With pharmaceutical companies struggling to maintain pipelines and portfolios with products developed in-house, organizations are increasingly turning to licensing to bolster profits. However, both the advantages and disadvantages of each proposed partnership must be evaluated fully before the deal is signed, because the failure to do so will greatly compromise the success of a deal.

Licensing to fill pipeline gaps

Several key factors are currently negatively affecting pharma R&D productivity and sales, including: the reduction in the number of innovative drugs being approved; increasing cost of developing new drugs; increasingly harsh pricing and reimbursement environment and regulatory pressures; shorter periods of exclusivity; patent expiries on a number of key drugs; historical over-reliance on blockbusters and increasing internal pressures.

Consequently, pharma is increasingly turning to licensing products developed by third parties as a means of filling the gaps within its collective pipeline. However, with the constant demand for late-stage product candidates resulting in spiraling licensing deal costs, companies are now looking to in-license earlier-stage compounds, demonstrated by the recent resurgence in preclinical and phase I licensing deals made by the top 20 pharmaceutical companies.

Licensing - the earlier performed the better

Although the level of licensing observed in the pharmaceutical industry is on the increase, the fact that in-licensed drugs produce a lower return-on-investment (ROI) than those developed in-house implies that the growth of licensing is not sustainable. Pharma companies therefore need to make significant internal changes if they are to continue to remain profitable.

By 2012, Datamonitor forecasts the top 20 pharmaceutical companies will derive one third of their ethical revenues from licensed products. However, while companies facing the patent expiries of key revenue drivers between 2006 and 2012 have in-licensed products to counteract the ensuing sales erosion, this tactic, for six of the leading top 20 companies at least, is not expected to produce positive growth in the short term, although it will at least offset part of their revenue deficit.

Biologics will be driving market growth

Oncology is becoming a popular therapy area for pharma to target in licensing deals, given the increasing longevity of the population, with the prevalence of cancers also growing due to lifestyle factors such as smoking and obesity. The approval of high-value biological therapies such as monoclonal antibodies (mAbs) for the treatment of various cancer indications is a further incentive for manufacturers to enter this market, given the increasing pressures faced by genericization of small molecule products. These factors are set to drive the oncology market from the fourth largest sector in the pharma market at $27 billion in 2006 to the third largest in 2012 ($55 billion).

In fact, while biological product licensing and co-development deals only make up a quarter of total product deals made by the top 20 pharma companies (the remaining attributed to small molecule products), the biologics sector is forecast to grow by 10% year-on-year through 2012, while sales of small molecules will remain relatively flat. However, despite the increasing interest in entering the biologics market, questions have been raised as to whether companies looking to enter the market now have already missed the window of greatest opportunity. Consequently, manufacturers now wishing to enter this lucrative and fast growing market face considerable competition if they wish to generate any significant market share.

Biotechs increasingly flex their bargaining power during deal negotiations

As the complexity of deal structures increases, licensors, emboldened by the knowledge that pharma companies are increasingly reliant upon licensing deals to ensure their future profitability, are demanding more in the negotiation stage, while major pharmaceutical players are conceding more. Licensors are now preferring to retain certain rights to the future development, manufacturing and product marketing. However, this ultimately means that while licensors increase their potential ROI, they also increase their burden of risk.

In order to prevent overlap of responsibilities between companies, licensing deals now need to be sufficiently flexible to minimize the duplication of activities by each party, which can cause confusion, while also wasting time and money and putting the deal itself in jeopardy. Such plans should be formed at the outset of an alliance, and if successful may facilitate future synergies that arise, which can be exploited downstream in the relationship.

Related research:

Pharmaceutical Licensing Strategies: Best practices in deal-making, valuations and strategic management 

Big Pharma Turns to Biologics for Growth to 2010: Financial and strategic segmentation of the 'Big Pharma' sector by drug technology