Big Pharma’s traditional R&D approach isn’t paying off anymore. Alongside traditional M&A deals – strategic alliances are a promising game changer. However, to avoid the pitfalls, alliances must be a top priority on the CEO’s agenda.
Large life science companies are currently facing daunting challenges. On the cost side, research and development (R&D) costs have grown significantly as research shifts to diseases that were once considered intractable and as medicines are custom-tailored to smaller patient populations. Pressures also abound on the revenue side. We’re seeing expiring blockbuster patents open doors to competitors – like Sanofi when its diabetes blockbuster Lantus took a 16 percent sales hit in Q1 2018 as it lost exclusivity in the US.
Meanwhile public and political pressure on drug pricing is growing, especially in the US, where the Trump Administration has vocalized their goal to lower drug prices.
Not surprisingly, the return on investment in Pharma R&D has fallen consistently over time (see Figure 1).
Increasing costs per R&D project and falling margins have also resulted in ever-growing scale requirements. Yet, unfortunately for the big players, there is growing evidence that small firms tend to be more innovative in the R&D space – according to IQVIA, 72 percent of the late-stage R&D pipeline in 2018 belonged to emerging biopharma companies, up from 61 percent in 2008. For Switzerland, these challenges bear particular relevance, as the chemicals and pharmaceutical industry is the country’s export leader - over 30 percent of total Swiss exports (source: Swiss Federal Customs Administration).
Against this background, life science companies are extraordinarily active in the area of mergers and acquisitions (M&A). Typical deals usually involve a large company acquiring a smaller company or a development-stage drug asset to utilize its experience in commercializing the drug to its full potential. Novartis is a Swiss example of such a continuous "pipeline deal maker" with its acquisition of Advance Accelerator Applications (AAA) in January 2018; AveXis, Inc. in May 2019; and Xiidra® in July 2019.
On the sell-side, several Big Pharma players have actively divested multiple businesses in an effort to re-focus on their core competencies. Examples include Bayer’s announcement to divest the animal health division in November 2018 and Novartis’ recent spin-off of Alcon in April 2019.
Many large life science companies can therefore be considered "M&A veterans", with well-established M&A departments, people and processes. Yet, there’s reason to believe traditional M&A alone may be insufficient as a corporate development tool in the face of the industry’s current challenges. M&A may be particularly insufficient in dealing with the imminent transformation in the R&D space.
We believe that strategic alliances should be a top priority on the CEO’s agenda.
In a previous KPMG study, we argued that strategic alliances have several key benefits compared to traditional M&A:
In our previous KPMG study R&D 2030, we argued that technology players will play a major role in transforming Big Pharma’s R&D landscape. Dassault’s announcement in June 2019 to acquire Medidata for a whopping USD5.7 billion is a recent example of how significant data and tech players have become. Medidata’s software is used to analyse trial data of some of the world’s largest pharma companies.
It’s precisely at this nexus of traditional R&D and new technology players where we believe that strategic alliances have their greatest potential for life science companies.
In fact, in the shadow of larger M&A deals, partnering with tech players has already started:
In these examples, we can see many of the benefits of strategic alliances at work – namely, the ability to partner with several partners at once, gaining access to companies that may not be currently up for sale, as well as the ability to tinker with a technology without fully committing to it when outcomes of that technology are still uncertain.
In advising on alliances across industries, we’ve seen that they are fraught with potential pitfalls – perhaps even more so than traditional M&A. In fact, roughly two thirds of alliances are said to fail according to various studies (source 1, 2).
In our experience, we’ve seen that failure is often down to two factors:
In summary, strategic alliances promise exciting benefits that may be particularly relevant for the transformation of life science R&D – but only if managed with the same rigour and focus as transformative M&A deals.