Biopharmaceutical companies are no strangers to looking outside their own walls for the innovations that will improve future patient healthcare. In 2020, no less than 45 percent of the drugs in the pipelines of the 20 biopharmaceutical companies with the biggest R&D budgets were sourced externally, and in 2021, 66 percent of the entire industry’s pipeline revenues were generated from such drugs.
Externally sourced drugs often have a greater chance of clinical success than those developed internally. Between 2016 and 2020, assets sourced through partnerships at Phase 1 were more than twice as likely to be launched than those developed internally (Exhibit 1).1 And all five of the biggest recent blockbusters were sourced externally by the companies that launched them.2
Not surprisingly, then, demand for new assets is fierce. There were 4,650 biopharmaceutical deals in 2021, up some 25 percent before the COVID-19 pandemic in 2019.3 And the industry attracted a record $47.2 billion of venture capital (VC) in 2021, up more than 80 percent from 2019, while capital raised from IPOs reached $35 billion, roughly triple the 2019 sum.
Against this backdrop, we examined deal activity to identify investment trends. Our research shows that competition is increasingly fierce for assets in four areas: oncology, infectious diseases, platform technologies, and data and analytics. Sixty-five percent of the value of all partnership deals in 2020 were in oncology, for example (for more detail, see sidebar, “Investment hot spots”). And the research reveals shifts in the types of deals struck: more deals are being made for early-stage assets and there are more partnerships—especially R&D partnerships.
We also reviewed the strategies pursued by some of the industry’s best deal makers regarding asset productivity to understand how others might hone their investment strategies and skills. This, combined with our own industry experience, suggests four practices that will help ensure that assets acquired in such a heated deal environment flourish and support the next wave of medical innovation.
Investment hot spots
An analysis of deals made by pharmaceutical companies in 2020 in pursuit of innovation uncovers four clear hot spots: oncology and infectious diseases (Exhibit A, part 1); and platform technologies and data and analytics capabilities (Exhibit A, part 2).
- Oncology partnerships: Partnership in this therapeutic area accounted for one-third of partnership deals in 2020 and 65 percent of their value.1 More than half were clinical collaborations, rather than commercial, distribution, or licensing deals or joint ventures.
- Infectious-disease partnerships: The COVID-19 pandemic triggered a wave of partnerships to gain access to infectious-disease assets. Though still only representing some 7 percent of the total value of deals in the industry in 2020, deal volumes quadrupled from 2019 to a total of 691. Sustained interest in vaccines by governments, nonprofits, and pharmaceutical companies alike suggests infectious diseases will remain a deal hot spot.2
- Platform technologies: In 2020, novel platform technologies, including modalities such as cell and gene therapies, other DNA/RNA-based therapies, and antibody conjugates, accounted for 58 percent of all assets sourced externally by the 20 biopharmaceutical companies with the highest R&D spending, be it through partnerships of various forms or M&A. External deal making has gathered pace as the relevant technologies—often developed by biotechs—have matured and pharmaceutical companies have sought access to them. The value of deals associated with cell and gene therapies increased almost sevenfold between 2016 and 2020 from the previous five years, for example, while the pandemic provided proof of concept for mRNA.
- Capabilities and technology for data and analytics: The average annual value of deals made by the same top 20 companies to acquire data and analytics capabilities and technologies grew around threefold between 2016 and 2020 compared with the previous five-year period (from $1.5 billion to $4.2 billion). These investments were largely to gain access to data and the means to analyze them—through artificial intelligence and machine learning, for instance—or to generate data from diagnostics such as wearables, liquid biopsy, and various omics. While $4.2 billion is still a relatively small share of the overall investments by the top 20 companies, the pace of growth is noteworthy.
Investment trends
Intense investment interest has triggered shifts in the market for pharmaceutical assets.
First and not surprisingly, M&A premiums have risen. The median deal price offered in 2020 by nonfinancial acquirers in the industry was 86 percent above the target’s stock price a month earlier—a record high.
This probably helps explain why there has been a sharp increase in the proportion of funds invested in partnerships at the expense of M&A. In 2010, M&A accounted for 73 percent of total deal value. By 2020 that figure had fallen to 47 percent. At the same time, as the proportion of partnership deals rose, so too did the proportion of partnerships deals made for early-stage assets. In 2020, 58 percent of all partnerships were for assets that had not yet entered the clinic, compared with 45 percent in 2010. Finally, while partnerships have always been a means of sharing the risks associated with unproven assets, today we see evidence of companies seeking to manage those risks still further by lowering up-front payments and linking the remainder to development milestones and royalties. The median up-front payment as a percentage of total deal value ranged between 3.8 and 16.0 percent between 2016 and 2020, depending on the asset stage. That is between 0.5 and 2.3 percentage points lower than between 2010 and 2015 (Exhibit 2).
Beating the odds
Ever-increasing competition for innovation assets among biopharmaceutical companies and other players makes it harder to strike successful deals. There is no single right formula, but some companies have a better track record than others.
We reviewed the financial performance of 21 of the world’s biggest biopharmaceutical companies by revenue over the past 15 years and discovered that those with the best financial performance also had the best deal record on certain measures. Of the 21, six companies—two European and four from the United States—enjoyed above-median revenue growth between 2003 and 2017 and then economic profit between 2013 and 2017. On average, those same six companies made deals that were three times more productive than others in the group, measured as average revenues per externally sourced asset over a five-year period. Their deals were 6.5 times more productive when measured as average revenues over a five-year period in relation to the reported deal spend (Exhibit 3).
We therefore took a closer look at the investment strategies of these six outperformers to learn what they might be doing to beat the industry odds. This, along with our own experience working alongside companies in the industry, suggests four practices than can help maximize the performance of a biopharmaceutical company’s external innovation portfolio.
Sharpen the focus
Sharp therapeutic focus was a common trait of the outperformers in our analysis. First, they concentrated their on-market assets in fewer therapeutic areas (TAs)4 (an average of 4.7 compared with 10.7 for others in the group). This could be key to their superior deal record: it is likely that companies can add more value to assets in TAs or platform technologies where they have a track record of expertise and are likely to be more attractive to sellers in the same space as a result.
Another trend pronounced among our outperforming group of companies is a focus toward deals for early-stage assets. A considerably higher proportion of the assets they sourced externally between 2003 and 2007 were in the early research and preclinical phases of development (61 percent compared with 49 percent for others in the group), and they sourced fewer assets that were filed, approved, or marketed (12 percent compared with 29 percent). More recently, the outperformers doubled down on early innovation, sourcing 74 percent of their assets here between 2018 and the beginning of December 2021, compared with 61 percent for others in the group (Exhibit 4).
Use data and analytics to spot the next wave of innovation
In the VC and private-equity (PE) industries, value lies in spotting a future innovation hot spot ahead of the pack—a principle that outperformers in the biopharmaceutical industry appear to have applied by investing more in early-stage assets. Scientific expertise, business acumen, and relationships with others in the innovation ecosystem have long been used to identify potential opportunities. Today, however, advanced analytics can deliver additional valuable insights, identifying biochemical pathways, targets, and technologies that are attracting scientific and investor attention before preclinical evidence is generated and, hence, often before they are on the radar of pharmaceutical companies’ networks of academics and innovation partners. Artificial intelligence (AI) deployed on publications and patents data, for example, could steer biopharmaceutical companies toward promising disease targets and modalities and toward those working in the relevant areas, with the aim of staking a position. Companies that use AI to screen and rank investment options in various industries are already emerging, and some forecasters predict AI will soon shape the majority of investment decisions.5
Scouting in this manner does not replace traditional ways of nurturing external innovation through academic collaboration and incubators, however. Rather, it augments those approaches by widening the net geographically and beyond traditional biopharmaceutical clusters.
Build expert capability to enable fast but sound decisions
The trend toward sourcing more assets at an early stage of the innovation funnel entails more risk, which is why biopharmaceutical companies well-practiced at sourcing innovation externally build dedicated teams with the right set of capabilities. These include strong scientific due diligence capabilities to rapidly assess the technical validity of the potential target or partner’s pipeline, a regulatory and intellectual property (IP) capability to form a view on these risks, and an early commercial capability to pressure-test future revenues. Critically, given the competition for assets and the need to assess potential deals fast, a team with the right profiles (including scientific subject matter experts) is assembled to work alongside the deal team, with governance structures in place to make sure investment decisions can be made quickly. Working in this way, some companies can make an offer just two to three weeks after identifying a partner or target. And some are working to cut the time gap still further to ensure they do not miss out on a valuable asset.
Take an activist approach to maximizing the value of external partnerships and assets
PE and VC firms put mechanisms in place to support the success of their portfolio companies—an approach we see some biopharmaceutical companies now emulating. These include:
- Review rigor and tracking. Portfolio-review meetings should track both internally sourced and externally sourced assets with the same rigor, using the same evaluation processes and metrics—value to patients, level of evidence, the timely completion of trials, and enrollment rates, for example. This ensures a level playing field when making investment decisions and deciding which assets to progress, and also optimizes the productivity of a company’s assets.
- Functional and operational support. Some biopharmaceutical companies have replaced the traditional alliance management approach of biannual progress check-ins with a more hands-on approach, providing access to their functional capabilities in medicine development, regulatory affairs, and IP, for example, and deploying operational talent to troubleshoot emerging challenges.
- Cross-fertilization. The partnerships biopharmaceutical companies enter into often give them access to enhanced capabilities or technology—genomic/omic or clinical data, for example. Like PE and VC firms, they should consider using this to maximize the value of other assets or companies in the portfolio, though this requires full portfolio transparency and incentives that ensure those managing alliances work to identify such opportunities.
The bar for outperformance in biopharmaceutical deal making is rising. Competition for assets is heating up, and deals are increasingly struck for early-stage assets. Against this backdrop, biopharmaceutical companies may find they need to sharpen their strategies and invest in building the skills and capabilities that will help ensure their investments deliver important new innovations in healthcare. Some of the industry’s best performers show the way.
