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.
The life science industry faces big R&D challenges
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).
Benefits of adding strategic alliances alongside M&A
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:
- Less upfront investment required: As such, alliances are a lower-risk option for a business combination. Investment can be tested and phased without the full financial commitment required for an acquisition.
- Increased flexibility: Compared to M&A, most alliances are easier to unwind or adjust. If a change of direction is required, it can be done faster and less painfully.
- Ability to create an ecosystem of relationships: Alliances allow an organization to form relationships with multiple important partners concurrently, which is difficult to achieve at the same pace via M&A.
- Access to important partners that cannot be acquired: Some interesting counterparts are simply not up for sale – in this case, alliances are the only viable alternative for cooperation.
Alliances with technology partners are already emerging
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:
- Partnering for real-world data: GSK has invested USD300 million in 23andMe. And signed an exclusive four-year deal focusing on the discovery of new cures based on 23andMe’s genetic and phenotypic data (23andMe has over five million customers – over 80 percent of which consent to sharing their data).
- Partnering for drug discovery: Artificial Intelligence (AI) companies have teamed up with more than half a dozen big pharma companies in an attempt to discover new molecules faster than through traditional methods. Examples include: Scotland’s Exscientia (partnering with Celgene, Roche, GSK, Sanofi); Canada’s Cyclica (partnering with Merck, Bayer, and others); and, US-based Insitro (partnering with Gilead).
- Partnering for improved diagnostics: Both Novartis and GE Healthcare have announced partnerships to improve diagnostics for cancer – Novartis and PathAI are jointly training an algorithm to improve cancer diagnostics, while GE Healthcare teamed up with Vanderbilt University to build various tools to predict effectiveness of cancer immunotherapy.
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.