By Arda Ural, Ph.D., EY
After overcoming challenges posed by the pandemic, biopharma continues to face headwinds caused by more foundational issues that hinder growth. Although the industry is facing a significant slowdown due to biological products' patent expirations, many organizations have not established a robust enough pipeline to overcome the revenue to be lost. To bridge this innovation gap, pharma CEOs will need to expand their use of alliances, in tandem with bolt-on M&A, as a pipeline booster strategy.
In this article, we will cover reasons why the life sciences industry is experiencing an innovation deficit, how ecosystems can help replenish biopharma pipelines, and what leaders can do now to offset the innovation gap.
Why The Life Sciences Innovation Gap Is Growing
According to a report from Evaluate Pharma, patent expirations are putting $226 billion in global prescription sales at risk through 2026. While this is occurring, the cost of bringing new medicines to market and development times have increased, with Big Pharma new molecular entity submissions to the FDA trending down.
The rate of pipeline replenishment is an important tool to understanding a company’s revenue growth outlook. Replenishment rates show the ratio of incremental sales from products launched in the last five years to losses in sales from patent expirations over the same time period. The industry is already anticipating this rate to fall from 2022 through 2026 as there will be a paucity of new products being launched while upcoming patent expirations occur.
Of the top 25 biopharma companies by revenue, our analysis of the replenishment rates suggests the ratio will drop more than 50%, from 1.6x in 2020 to 0.8x by 2026. Companies with a ratio of less than 1 are losing more sales from patent expirations than what they are recouping from pipeline assets. The innovation deficit we see on the horizon comes as these major biopharmas are launching fewer products themselves – and pushback from legislators and payers curbs the ability to achieve sales growth through price increases.
This is clear, considering Big Pharma’s new molecular entity (NME) approval rate, which fell from 77% in 2011 to 49% in 2020, while smaller biotech companies have seen their approval rate rise from 20% to 49% over the same period.
Even as the industry continues to spend more on R&D every year, the replenishment rate declines. According to our analysis of CapitalIQ data, R&D as a percent of sales has increased consistently from 14.5% in 2011 to 16.8% in 2021, but the complexity of advanced medicines and investments in treatments that do not end in success make R&D more expensive. Longer development times and a tripling of costs for developing new prescription medicines that gain market approval are also weighing on productivity. In this process, the therapeutic targets also are more complex when compared to a decade ago. Even though the number of candidates entering preclinical and Phases 1 and 2 at the top 25 biopharma companies has grown by 2%-4% CAGRs over the last decade, Phase 3 candidates have grown by only 0.3% and the share of Phase 3 candidates in the pipeline has fallen from 19% in 2010 to 15% in 2020, according to Evaluate Pharma.
Benefits Of An Ecosystem Approach
According to the Ecosystem Survey, which included more than 100 life sciences C-suite executives, life sciences executives understand that an ecosystem model can provide significant advantages over traditional business approaches. These advantages include:
- increasing efficiency and reducing costs (59% of life science executives surveyed);
- creating new, joint products (54%); and
- fostering creativity and innovation (55%).
Specific to R&D, executives believe the ecosystem approach allows for:
- greater access to talent (60%);
- improved likelihood that R&D will be successful (58%); and
- sharing of R&D assets such as labs and testing facilities (55%).
What Is A Biopharma Ecosystem?
Ecosystems are business arrangements between two or more entities designed to create and share a higher level of value collectively for a common set of customers than the members can create individually considering time, capital, brand permission, market access, and other real-world constraints.
An ecosystem could include participants such as:
- big pharmaceutical companies that bring access to knowledge, resources, and technical expertise, as well as the ability to drive commercialization;
- contract research organizations to conduct trials;
- contract development and manufacturing organizations (CDMOs) to help produce the drugs;
- smaller biotechs with novel R&D; and
- tech companies and data providers for sharing the right information at the right time with patients, caregivers, and providers.
High-performing ecosystem relationships contribute significant value to the company and drive enterprise performance by building better growth opportunities, improving R&D leverage through access to assets, skills, and ideas, and increasing capital leverage by creating advantageous opportunities.
3 Actions Life Sciences Executives Can Take Now
1. Build robust and agile ecosystems to support alliances and M&A
While M&A is still a key tool for acquiring innovation, ecosystems can offer higher-growth opportunities (53%), faster execution (50%), and better outcomes (50%), according to life sciences executives. To build strong ecosystems, companies should establish an ecosystem development function with a dedicated budget, request C-suite or board-level review, and consider hiring a third party to manage the ecosystem.
2. Go early with alliances with optionality for Phase 2 assets
Compared to traditional R&D, ecosystems offer significant advantages by providing greater access to talent and expertise as well as mitigating risks by reducing cost and accelerating time to market, increasing the return on R&D investment. Alliances with promising assets, and the option to acquire at the Phase 2 stage, could provide a good balance between risk and return, maximizing the value of assets versus developing them in-house. For treatment developers, linking with a larger company can provide the scale and commercial capabilities to bring a drug to market.
3. Don’t neglect traditional M&A
Pressure to do M&A will accelerate as patents expire in 2025-2026, even as alliances may shrink the innovation deficit. The lowest M&A in terms of value was in 2020 and 2021, while firepower, a company's capacity to fund transactions based on the strength of its balance sheet, in biopharma has remained near record levels, exceeding $1.1 trillion. In 2020 and 2021, biopharma companies had time to explore and shop around. However, this strategy has shifted with pipeline replenishment diminishing beyond 2022 and the innovation deficit widening by 2025. Now companies need to increase their deal-making to maintain and sustain long-term growth.
As we can see, there are many benefits to taking an ecosystem approach versus relying too heavily on internal R&D alone. By fostering alliances and M&A with companies producing early-stage products, digital investing and technology can help close the innovation gap that big biopharmas might face in the coming years.
About The Author:
Arda Ural, Ph.D., is the EY Americas Industry Markets leader for EY’s Health Sciences and Wellness Practice. He has nearly 30 years’ experience in pharma, biotech, and medtech, including general management, new product development, corporate strategy, and M&A. Prior to joining EY, he was a managing director at a strategy consulting firm and worked as a VP of strategic marketing and a BU lead at a medtech company. Ural holds a Ph.D. in general management and finance and an MBA from Marmara University in Istanbul, as well as an MSc and BSc in mechanical engineering from Boğaziçi University.