Executive Summary
Leading up to 2009, a confluence of events created substantial challenges for the pharmaceutical industry. Global pharmaceutical drug candidate submission and approval rates have fallen during the past 5 years while the aggregate of R&D expenditures have risen in an attempt to spur the creation of replacement products. Added to this, Wall Street analysts forecast Big Pharma to lose $140 billion in annual sales by 2016 as patents for premier products, including several major blockbuster drugs, are scheduled to expire. Today generic products are poised for rapid deployment. Substitute formulations are ready to begin cannibalizing brand name drug sales revenues once patent protection has elapsed. Upon introduction of generics, branded pharmaceuticals frequently relinquish up to 80% market share to low-cost generic entrants.
In anticipation of diminished sales revenues, pharmaceutical executives continue to restructure and streamline operations. However, cost containment measures, while significant, are nonetheless insufficient to compensate for lost income from multiple revenue streams. The impetus to rapidly and efficiently develop new pharmaceutical products has never been greater.
Executives have scrutinized their existing R&D programs to optimize internal assets under development. Strategic programs are afoot to flatten organization charts, focus on core capabilities, and promote integration among functional units in an effort to stimulate productivity. Nearly all senior executives participating in this study were in agreement that such internal measures alone will fall short in most cases in stimulating new product output.
Multiple compound, early stage alliances are en vogue. Top-tier licensor partners have been successful in leveraging their promising lead compounds and technology platforms. These select few companies have garnered astonishingly lucrative terms for their burgeoning intellectual properties. Complex multi-faceted deals are more frequently laden with substantial upfront payments, prized co-promotional and co-distribution rights and royalty rates which have been tailored to suit the demands of the partners.
The majority of A list biotech and pharma licensors enjoy an unprecedented period of favorable negotiations yielding broad and deep deal terms simply unheard of just five years ago. It is important to remember that while there is fierce competition among well-heeled licensees for what is deemed the most promising picks, most of the field of potential partners have not been nearly as fortunate in securing funds. Deal rejection rates are near an all-time high at big pharma. In fact, several senior pharma business development executives acknowledged that nearly 60 percent of all partnering proposals were turned down without further consider.
Current deal dynamics are a strong reflection of greater forces at work at the negotiation table. Licensees, notably big pharma, recognize the need, significance and potential future value of the most promising technologies and molecules in development. Accordingly, companies continue to pay their partners substantial sums. Deal size and structure is just part of the whole mosaic of driving forces, strategies and considerations involved in the formation of a licensing agreement.
Two methods were used in preparing this report. First, secondary data of announced deals were dissected into upfront, milestones, royalty and other forms of compensation. Second, in-depth interviews were conducted with major pharma business development executives, principal financial analysts and other industry luminaries. This report presents their perceptions, insights, and prognosis of licensing and related business development activities.
When this study began, the primary objective was to assess pharmaceutical licensing activity of global therapeutics employing a bottom-up approach. All compiled data sets were carefully vetted and cross-checked. The outputs collected from six fiscal quarters were evaluated in the context of comparable historical information of equal caliber. A clear trend emerged from the data: total deal values and its constituents in aggregate were on the rise. The number of co-promotion and co-marketing deals has increases as well as the variable royalty rates exceeding a baseline total deal value. But what exactly were licensees willing to pay, and more importantly, what were they getting in return for their investments? What impact will this next generation of partnering have on their drug discovery pipelines and operations? What range of tactical methods are being rolled out by big pharma to supercharge intellectual property acquisition, dispersal (spin-offs/ out-licensing/ claw back provisions) and development of late-stage pipeline candidates?
Beyond the metrics and due diligent, what began to emerge after initial discussions was nothing short of a sea change in the pharmaceutical industry.
Concurrent with the financial crisis which has gripped the global economies, the pharmaceutical industry, under extraordinary pressures, is undergoing a fundamental transformation. Companies always seek to maximize the potential of their product portfolio, markets and profitability. However, pharmaceutical executives acknowledge that the traditional blockbuster model is likely not sustainable for future generations of drug discovery. This has given way to the rise of pharmacogenomics, paired diagnostic/therapeutic treatment options, and post-treatment biostatistics: the advent of targeted therapeutics. Collectively, these targeted therapeutics may yield one or more ‘blockbusters’ for one or more clinical indications.
Business development partners may be expected to contribute in some instances greater resources upfront and share the risk and benefits downstream. Big Pharma has reorganized its research and development operations in alignment with new strategic initiatives focused on the integration between departments or silos to simulate a “startup environment.” Also, some companies have chosen to decentralize a portion of their entire development portfolio and distribute responsibilities among many partners with varying degrees of experience and capabilities. Once this transformation is completed, major companies competing in the pharmaceutical sector may never be recognized as the same companies.
The recurring themes distilled from our executive interviews characterize the sea change underway and make this transformation of great interest to business development professionals. What emerges from these discussions is a corporate blueprint for the extended application of strategic alliances as a true synergistic path to value creation.