The Power of Deals in Pharma: Why They Matter?
Biotech is driving innovation within the pharmaceutical industry, with Big Pharma increasingly relying on external innovation to maintain competitive pipelines
Fig. 1
In line with Joy’s Law of Management—which states that most of the smartest people work for someone else—Big Pharma is increasingly turning to external innovation to drive drug development.
As the costs and complexity of developing new therapies rise, these companies are partnering with biotech firms, universities, and other organizations through various deals - mergers & acquisitions (M&A) and in-licensing, particularly when their top-selling drugs approach patent expiration.
As seen in Fig. 2, between 2015 and 2021, more than 65% of new drugs introduced by the top 6 pharmaceutical companies originated from M&As and in-licensing, while only 27% originated from internal R&D. Leveraging external innovation to help quickly bring new therapies to the market while avoiding the costs of in-house R&D has become a crucial move to sustain growth and maintain healthy pipelines.
Drug Origins of Top 6 Pharma (2015-2021)
However, the approach to securing these external innovations is not one-size-fits-all. A recent analysis by Nature shows that while Pfizer and Gilead have focused on M&As to drive their growth strategies, Bayer and Amgen have leaned on in-licensing deals. This variation in strategy highlights the different approaches pharma companies are taking to secure the cutting-edge treatments to sustain growth (and keep their shareholders happy!).
Did You Know? Biotech companies founded after 1976 are responsible for almost half of all new drugs approved for major pharma companies in the past few years!
Biologics vs Small Molecules
A closer look at deals reveals a clear distinction: the types of drugs acquired differ significantly between new therapeutic biologics (NTBs) / biologics and new molecular entities (NMEs) / small molecules.
Biologics
The majority of drugs acquired through dealmaking are new biologics sourced from biotech firms. Of the 48 NTBs approved for top biopharma companies, 63% originated from biotech firms, while 27% came from pharma companies.
Small Molecules
In contrast, small molecules tend to come from internal pharma R&D, representing 44% of the 90 NMEs approved. Of these, 39% were developed by biotech firms, 6% through collaborations with other entities, and 10% from non-profits or governmental research organizations.
Did you know? If a pharma company launches a first-in-class drug in a therapeutic area with no previous treatments, it can avoid pricing pressure and set its own market price. Do you think this could be another reason why partnerships and acquisitions are on the rise?
What’s Next for Biotech and Pharma?
Looking ahead, the partnership between biotech and Big Pharma is expected to intensify. With strong financial positions, pharma companies are turning to new technologies, AI, and digital tools to enhance their capabilities. Target companies are now more open to deals aimed at stabilizing valuations, creating favourable conditions for transactions.
These trends are anticipated to fuel an active M&A market, as life sciences companies seek deals to build their pipelines, tap into high-growth areas like cell and gene therapies, and shed non-core assets to boost value creation.
This shift is giving rise to a new model, known as "Biotech-Leveraged Pharma Companies" (BIPCO), which is likely to shape the future of drug development. The traditional fully integrated pharma company (FIPCO) model may be fading, with biotech innovations increasingly driving industry success.
Key Takeaways
Big Pharma increasingly leverages external innovation through various partnership models to sustain and diversify their pipelines.
Biologics are primarily sourced through external partnerships, whereas small molecules are predominantly developed via internal R&D.
The partnership between biotech and Big Pharma is set to shift towards a Biotech-Leveraged Pharma Company model driving future drug development, replacing the traditional fully integrated pharma model.
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References
Schuhmacher, A., Hinder, M., Dodel, A., Gassmann, O. and Hartl, D. (2023). Investigating the origins of recent pharmaceutical innovation. Nature Reviews Drug Discovery. [online] doi:https://doi.org/10.1038/d41573-023-00102-z.
www.mckinsey.com. (2024). Life sciences M&A shows new signs of life | McKinsey. [online] Available at: https://www.mckinsey.com/capabilities/m-and-a/our-insights/life-sciences-m-and-a-shows-new-signs-of-life.
Glossary
Big Pharma: These refer to large companies that handle drug development and commercialization on a global scale
Biotech: Smaller companies that develop innovative therapies, often specializing in cutting-edge fields like gene therapy and biologics
Mergers: The combination of two companies into one, often to expand market share, resources, or capabilities
Acquisitions: The process where one company purchases another to gain control of its assets, intellectual property, or market position
In-Licensing: The acquisition of rights to a drug or technology from another company, allowing the licensee (buying side) to develop and commercialize the product
Patent Expiration: The end of a company's exclusive rights to sell a drug, allowing others to make cheaper versions, thus affecting sales and revenue
In-house: Refers to activities, such as research, development, or production, that are conducted within a company rather than outsourced to external partners or providers
Pipeline: A company's collection of drugs that are being developed or tested before they can be sold
Shareholders: These are investors who own part of the company, often allowing them to vote on key decisions and receive a share of the profits
Biologics: Medicines derived from living organisms, including proteins, cells, and tissues, used to treat various diseases, often more complex than traditional drugs. For example - Insulin
New Therapeutic Biologics (NTBs): Recently developed biologic drugs that provide innovative treatments for diseases, typically involving advanced biotechnological methods
Small molecules: Chemically synthesised compounds are often used as traditional drugs such as Aspirin
New Molecular Entities (NMEs): These are small molecule drugs with novel active ingredients that have not been previously approved or marketed. They are often chemically synthesized and represent a new mechanism or approach to treatment
Pricing pressure: The external forces that drive pharmaceutical companies to lower drug prices, such as regulations, competition, and market demand
Valuations: This refers to the estimated worth or market value of the target companies
Cell and gene therapy: Treatments that use genetic modification or healthy cell transplants to address diseases at the molecular or cellular level
Biotech-Leveraged Pharma Companies (BIPCO): Pharmas that rely on biotechnology innovations, often through collaborations or acquisitions, to enhance their drug development and commercialization capabilities
Fully Integrated Pharma Companies (FIPCOs): Pharmaceutical companies that control all stages of drug development, from research to commercialization