The decline in the replenishment rate comes even as the industry continues to spend more on R&D every year. R&D as a percent of sales has increased consistently from 14.6% in 2011 to 16.9% in 2023, according to an EY analysis of CapitalIQ data for the top 25 biopharma companies.
The increasing complexity of advanced medicines and investment into 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. Over the last decade, even though the number of candidates entering preclinical and phases I and II at the top 25 biopharma companies has grown by 1%-4% CAGRs, phase III candidates have declined by 1% and the share of phase III candidates in the pipeline has fallen from 19% in 2012 to 16% in 2022, according to Evaluate Pharma.
Benefits of an ecosystem approach
Life sciences executives understand that an ecosystem model can provide significant advantages over traditional business approaches, 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%)
- Fostering creativity and innovation (55%)
Specific to R&D, executives believe the advantages of an ecosystem approach are:
- Greater access to talent (60%)
- Improved likelihood that R&D will be successful (58%)
- 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 example of participants in an ecosystem could be big pharmaceutical companies that bring access to knowledge, resources and technical expertise, as well as the ability to drive commercialization; smaller biotechs that may have novel R&D; contract research organizations to conduct trials; contract development and manufacturing organizations (CDMOs) to help produce the drugs; and tech companies and data providers for sharing the right information at the right time with patients, caregivers and providers.
According to the EY Ecosystem Survey, high-performing ecosystem relationships contribute significant value to the company and drive enterprise performance. They do this by:
- Building better growth opportunities
- Improving R&D leverage through access to assets, skills and ideas
- Increasing capital leverage by creating higher-value opportunities
How to make an ecosystem work in life sciences
There are several best practices identified in the Ecosystem Survey that life sciences executives can adopt:
- Conducting regular C-suite or board-level review of ecosystems
- Having a corporate function dedicated to track progress
- Having a business development function that identifies potential partnerships
- Having a dedicated ecosystem budget
- Having operating ecosystems as a distinct line of business
- Designating one person to have clear ownership of cultivating and managing ecosystems
Three actions life sciences executives can take now
Life sciences executives can consider the following steps as they build an ecosystem mindset.
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. Companies can start to build strong ecosystems by establishing an ecosystem development function with a dedicated budget. C-suite or board-level review is also essential, and companies may bring in a third party to manage the ecosystem.
2. Go early with alliances with optionality for Phase II assets
As mentioned, ecosystems offer significant advantages over traditional R&D by providing greater access to talent and expertise as well as mitigating risks by reducing cost and accelerating time to market. As such, they increase the return on R&D investment. Entering into alliances for promising assets early with an option to acquire at the phase II stage could provide a good balance between risk and return, maximizing the value of assets versus developing them in-house. For the treatment developer, 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
While an alliance approach can help shrink the innovation deficit, pressure to do M&A will accelerate as patents expire in 2025-2027. The pace of dealmaking has seen a decline since 2020 and the year 2022 saw the lowest M&A in terms of value in the last several years 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 US$1.47trillion.
In 2020 and 2021, biopharma companies had the luxury of employing a watchful, waiting approach. However, with pipeline replenishment diminishing beyond 2022 and the innovation deficit widening by 2025, companies need to increase their deal-making to maintain and sustain long-term growth.
Conclusion
The study suggests major biopharma companies will be challenged to meet their growth objective if they rely too heavily on their internal R&D alone. Taking an ecosystem approach that fosters 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.
Harish Kumar, Tushar Shah and Kritika Verma contributed to this article.
