The Innovation Game
Big pharma is turning to outside sources to fill pipelines, but how often are companies backing the wrong horse?
A growing number of pharma companies are looking outside of their own walls for innovation, turning to mergers and acquisitions (M&As) and licensing deals in the search for promising projects. Every day seems to bring a new partnership or takeover somewhere within the industry. But how many of these deals actually deliver the anticipated revenues?
Management consulting firm McKinsey decided to probe the topic. “Given the increasing rate of external innovation sourcing in the pharmaceutical industry and the focus on capital efficiency among investors, we wanted to understand how variable M&A and licensing performance has been for the top 20 pharma companies,” explains Myoung Cha, a principal at McKinsey.
Cha and his colleagues conducted a study to rank M&A performance (excluding mega-mergers) in the top 20 pharma companies over the past decade. Some of the deals studied included Bristol-Myers Squibb’s acquisition of Medarex (and its immune-oncology drug nivolumab), and Roche’s acquisition of GlycArt (and obinutuzumab, its blood cancer drug). “We measured capital efficiency by calculating the total projected revenues in 2023 from products directly sourced from each deal, divided by the cumulative M&A capital deployed by each company between 2004 and the first half of 2014,” says Cha. “For licenses, we measured performance by the hit rate of scoring a blockbuster (>$1 billion peak sales) and moderate-win (>$200 million peak sales) deals.”
The super-executive summary: big pharma is not so great at sourcing the right deals.
In fact, the study rated only two companies highly – Roche and Johnson & Johnson – at both M&A and licensing over the past 10 years. “The wide variability in performance and the relatively low hit-rate for license deals overall was interesting,” says Cha. “This variability in performance across deal types suggests that different capabilities and skill sets are necessary in executing M&A transactions versus licensing deals. It is striking that few companies were able to license one or more blockbuster products over the past 10 years, despite a high number of deals. Thus, the difference between an average performer and a great performer could be one or two great deals, which is not too dissimilar from the venture capital model, in which ‘home runs’ make up for misses.”
Sourcing home-run innovation clearly isn’t easy. No one can be certain which drugs in development will be the ‘winners’, particularly those that are in the very early stages. And the fact that the M&A and licensing arena for pharmaceuticals is competitive doesn’t help; increased asset prices equals increased risk.
So there’s no silver bullet for spotting a successful innovation, but Cha has noted patterns that could help increase your chances. “In our experience, the best performers develop robust forecasts for the key assets, are fiscally disciplined, and set up their innovation-sourcing teams and transaction capabilities to ensure that the right internal expertise is brought to bear and to ensure smooth hand offs through the life cycle of a deal.”
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