Building Pipelines From The Outside: Pharma Seeks Good Science And Sound Operations

By Jim Bedford, director, Life Sciences practice, and John Hurley, director, Private Equity practice, West Monroe Partners.

Large pharmaceutical companies are increasingly looking outside their organizations to shore up their portfolios and bring products to market faster and more efficiently than internal R&D functions. In particular, niche pharma has become an attractive target for the industry giants—either for funding, licensing or acquisitions. What is driving this, and what does it mean?

Moving From One End Of The R&D Spectrum To The Other

A strong drug pipeline has always been essential to future growth, but various forces have changed the nature and source of that pipeline. In 2002, according to Medtrack, the percentage of drugs in development at the 10 largest pharmaceutical companies that were initially developed by another organization stood at 16 percent. In 2012, that percentage had grown to 33 percent.

One factor has been escalating development costs. For example, over the past four decades, the average cost to develop a drug has jumped from $140 million to nearly $1.5 billion. That, combined with declining profits due to expiration of blockbuster drug patents and reimbursement pressure, has challenged traditional approaches to research and development.  Large pharmaceutical companies have downsized their R&D functions, with product development shifting to a rapidly growing number of small, R&D-oriented companies, some with headcounts barely in the double digits.

Jim Bedford, director, Life Sciences practice, West Monroe Partners	John Hurley, director, Private Equity practice, West Monroe Partners

A second factor is clearly “hunger.” Scientists in small teams have a very high degree of success motivation due to their equity positions. Their creativity is also not impeded by large organization structure and legacy thought processes. Big pharma likes to place bets on these nimble organizations.

In the past, we’ve seen a wave of mergers among large firms seeking to strengthen their pipelines and combine complementary products and services through integration. But there are only so many mega deals possible.

Today, deal activity is settling in favor of selective carve-outs from large companies and investments in the smaller, niche R&D operations, either through acquisition or licensing agreements that provide funding in exchange for future product rights.

Showing Off A “Clean House”

Lundbeck’s 2009 acquisition of Ovation Pharmaceuticals is an example of a development model that has been successful in strengthening the drug pipeline through acquisition, but not a mega merger. Ovation was a private  portfolio firm formed around older products carved out of big pharma.   They rejuvenated this “old” revenue into growth that funded other acquisitions. Quickly they became a great acquisition target for Lundbeck, the Danish pharma company who used the deal to develop their US beachhead. Other large pharmaceutical companies are looking to emulate that success.

For niche development firms, standing out in a crowded field is critical to gaining the necessary investment, whether through licensing or acquisition. Certainly, a portfolio’s potential is important; equally important is the developer’s ability to deliver reliably on that potential over a long-term process with many critical stages. Prospective investors will look closely at a firm’s capability to bring a new product successfully to market, from navigating the many moving parts and variety of outsourcing providers that support regulatory affairs, to clinical trials, manufacturing, distribution, and commercialization. Managing a single project through these stages is challenging; for a company that has multiple projects in the works, the management and administrative complexity can be paralyzing.

Outsourcing critical functions helps, but it, alone, will not ensure success. Firms need to plan ahead for the challenges of managing and coordinating all the aspects of a project to ensure that it stays on course. If you’re telling the marketplace that you expect Product A to have great trial results in January 2015, then you need to make sure everything is in order to deliver on the expectations you’ve now set. Just as with selling a home, a “clean house” will realize maximize value.

There are several steps a development firm can (and should) take as it moves closer to its goals – and that a prospective investor should look for in its funding or acquisition due diligence. These include ensuring solid operational expertise on the staff; someone who has the capability to manage and coordinate moving pieces and multiple vendors. The new breed of pharma R&D leader will need to be scientifically wise, and relationship rich to manage the quality of work done by third parties. As big pharma giants strive to meet their own goals and grow project portfolios, adding operational and project management expertise is as essential as the innovations themselves.  

Buyers will look for other signs of well-managed operations, such as the presence of a development plan and potentially an outsourced provider to oversee and deliver it, as well as a track record for successfully meeting milestones.

The implication for both buyers and development firms seeking capital is quite clear: in the evolving pharmaceutical R&D environment, success and future value isn’t just the product of good science. It’s also the product of good management and sound operations.