Big pharma push on with externalisation strategies

Analysis

The desire of big pharma companies to invigorate their pipelines with externally sourced candidates has been one of the key strategic trends in recent years. This ‘externalisation’ drive means that half of all big pharma’s clinical stage assets today have come from outside their own research labs.

Furthermore, in terms of potential pipeline value these externally sourced products are attracting most optimism, accounting for two-thirds of sales from all pipeline candidates by 2016, according to EvaluatePharma data. At the recent BioPartnering Europe conference, representatives from the likes of AstraZeneca and Merck & Co talked glowingly about the greater value and potential inherent in these external products. The question now is how much further the externalisation strategy can go – almost 70% of Sanofi’s pipeline is already externally derived, whereas Eli Lilly continues to place greatest faith in its own abilities with less than 30% of its pipeline coming from outside sources (see tables below).

Better on the outside?

The table below, sourced from EvaluatePharma’s pipeline data, shows the relative split between organically developed candidates to those derived from outside the company, which can be through product licensing deals, M&A or joint venture activities.

Big Pharma Clinical (PI, II, III) Stage Pipeline Analysis
Product Count Pipeline Product Sales in 2016
% Organic % External Total % Organic % External Total ($bn)
  Sanofi  32%  68%  112  4%  96%  3.1
  Abbott Laboratories  41%  59%  59  26%  74%  0.5
  Bristol-Myers Squibb  41%  59%  100  70%  30%  1.3
  Pfizer  47%  53%  173  36%  64%  4.7
  Merck & Co  48%  52%  113  37%  63%  3.3
  AstraZeneca  49%  51%  96  47%  53%  1.5
  Roche  50%  50%  139  11%  89%  2.1
  Johnson & Johnson  51%  49%  101  0%  100%  0.5
  GlaxoSmithKline  55%  45%  227  54%  46%  4.5
  Novartis  55%  45%  167  27%  73%  3.3
  Bayer  62%  38%  68  27%  73%  1.9
  Eli Lilly  71%  29%  116  58%  42%  2.1
Peer Average 50% 50% 33% 67%

The data refers to active clinical stage assets only and is therefore a snapshot of this peer group. The current picture will certainly be quite different from five or ten years ago, an age when most big pharma companies presumed they could continue to do it all and maintain a monopoly on innovation.

Sanofi is a classic case in point. Since Chris Viehbacher took over as chief executive almost three years ago, the company has been one of the most active on the deal front, culminating in the $20bn purchase of Genzyme. Yet Sanofi’s current position is almost a complete reversal of its more internally focused past when almost all of its new drugs were produced organically (Sanofi and Astra playing catch up in externalising R&D, August 30, 2011).

Meanwhile, although the overall numbers of products are split evenly between internal and external sources, there is a clear bias in favour of externally derived drugs when it comes to potential value. Sanofi is just such an extreme case, with 96% of its projected pipeline product revenues of $3.1bn in 2016 coming from external sources.

In contrast, Bristol-Myers Squibb appears to be bucking the trend with 70% of its potential pipeline value coming from within the company, despite a greater number of projects in its portfolio coming from outside.

Natural bias?

On the value aspect, there is perhaps a natural tendency for analysts to overly focus on licensed products, or those acquired through M&A, given the more transparent amount of money invested in these products.

In addition, the partners on many of these programmes will be making noises in the market and on the conference circuit about their candidate, also potentially skewing the focus on these agents. Conversely, big pharma companies tend to be more wary of talking up the chances of their internal programmes until much more advanced stages of development, leaving analysts and investors with fewer signals or guidelines as to their potential.

As such, it is worth pointing out that there is likely to be an inherent bias in valuing external products slightly higher than internal candidates. Certainly the balance of new drug approvals for big pharma companies over the last ten years, in terms of internal versus external sources, has shown little change – about 55% of new products come from outside their own research labs.

R&D spend tracking sales

As to what impact this externalisation strategy is having on R&D budgets, the data below show the significant reining in of expenditure with only modest changes between 2011 and 2016. The previous five years saw almost double-digit growth in R&D spend across the board.

Yet the real pull on R&D spend is the current patent cliff that all these companies are experiencing, such that dollars invested is largely in line with revenues generated. The days of investing 20% to 25% of sales into R&D, once the accepted benchmark, are long gone.

The squeeze on R&D budgets is likely to affect both internal and external research efforts in equal measure, so it will be interesting to see which source of product proves to be more fruitful in the long run.

Big Pharma R&D Spend Measures
Pharma R&D ($bn)  R&D as % of Rx & OTC sales
2011 2016 CAGR 11-16 2011 2016 CAGR 11-16
  Novartis  8.9  10.1  2%  18%  18%  0%
  Roche  8.6  10.0  3%  22%  20%  (1%)
  Merck & Co  8.1  8.3  1%  19%  19%  0%
  GlaxoSmithKline  6.0  7.8  6%  15%  15%  0%
  Sanofi  6.9  7.7  2%  14%  13%  (2%)
  Pfizer  8.0  7.0  (3%)  15%  13%  (2%)
  Johnson & Johnson  4.8  5.6  3%  19%  18%  (2%)
  Eli Lilly  5.2  5.2  0%  24%  29%  4%
  AstraZeneca  4.6  4.1  (2%)  14%  16%  2%
  Bristol-Myers Squibb  3.5  3.7  1%  20%  19%  (1%)
  Bayer  2.7  3.6  6%  14%  15%  1%
  Abbott Laboratories  2.4  2.8  3%  11%  11%  1%

All data sourced to EvaluatePharma.

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