Why licensing deals are a powerful source of growth in life sciences

Licensing is becoming key to access innovation, broaden R&D horizon and markets, enabling pharma companies to grow while keeping risks low.

In brief

• Life sciences companies navigate an increasingly complex environment. While innovation is key for growth, several hurdles erode their power to innovate. 
• Licensing is an effective strategy to expand market and R&D horizon while decreasing risks and maximizing potential. It allows access to innovation and growth. 
• Scrutinizing investments is crucial to enable long-term growth. To select the right strategy and partnership, it is essential to understand deal potential and risks.

The many challenges faced globally by the life sciences sector call for more flexible options to access innovation and broaden markets. While innovating is crucial to succeed in life sciences, innovation is a more expensive and complex endeavor than in previous years. At the same time, as technology advances at an unprecedented pace, innovation speed in life sciences is imperative. Under this complex constellation, licensing deals increasingly become an attractive tool to overcome challenges and achieve growth.

The strategic importance of licensing deals is boosted by major trends like upcoming patent cliffs, the rising cost of innovation, increasing price pressures and a complex financing environment. These developments erode the margin of pharmaceutical companies and hamper their ability to embark on large dealmaking. Amid this challenging situation, licensing provides a lower-risk investment alternative enabling access to innovation and growth. This has also been echoed by industry leaders, acknowledging licensing as a key growth driver.

1. Licensing as a tool to overcome patent cliffs

Pharmaceutical companies continue to face patent expirations on large revenue carriers, followed by the introduction of generics or biosimilars. This fiercely increases competition, pushes down prices and creates revenue gaps for originators that are hard to recover by in-house R&D at the speed required. In the upcoming five years, patent expirations will impact a pool of drugs with total sales close to US$300b.

This trend can increase as the challenging financing environment may lead biotechnology companies to partner early, instead of waiting for assets to be closer to launch. For pharmaceutical companies, this can be an opportunity to access innovation. While late-stage assets bear less risks, partnering several assets at early development stages can increase overall pipeline cost efficiency.

Innovation is often in-licensed early. The number of innovative assets in-licensed at pre-clinical stage far outweighs non-innovative assets. While corporate is the main source of overall assets, academia is relevant in early-stage innovation.

Companies looking to in-license should consider this to prevent overlooking opportunities. Companies planning to out-license should analyze the best timing, according to their strategy and goals.

3. Licensing as a tool to diversify the portfolio

External innovation is an efficient option to diversify portfolio and increase revenue while reducing R&D costs. We expect an increase in licensing deals as pharma companies look for more flexible deal-making.  This can already be observed, as roughly 45% of pipeline assets of the top 20 pharmaceutical companies originate from external innovation, leveraging licensing, collaborations and acquisitions. External innovation to boost pipelines and portfolios is a growing need and practice.

While in-licensing is often utilized by large pharmaceutical companies to access innovation, it can be leveraged by local players to introduce products to countries not covered by originators due to lack of market presence, reimbursement, or other barriers.

When analyzing the therapeutic areas licensed, there is emphasis on oncology deal-making, an area with high unmet need and market potential. While oncology provides a positive outlook, it is crucial for pharmaceutical companies to analyze the most attractive and suitable area to invest considering further dimensions and their own capabilities. This is essential to increase the probability of success in integration, launch and commercialization of in-licensed assets.

4. Licensing as a tool to strengthen financing

There are several strategic rationales to out-license. Innovation is marked by new modalities and personalized medicine. Innovating in both areas is expensive, leading small innovators to partner with larger firms to support development costs and reach market.

There has been a significant increase on licensing of biologics and biosimilars. While in 2017 27% of licensed assets concerned biologics, this increased to 35% in 2022; licensing on novel modalities has almost doubled. Biosimilar deals showed a strong 24% CAGR, expected to increase as more biologics face patent expiry.

Type of assets in/-out licensed in 2017-2022

¹ NME, New Molecular Entity
² Incl. devices, vaccines, diagnostics, technologies, AI-based drug discovery, deals missing asset information

Source: Biomedtracker; EY-Parthenon analysis

Biosimilars have the potential to enable treatment access at lower price and reach more patients than their originators. Developers often partner to support development costs and reach market access.

5. Licensing as a tool to expand a footprint

Deals are executed worldwide. Asia-Pacific has the highest in-licensing, influenced by factors like increasing health expenditure and population. Most of its in-licensed assets come from the Americas, followed by EMEA. The Americas are the largest out-licensing source, particularly the US, influenced by robust R&D infrastructure, strong IP protection and comparably favorable funding.

In- / out-licensing flows between regions¹ (2017 – 2022)

¹Based on asset-region combinations; in case of multiple licensors, 1st licensors geography was decisive; excl. deals with no licensor geography available

Source: Biomedtracker; EY-Parthenon analysis, Pharma Licensing of the future by EY-Parthenon

The type of assets licensed vary by region – while biologics are mainly out-licensed from the Americas, APAC is the main source of out-licensed biosimilars

Licensing as tool to expand footprint

¹Based on asset-region combinations; in case of multiple licensors, 1st licensors headquarter location was decisive; deals with no licensor geography available not depicted
²The timeframe analyzed covers the past six years

Source: Biomedtracker; EY-Parthenon analysis, Pharma Licensing of the future by EY-Parthenon

An increasingly complex geopolitical environment might reshape the geographies partnering in the future. The pharmaceutical industry is increasingly considered as a strategic sector by governments, adding pressure on regionalizing supply chains. While licensing is a powerful tool to broaden markets, the impact of geopolitical developments should be considered before entering deals to minimize risks.

Implications for life science companies

Although licensing can unlock growth, it can fail to meet the planned ROI if the deal outcome is unsuccessful. A clear market understanding, solid analyses and strong transaction strategy are essential.

Companies seeking to in-license should identify the right asset, understand its potential, challenges, and partner suitability. Companies seeking to out-license should assess potential, prepare professional marketing materials, and execute a competitive process to attract the right bidders, enhance value and close deals within short timeframes. The following points depict selected key considerations for companies looking for growth in the life sciences industry, leveraging in- or out-licensing as strategy.

• Expand pipeline horizon: Accessing external innovation is a growing need. To unlock growth, pharma companies can actively identify targets to strengthen pipelines, portfolios and sales.
• De-risk while growing: While innovation is an imperative, its cost is increasing. Life sciences players can leverage licensing to access innovation, while reducing risks and costs.
• Boost market potential: Innovators can benefit from out-licensing to secure capital, achieve market readiness, or expand the patient pool.
• Scrutinize investments: Identifying the right partnerships is decisive for success. A thorough analysis is essential for life sciences firms to close high-potential yet low-risk deals.

Overall, to successfully use licensing as a tool for growth and cost-efficient innovation, it is key to have a clear plan, a strong strategy and expert know-how to analyze the options and execute the right deals.

Summary

In a time where technology speed is increasing in life sciences, paired with higher costs to innovate and price pressures on the industry, pharmaceutical companies increasingly turn to external innovation to fill pipelines and revenue gaps.

By leveraging licensing deals, life sciences firms can build their product pipeline of the future and expand their market presence, while keeping risks at a moderate level.

A clear strategy and an efficient transaction execution are fundamental to find the right deals, partnerships and value.