Stefanie A. Schubert - Professor of Economics – SRH University Heidelberg
Stefanie A. Schubert Professor of Economics SRH University Heidelberg
Harm-Jan Borgeld - Head Alliance Management – Merck KGaA—Darmstadt, Germany
Harm-Jan Borgeld Head Alliance Management Merck KGaA Darmstadt, Germany

BTN: Stefanie and Harm-Jan, please tell me what you will address in your workshop?

Harm-Jan: In our workshop, we discuss and practice with the participants real-life biopharma negotiation cases with the goal to enhance decision-making and improve the negotiation skills of the attendees. This new way of making decisions will help attendees  reliably predict their counterpart’s decisions and create one of the cornerstones needed to become a great negotiator.

Stefanie: We do this by applying game theory, the science of strategic decision making.  Combining game theory with biopharma cases is the unique feature of our workshop.

We gave a similar workshop at the BIO CEO and Investor Conference last year as well as BIO 2018 and 2019 (targeted at a broader audience). Taken the participants’ feedback into account, we added two more cases so that the entire workshop is based around real-life negotiation cases in the biotech and pharmaceutical world.

BTN: Stefanie, please tell me the core principles of Game Theory that you are going to address?

Stefanie: The basic idea is that the outcome you get does not only depend on your own decision – but also on the decision of others. Thus, in negotiations and other decision- making situations, this needs to be taken into account. And Game Theory offers a structured framework that enables you to make the right decision.  

BTN: Tell me a bit more about the link between negotiations and the elevator pitch?

Harm-Jan: Good negotiators plan ahead, chose the right approach, negotiate with impact, and close deals very successfully. Great negotiators have, in addition, mastered the skill of delivering their offers and ideas by influencing their counterparts and stakeholders by superb elevator pitch skills. The elevator pitch is not the elevator pitch that refers to selling a business idea but a pitch that allows the negotiator to deliver a proposal or message in a concise way that has an impact beyond the words chosen or with the style the pitch has been delivered.

BTN: How did you come up with the combination of negotiations and game theory?

Stefanie: The first time that I met Harm-Jan, I realized quickly how he makes decision and negotiates – he used game theoretic principles in practice. But he wasn’t aware he did. Thus, he was not able to fully exploit the benefits from this structured way of thinking. Now, many of the attendees to our workshop at BIO 2019 were in the same situation as Harm-Jan.  The beauty of the workshop is that the attendees learn how to proactively leverage opportunities and improve their performance.

BTN:  I understood that your workshop will be interactive and involve negotiations in groups, can you give a few examples?

Harm-Jan: Yes, with pleasure. The workshop provides the participants with negotiation and influencing tools that needs to be used during the Group Negotiation. In teams of two the participants need to conclude a merger between two companies. During the negotiations new information is provided and that affects the pay-offs (a true real-life setting).

Stefanie: The participants needs to make their offers using the learnings from the elevator pitch session. Even the students need to earn their coffee breaks and need to make a decision on which size of a pie the other participant receives in the break.

BTN: Could you please provide us with a realistic biopharma example where Game Theory is applied in negotiations?

Harm-Jan: Let’s assume that you are the CEO of Company X, and intend to partner your Phase II compound, ‘Diatuzumab.” Without Game Theory we would analyze the case as following. You want to partner Diatuzumab for a minimum upfront of USD 175M, and if this is not received you would develop the compound yourself. The highest bidder provides an upfront of USD 125M. You decline.

Stefanie: Now have you made the right decision? Let’s analyze the case. If you would have accepted the highest offer, then the pay-off would have been: expected Net Present Value (eNPV) USD 550M.  However, if you would develop the compound internally the pay-off would have been eNPV USD 375M, this pay-off is low due to the high development cost and high risk of the project.

Game Theory tells us that there could be a deal if you tell the highest bidder that if they would increase the upfront that you are willing to accept lower milestones and royalties payments (lower than eNPV USD 550M). The highest bidder, changes the bid and offers USD 175M but lowers the eNPV for Company X to USD 425M. Deal is done! 

BTN: There are many decision-making or negotiation classes. Why should people attend your course?

Harm-Jan: The uniqueness of our workshop does not only come from the combination of both topics, but also from adding “Elevator Pitch” for which we have a separate section in our workshop. Our principle is that neither negotiations nor decision making can be thought as a stand-alone course. The combination of negotiations, game theory, decision-making and elevator pitch is where the attendees can truly enhance their negotiations skills with.  

Stefanie: We use game theory on a very applicable basis so that learnings can be used immediately. On top of that, we show that changing the rules of the game and applying strategic moves may change a situation completely – to one’s own advantage. 

Interviewer: Thank you for the interview and good luck with your workshop after the BIO CEO & Investor Conference in New York.

 

For additional details and to register for the workshop visit here.