With pharma struggling to maintain its pipelines and portfolios with products developed in-house, companies are increasingly turning to licensing to bolster profits.
However, the search for late-stage developmental products is becoming tougher and more expensive, with companies now looking towards licensing earlier-stage compounds.
Such a strategy brings with it the potential for greater returns, but also confers greater risk. Licensing is far from an exact science, and according to a new report from independent market analyst Datamonitor, both licensors and licensees need to do their homework before entering into the actual process of licensing.
"With the number of licensing deals and partnerships made rising, the drivers in today's market increasingly outweigh the resistors," Datamonitor senior pharmaceutical analyst Alistair Sinclair says.
"Nevertheless, 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, exemplified by the fact that approximately half of all deals are currently unsuccessful."
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 (P&R) 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, Sinclair says.
"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," he says.
Licensing - the earlier performed the better
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.
Sinclair comments that: "In hindsight, in-licensing more products earlier in the life of a potential blockbuster might have prevented this expected static or declining period of company revenues."
Small molecules remain target of choice for licensing deals, but 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, Sinclair says.
"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," he says.