Can licensing cure big pharma's ills?

The pharma industry’s leading players are relying on product licensing to sustain their financial growth. A new report from Datamonitor examines how they can best ensure the success of this strategy.

THE PHARMACEUTICAL INDUSTRY’S top 20 companies are facing a poor growth outlook, in part caused by poor R&D productivity levels. In order to overcome this problem, they are turning to licensing. But with high competition for products, companies need to leverage their assets and offer creative deals to win them from their competitors, according to a new report from independent market analyst Datamonitor.

Poor outlook

The top 20 pharmaceutical companies are in crisis, with many facing a poor growth outlook for their prescription pharma businesses over the next six years. In fact, Datamonitor forecasts that Amgen will be the only company among the top 20 to achieve double-digit growth over the next six years. The companies are struggling to overcome a wave of patent expiries, tightening drug prices and increasing regulatory pressures.

One of the main internal causes of the problem has been declining R&D productivity, with pharma companies pouring more money into R&D but failing to generate promising candidates that will provide a high return, says Datamonitor pharmaceutical industry analyst Romita Das. “However, licensing is providing hope for the industry as a means to overcome these problems, but only if companies can get their hands on the promising candidates under favourable terms.”

The top 20 pharma companies are increasingly recognising the potential of licensing, with the number of licensing deals signed rising by 16% in the last five years. In addition, these companies have become increasingly dependent on licensing to generate sales, with an average of 19.5% of their ethical sales being derived from licensed products in 2004 compared with 17.5% in 2002. This equates to $63 billion of sales in 2004, compared with $48 billion in 2002 – an increase of almost a third.

Merck no longer in front

Merck & Co. and GlaxoSmithKline were the most active deal-makers between 2000 and 2004. Merck was particularly active in 2003 and 2004, when it was the top deal-maker. However, in the first nine months of 2005 Merck’s activity fell dramatically, with only six deals signed compared with 30 signed in 2004. It appears that the withdrawal of Vioxx (rofecoxib) may have had repercussions throughout the company, resulting in a slowdown in licensing activity – perhaps to save money, or perhaps because companies had been put off signing a deal with Merck.

Furthermore, the two companies’ licensing activities highlight key differences in strategy. GSK’s licensing activity follows the traditional strategy of focusing on acquiring the rights to compounds in clinical development. Merck, on the other hand, has a distinct licensing strategy from its peers in that it has focused on drug discovery alliances, Das says. “However, as a result of the lost revenue stream from the withdrawal of Vioxx and its poor growth outlook, Merck may need to turn to late-stage product licensing to find new revenue streams quickly.”

Dependence on licensing set to increase

Datamonitor expects the top 20 pharma companies’ licensing dependence to increase over the next five years, with Roche seeing the greatest jump as a result of its tie-up with Genentech. Datamonitor forecasts that these companies, on average, will derive 26.1% of their ethical sales from licensed products by 2010. This will equate to more than $100 billion – double the sales that the top 20 pharma companies generated from licensed products in 2002. Datamonitor also expects that the number of licensing deals struck will continue to rise, though competition and the limited number of lucrative licensing opportunities will restrict this growth to some extent.

As a result of the high competition for licensing of promising products (particularly late-stage compounds), it is difficult for companies to secure deals. It has therefore become ever more important that companies leverage their tangible assets (such as marketing experience and licensing history) as well as their intangible assets (such as reputation and good alliance management) to be positioned as a ‘partner of choice’ in order to help attract and secure promising, high-value deals.

In addition, companies need to offer more creative deals that make them stand out from the crowd and exploit synergies, according to Das. “For example, as part of Pfizer’s co-development and co-promotion deal with Neurocrine for indiplon, Pfizer agreed to train Neurocrine’s sales team.

“The structure of the deal was designed to help build up Neurocrine’s capabilities, while from Pfizer’s perspective, Neurocrine’s resultant sales force is likely to be compatible with Pfizer’s marketing approach and of course, the deal ultimately gave Pfizer access to the product. The deal also highlights the rising complexity of licensing agreements, with potential licensees conceding to the demands of out-licensors to secure rights to the product.”

Early-stage licensing – an undervalued opportunity

The top 20 pharmaceutical players are currently focusing their licensing efforts on late-stage compounds in an attempt to address their R&D productivity crisis and weak growth prospects in the short term. However Datamonitor’s research indicates that these companies are not fully capturing the opportunities to in-license early-stage compounds, where competition to secure the best deals is less fierce and lower costs are involved.

In most cases, smaller companies have little chance to compete with the likes of Pfizer and GSK, with their more diverse offerings and bigger cash piles. Datamonitor believes that early-stage product licensing deals are ideal for smaller players, allowing them to license the product before competitors do. The early-stage product licensing arena is a more even playing field, with plenty of products available for licensing. Das comments: “However, the higher risk of such products and difficulty in assessing the potential has tended to deter companies in the past. In Datamonitor’s view, the higher risk is counterbalanced by the substantially lower costs in licensing products and even more crucially, far lower royalty rates are applicable.”

The structure of licensing deals is becoming more complex, with companies that are seeking to out-license products becoming more demanding and potential licensees conceding to demands for access to high-potential products ahead of their competitors – as highlighted by the Pfizer and Neurocrine agreement. Das says: “It is now crucial for companies to ensure they optimise their licensing strategies to fully extract the value that licensing can offer.”