Productive R&D is the lifeblood of pharmaceutical companies. But great pharmaceutical R&D requires a mindset that transcends classical management approaches.

How can organisations create effective R&D mindsets to ensure they continue to get the most from their internal and external R&D ecosystems? How do they acquire, motivate and manage the multiple sources of internal and external expertise that are required to do this successfully?

In this on-demand webinar, John Rountree, Managing Partner at Novasecta, is joined by three heads of R&D. Thomas Eichholtz (Head of Global R&D, Chiesi), Araz Raoof (SVP Global Drug Discovery and External Innovation, Ferring) and Arndt Schottelius (Chief Scientific Officer, Affimed) discuss with John their extensive experience across many companies in fostering an innovative R&D mindset. We also identify the behaviours other organisations need to adopt in order to prosper in 2021 and beyond.

The expert panel take an in depth look at a range of topics including:

  • Why R&D mindset is both important and challenging, and how it has changed and evolved over time
  • How to identify and adopt the most practical methods to evolving and sustaining an effective R&D mindset, for example strong leadership, a great strategic focus, the right capabilities, simple decision-making, and effective internal collaboration
  • How to recognise and measure an effective R&D mindset
  • The top priorities for sustaining an effective R&D mindset

As well as a valuable discussion and the opportunity to gain key insights, the panel also answer the audiences most pressing questions regarding specific challenges.

If you are a Head of R&D or in an R&D Leadership Team, this webinar is a must watch.

Press the image below to watch now.

Effective Research and Development (R&D) is the lifeblood of the pharmaceutical industry. The funding of this highly risky and long-term activity had until the last decade or so been primarily left to well-capitalised and integrated global Big Pharma companies. A more recent era of cheap money has now changed all that. Since the market crash of 2008, a combination of ultra-low global interest rates and quantitative easing have changed how pharma R&D is funded, which has in turn changed how R&D is done. Products that take many years to research and develop are now passing through the hands of a multiple and fragmented set of investors, companies and individuals. Yet the complexity of today’s R&D requires an integration of many skills, perspectives and experiences. In this paper we explore how a new breed of leading pharmaceutical companies have been responding to the new funding environment, by defragmenting R&D to the benefit of the patients they develop medicines for and the investors that fund their businesses.

From ‘Big Pharma does all the R&D’ to a highly fragmented R&D ecosystem

Over the last 50 years the pharmaceutical industry has created tremendous value for both patients and investors. In the 1970s to 1990s, all that was required for a pharma company to become a success was the creation of a single revolutionary product. The rewards for such products were substantial: a combination of patent laws and tight regulation led to an environment where a single product could command annual revenues of $10bn+ with enviable gross margins in the 80-90%+ range. Faced with the prospect of sustained and substantial cash flows from such products, pharma companies typically felt that spending 15-20% of that revenue every year on R&D was a reasonable sum to put aside to create the next product. Investors typically complied – after all the profits and dividends were great, and management had demonstrated success before.

Yet even after investing a substantial chunk of free cash flow in R&D, the cash kept coming in, so pharma companies turned to additional ways to spend their investors’ money, more often than not M&A. The consolidation of the industry in the late 20th Century is well documented: companies like today’s GSK are the result of a series of M&A activities involving previously successful and integrated companies like Glaxo, Allen & Hanburys, Burroughs Wellcome, Affymax, SmithKline & French, and the Beecham Group. Almost all of todays’ Big Pharmas have followed the same path.

The combination of substantial profits and M&A activity inevitably led to a hangover. Big Pharmas became too big and too comfortable. R&D was seen as a necessary P&L expense, but somehow it wasn’t delivering the next great product fast enough to replace the previous one on patent expiry. Eventually investors in Big Pharma and market analysts started to complain. To cap it all Morgan Stanley urged pharma to “Exit Research and Create Value” in 2010, and the days of large R&D campuses and a substantial and relatively unquestioned evergreen funding of Big Pharma R&D were over.

As with many investor-led adjustments to industries, the solution to complacency was brutal, as waves of cost cutting and R&D site closures swept the industry. A huge diaspora of ex-Big Pharma R&D scientists and executives found new homes in a combination of service companies and a plethora of small and nimble “biotech” companies. The industry therefore fragmented: Big Pharma acknowledged that “outside” was sometimes better than “inside”. New and rapidly growing service companies filled the gap left by pharma companies, first in clinical trial execution, then earlier in the value chain into discovery, and finally towards fully integrated R&D services. And they found willing customers in the virtual and flexible biotechs funded by Venture investors to advance assets to a point where they could be sold to their former colleagues in Big Pharma.

Cheap money has reinforced R&D fragmentation

The restructuring and fragmenting of the pharma industry into small biotechs, Big Pharma, and multiple Contract Research Organisations (CROs) seeded a very different R&D landscape to the previous era of integrated and mid-sized pharma companies that created the successes and wealth that then led to Big Pharma consolidation.

The ultra-low interest rate era since 2008 has in turn now created and cemented an investor environment that encourages and reinforces industry fragmentation. Today’s “cheap money” era has led to an increasingly diverse set of methods for institutional investors to put capital to work in the pharmaceutical industry. At the highest level, depending on their various appetites for risk, institutions can invest in:

  • Private Equity funds (rapid profit growth) which in turn take stakes in:
    • Lower-risk often mid-sized pharmaceutical companies with relatively established product ranges, little R&D and reasonably reliable cash flows
    • Service companies and CROs with reliable cash flows from contracts with a diverse range of pharma/biotech companies
  • Venture Capital funds (high-risk, high-return) which in turn invest in:
    • Small and virtual biotech companies with promising assets that require a few years of funding to reach a point where they can be sold to pharma companies
    • Platform discovery biotechs with a unique technology that can create multiple assets of interest to pharma companies
  • Hedge funds (medium-risk, medium-return):
    • Take advantage of risk asymmetries in the market
    • Take stakes in private and listed pharma/biotech companies
  • Stock-market listed companies (stable returns and/or upside):
    • Big Pharma with sustainable and reliable income streams with good prospects for dividends
    • Early but more established biotech companies with potential for massive value increase on success of their products
    • Mid-cap pharma/biotech companies with sustainable prospects from a mix of own and partnered products
  • Privately held companies (medium risk and return):
    • Small to mid-sized companies that choose to invest for the long-term development and commercialisation of niche products

The flow of money into these asset classes is undoubtedly shaping the way R&D is both funded and executed. For example a resurgence of Venture Capital investing in pharma/biotech over the last decade has driven the creation of small and virtual companies that fit the model of delivering a potential exit for investors in 3-5 years. Meanwhile Private Equity funds have seen the pharmaceutical services sector as an interesting way to generate reliable and growing profit streams from pharma/biotech companies that do not like investing in fixed costs. The small biotech and service sectors are therefore both here to stay while investors are seeking the type of higher returns that the era of cheap money demands.

Fragmentation has increased the price and risk of external R&D

In a sense the newly fragmented world of eager and nimble small biotechs producing innovative products to be bought at huge prices by Big Pharmas that need to replenish their R&D pipelines is a repeat of history: profitable Big Pharmas are now spending their excess cash on the external hope that a nimble biotech will provide them with their next product rather than the old internal hope that their own R&D organisations will deliver. And while frothy stock markets allow them to pay inflated prices, this will continue. For recent examples we need look no further than Pfizer’s acquisition of Medivation for 40% more than any other pharma company was prepared to pay after a series of negotiations, or Allergan’s acquisition of Tobira for an up-front of nearly 500% of its previous day closing share price. Cheap money has therefore created a world of inflated external R&D expenditure. Pharma companies are under constant pressure to increase profitability, so are looking to reduce the internal R&D expense that hits their P&L accounts every quarter. At the same time they need innovation, so are taking on external expenditure on assets and companies that can be charged to their Balance Sheets without any effect on EBITDA. The prices of external assets rose to match such demand.

Correspondingly Venture Capital companies have been eager to invest their Limited Partners’ enthusiasm for higher returns in companies that can subsequently be bought at these inflated prices. By contrast family and foundation held companies are unable to keep up with paying these kinds of prices for external innovation. And the sheer volume of external opportunities that are now available for in-licensing or acquisition (many more hope than reality) is creating a real problem for companies trying to sort the wheat from the chaff.

Whether the inflation in asset prices caused by the double dynamics of Big Pharma internal cost cutting and venture funds’ appetites for creating small companies that can be bought has peaked yet or not, one thing is for sure: Pharma R&D is too long-term and risky an endeavour to leave solely to the short-term volatility of investors’ appetites for risky asset classes. So a number of smaller and mid-sized pharma companies are stepping in to carry out the kind of integrated R&D that does not require constant purchasing of external assets and companies.

Pioneering a newly integrated R&D model

A new breed of entrepreneurial R&D integrators are now emerging to challenge the dogma of “fragmented is beautiful” that the new funding landscape has created. Such companies recognize the value of continuity and integration of highly diverse skills and understanding from science, medical, commercial, and partnership disciplines among others. They know that in order to buy the right external assets when they need to, they need to be excellent pickers and excellent partners post-deal or the knowledge residing in their partners will be lost.

We explored the companies that appear to be getting R&D right by analysing a set of companies’ market capitalisation to revenue multiples as a proxy for how confident investors are in the future for each company. A high multiple generally reflects market belief in the company’s R&D model, because either (a) revenues will grow, which will often be a result of good R&D creating new valuable products or (b) the R&D pipeline appears to be healthy and valuable. More specifically we compared European ‘MidPharmas’ with their global Big Pharma peers, as though capital has been plentiful in a global era of cheap money, European companies have found it tougher than their USA counterparts to access funds.

A new generation of integrated mid-cap pharma companies is out-performing Big Pharma

Note: For each company market cap was recorded end of Q1 2016; annual revenue is as stated from 2015 for all companies

The two common features of all the companies that have higher market cap to revenue multiples are focus and integration. For focus, some “Platform Pharmas” choose a technology platform that provides multiple shots on goal through own-development or partnerships, and other “Specialist Pharmas” choose a particular disease area, usually associated with intimate knowledge of the science and medical elements of the disease and strong connections with relevant physicians and patients. For integration, all companies have retained internal capability from discovery through to late stage development, with most already in commercialisation and the others very close.

1. Platform Pharmas (Genmab, Cosmo Pharma, Galápagos, MorphoSys)

Genmab, with it’s impressive 48X market cap-revenue multiple (compared to a MidPharma average of 3X), is a Danish company that was founded in 1999 to develop and commercialise a portfolio of human antibodies. Genmab now has two on-market products, ofatumumab and daratumumab, and multiple proprietary technology platforms for antibody production. Genmab’s antibody expertise and technology platforms are expected to provide a stream of future product candidates – the likely reason for Genmab’s high value.

We had comparable findings in Cosmo Pharma (30X multiple), Galápagos (24X multiple) and MorphoSys (11X multiple). MorphoSys is similar to Genmab in terms of its antibody focus, owning the rights to several proprietary techniques for human antibody production. Cosmo Pharma has a proprietary MMX technology platform for gastroenterology drug delivery. Galápagos is a bit different – it has a proprietary discovery machine that makes use of patients’ cells to discover new drug targets, meaning its ability to convert disease targets into therapeutics is its value driver. Its business model is less about straight out-licensing its technology, and revolves more around working with larger MidPharmas and Big Pharma partners to obtain patient expertise and provide access to its proprietary discovery system.

Remarkably, in the span of 2009 to 2015, none of these company’s revenues has grown by more than 15% CAGR – good, but not spectacular. This goes to show that the value assigned to these companies is undoubtedly based on future potential, and not past performance. Additionally, this suggests that these ‘Platform pharmas’ are focusing more on long-term growth, and their investors are not necessarily seeking quick wins from single product bets.

2. Specialist Pharmas (Sobi, Actelion, Novo Nordisk, Bavarian Nordic)

The second group of pharma companies identified through this analysis is made up of Sobi, Actelion, Novo Nordisk and Bavarian Nordic, having market cap-revenue multiples ranging from 7X (Bavarian Nordic) to 10X (Sobi). The interesting trend that we see here is that all of these companies have focus: they are choosing to build a dominant presence in a specific domain. Sobi focuses exclusively on rare diseases. Actelion recently started emphasising rare diseases with its small molecule platform, supported by continuing life cycle management of its pulmonary arterial hypertension franchise. Novo Nordisk is synonymous with diabetes and, to a lesser extent, haemostasis and hormone therapy. Bavarian Nordic focuses on immuno-oncology and infectious diseases, which may not seem similar upon first glance but which share an underlying virus-based technology platform.

Defragmenting R&D creates value

While the market cap to revenue multiple is only one (relatively crude) measure of R&D success, our experience from both privately held and publicly listed companies is that there is real value from a continuity of knowledge and perspective that comes from being integrated in R&D. However the nature of the integration, between new functions and disciplines, is fundamentally different to where Big Pharma was decades ago. Rather than creating huge internal R&D machines, strong innovators now seamlessly integrate R&D, commercial and Business Development (BD) perspectives throughout the value chain. Through this, they can pick the best assets to bring in and develop them in a way that matches ever-changing commercial realities.

The challenge is that the new integration practised by the pioneers requires a very different culture from the old integration that created success for pharma companies in the past. Old habits die hard, and many pharma companies are wrestling with a legacy of highly functional and specialist skill-focused R&D organisations that do not have the culture or mindset of the modern integrators: New habits such as relentless external wiring, seamless joint working with BD and commercial colleagues, fast decision-making and capital discipline do not come naturally to traditionally siloed R&D organisations.

The good news is that leading pharma companies are now restructuring their R&D organisations to suit the new fragmented reality of a plethora of small biotechs and plenty of strong R&D service organisations that has resulted from the era of cheap money. These defragmenting pioneers are creating organisational and governance forms that instil dynamism into those that are responsible for innovating (typically through smaller multi-discipline project/portfolio teams or units) and instil operational excellence into those that are responsible for delivering output on time to high quality, such as clinical operations, where there are clear options to outsource and get the benefits of external experience and capabilities.

Since looking outside for pipeline replenishment is likely to remain expensive and risky while global money is cheap, pharma companies must re-invent their R&D organisations in ways that they can genuinely innovate and execute. This requires a mix of clever partnering skill, profound multi-disciplinary knowledge, and operational excellence to deliver the right project results with the efficiency and quality required to bring great products to market.

Medical Affairs is in the midst of an exciting metamorphosis. The global shift towards evidence-based care is creating new opportunities for the function to play a more strategic role within pharmaceutical companies.

As medicines become more targeted and the evidence base more nuanced, Medical Affairs has the potential to become one of the key influencers of the future. To download our white paper click here or on the button above.

The realities of unrelenting price pressure and patent expiries put a special pressure on pharmaceutical companies to consistently create new and differentiated medicines. Pharma companies are compelled to innovate in order to survive, and the rewards for successful innovation are substantial. To understand the magic of innovation in pharma today, we have explored the lessons that can be learned from the FDA’s breakthrough innovation scheme. This relatively recent scheme provides a good indication of compounds that have the potential to become game changers, and through that the habits and behaviours of the companies that are achieving this, for some the “ultimate” level of innovation. So in this paper we review and analyse the granted breakthrough approvals from the scheme’s initiation in 2012 until the end of 2016, and explore the companies that are leading the way in the scheme. We conclude by exploring the lessons learned for would-be breakthrough innovators, defining the criteria and parameters that enable the discovery and development of game changing drugs.

A new measure of innovation for the pharmaceutical industry

The FDA’s introduction of its breakthrough designation scheme in July 2012 provided a new standard and benchmark for innovation in the pharmaceutical industry. The scheme aims to fast track and expedite the development and review of drugs for serious or life-threatening conditions. More specifically the criteria for breakthrough therapy designation require preliminary clinical evidence that demonstrates the drug may have substantial improvement on at least one clinically significant endpoint versus existing therapy. Once a drug has been designated as a breakthrough therapy, the FDA will then work with the sponsor (applicant) to ensure the design of the clinical trials is efficient and practical. Regulatory standards to demonstrate safety and efficacy must still be met to support final marketing approval. Nearly five years in, the scheme therefore now provides a comparative framework between the different products in development stage and a consistent indication of products’ potential of becoming game changers.

Between 2013 and 2016, the FDA’s CDER (Centre of Drug Evaluation and Research) and CBER (Centre of Biologics Evaluation and Research) have received 387 small molecules and 81 biologics breakthrough designation requests respectively. Of these requests, 36% have been granted by the CDER and 30% by the CBER. There has been a consistent year on year increase of granted breakthrough designations, coupled with a slow decline of failed requests that are either denied or withdrawn by the applicant.

As the Breakthrough Designation scheme is maturing, more designations are being granted and fewer are failing for both small molecules (NDA) and biologics (BLA)

Source: Novasecta analysis of the FDA’s Breakthrough Designations List. NDA is New Drug Application through CDER, BLA is Biologic Licence Application through CBER. Failed = Denied + Withdrawn

While the number of granted designations has been increasing, it is also encouraging to note that in the last three years an average of 10 breakthrough approvals per year have also been granted. For an industry with research and development timelines that can stretch to 12 years, this represents an important achievement for the companies that have made it happen.

FDA granted an average of 10 breakthrough marketing approvals per year from 2014 – 2016

Source: Novasecta analysis of the FDA Breakthrough Approvals List (2013 – 2016)

While the number of granted small molecule (NDA) breakthrough designations is almost six times the number of granted biologics (BLA) designations, the story for breakthrough designations that have subsequently been translated into marketing approvals is very different: the percentage of granted designations that subsequently obtained full marketing approvals is 50% for BLAs and only 15% for NDAs.

The chance of securing a marketing approval after a breakthrough designation is significantly higher for biologics than for small molecules

Source: Novasecta analysis of the FDA Breakthrough Approvals List (2013 – 2016)

In summary, the year on year increase of granted breakthrough designations will with time surely translate into a higher number of breakthrough approvals. The fact that biologics are delivering a higher ratio of approvals compared with small molecules points to a more biologics-oriented innovation landscape for the future.

So far breakthrough innovation is a Big Pharma – Biotech phenomenon

Now we take a closer look at the companies that are taking the lead in breakthrough innovation in the pharmaceutical industry.  We considered both size (using revenue as a measure) and geographical presence of these companies, for both designations and approvals, also noting the originators of the innovation. In terms of the breakthrough designation applicants that subsequently achieved marketing approvals, 73% were big pharmas/biopharmas (defined as revenue greater than $10bn) and 27% were biotechs (defined as revenue up to $3bn). Note we are using the term “biotech” to mean smaller and earlier stage companies rather than the nature of the molecule (biologics or small). So far companies with revenues between $3bn and $10bn have been notably absent from the breakthrough approvals list.

73% of breakthrough approvals have been achieved by Big Pharma applicants (n=33)

Source: Novasecta Analysis of the FDA Breakthrough Approvals List (2013-2016) and GlobalData for companies’ revenues

Though it is still in its early days for the scheme, it is interesting to note that in last two years smaller biotech companies have started to take an important share of approvals in comparison to Big Pharmas, taking their drugs all the way from discovery to regulatory approval.

From a geographic perspective, breakthrough approvals have been an exclusively US and European domain, with 73% of the total granted breakthrough approvals from 2013 to 2016 being to companies located in the US, and 27% to those located in Europe. Many reasons may explain these regional disparities, including the fact that it is the US’s FDA that has the scheme. US companies also have better access to funds for high-risk innovation, are close to thriving scientific hubs with access to exceptional talent, and a long tradition of entrepreneurship.

So far US companies have led the way in achieving breakthrough approvals (n=33)

Source: Novasecta Analysis of the FDA Breakthrough Approvals List and Companies’ websites

By contrast with the granted approvals being so far dominated by Big Pharmas, when considering the originators of the breakthrough approvals (the companies that created the initial compound before it was acquired or partnered for further research and development), the majority are biotechs, comprising 67%, with only 33% coming from the internal R&D of Big Pharma. It therefore appears that many Big Pharmas have been acquiring or partnering with small biotech innovators prior to requesting a breakthrough designation that they hope will subsequently result in an approval.

67% of the companies that originated the drugs that then achieved breakthrough approvals are Biotechs (n=33)

Source: Novasecta analysis of FDA Breakthrough Approvals and GlobalData for companies’ revenue

Of the Big Pharma companies that have led the way in originating the 11 breakthrough drugs that have subsequently been approved, Roche comes first with three approvals, all from its wholly owned subsidiary Genentech, followed by MSD, Boehringer Ingelheim, and Gilead with two approvals each, and Novartis and AstraZeneca with one approval each. It is also worth noting the US vs. Europe origination phenomenon for Big Pharmas. The European-headquartered Big Pharmas have originated eight breakthrough drugs internally compared to four for their US-headquartered counterparts. This also corresponds to the trend we observed in previous research of US Big Pharma companies being involved in more M&A and partnership activities than their European counterparts.

By contrast with those that originated the breakthrough molecules, of the sponsors that applied for breakthrough designations that subsequently achieved approvals, Gilead, Genentech and Abbvie have taken the lead, with four, four and three respective approvals obtained between 2013 and 2016. In the case of Gilead and Genentech this represents an impressive rate of one breakthrough approval per year.

In summary, the typical breakthrough innovator profile so far appears to be companies based in the US or Europe that are very entrepreneurial and have access to funds either through their own financing as a Big Pharma or through external investments as a smaller biotech.

The lessons for Pharma R&D

The good news is that companies do not necessarily need to undertake expensive M&A activities to increase their innovation output. Indeed, only 27% of breakthrough-approved drugs between 2013 and 2016 came from M&A, while 73% came from internal R&D and partnerships. As far as breakthrough innovation is concerned, M&A represents a quick fix and not a strategy for the long term. This is even more relevant in an environment where M&A prices are reaching new highs.

Partnerships and strong internal R&D are more sustainable paths to innovation than M&A

Source: Novasecta analysis of FDA Breakthrough Approvals and press releases

Our analysis of the breakthrough approvals confirms our prior research (M&A versus Partnerships, Defragmenting R&D) that strong internal R&D and partnerships represent the best way to innovate in today’s pharmaceutical environment. 73% of breakthrough approvals so far were achieved through this path. Developing internal know-how and capabilities is a sound strategy to build the foundations that will enable continuous excellent innovation. This can be achieved by:

  • Focusing on the company’s strength and capabilities
  • Collaborating strategically with other pharmaceutical companies, exchanging capabilities and assets that can create increased value for both parties involved
  • Fostering an entrepreneurial spirit and biotech mentality internally, with self-directed and motivated entities that entrepreneurially secure funding by understanding the commercial and business rationale for their innovation.

After years of success from fully integrated, huge and relatively closed R&D centres in the 1970’s and 80’s large pharmaceutical companies have slowly but increasingly embraced the concept of leveraging innovation from external sources to build and balance their internal R&D pipelines. This has coincided with plenty of statements of how “Open Innovation” adds value for pharma and a massive increase in partnering and networking activities and departments within companies. And yet. Open innovation is easier to put into a box and assign to a new group of executives than integrate culturally into proud and established internal R&D organisations. Management systems that are geared to progressing internal assets struggle to cope with the challenge of dealing with outside parties. In this paper we explore this integration challenge and how companies can have the best of both worlds by applying an Integrated and Open Innovation approach to their R&D and Commercial activities.

In Pharma, Open Innovation needs Closed Innovation and vice versa

The Pharmaceutical industry’s interpretation of “Open Innovation” now embraces two mindsets: an original “combine internal/external capabilities” philosophy and a more recent “open-source/free” approach. For the original idea of combining the best of two parties’ capabilities, pharma Open Innovation can legitimately be argued to be old wine in new bottles: the industry has always relied on partnerships with pharma, biotech, academic institutions and others to innovate. However the open-source/free concept is newer to pharma than it is to the software industry from which it came. Unlike with software, the basis for advantage and value creation for a pharma company is more driven by intellectual property (IP) rather than speed to reach huge critical mass. And since IP is by its nature closed not open, pharma companies are constantly wrestling with being both open and closed. We believe that pharma needs to master this open/closed dichotomy by integrating the two. It is the combination of the best that is outside with the best that is inside the company that enables the best innovation.

Since the lifeblood and biggest opportunity for value creation for the pharma industry is Intellectual Property (IP), pharma companies must find ways to gain or create IP from external partners, for example biotechs, technology providers, and academic institutions. Often the simplest path to achieve this from an IP point of view is for the pharma to acquire a biotech or academic spin-out company outright. While this is a relatively quick and clean way of accessing external assets and/or capabilities, it is not Open Innovation in its purest sense, as it basically just scales up a closed innovation system.

We define the essence of Open Innovation to be art of partnering with others rather than acquiring them. Furthermore the approach to Open Innovation can and should be highly open in terms of searching for the right partners that have external expertise and IP that could be of high value, then potentially more closed as two parties create and sign legal contracts with each other to divide up the responsibilities and value captured from the envisaged innovation. This requires an “Integrated and Open Innovation” approach, which successfully integrates innovation from outside with innovation from the inside.

Open Innovation is attracting attention and investment

Pharma companies have committed significant resources to experimenting and establishing a plethora of approaches to Open Innovation that reach beyond traditional one-to-one partnering/licensing into the world of pre-competitive consortia, sharing assets and capabilities, and investing in venture funds.

Pre-competitive Consortia

Participating in pre-competitive consortia is the form of Open Innovation that is most analogous to the open-source software concept favoured by some in the Tech industry. Institutions such as the Structural Genomics Consortium (SGC) bring companies and institutions together in an open fashion to solve tough scientific problems, while not pre-granting any IP rights to the outcomes. Similarly the European Innovative Medicines Initiative is Europe’s largest public-private initiative for speeding up the development of medicines and includes companies and institutions of all sizes. Pharma companies are also present in the Biomarkers Consortium and Pistoia Alliance and are founding members of the Italian Drug Discovery Network. As well as the shared generation of data, these consortia have been identified as a good way to grow a company’s network of academics, KOLs, and start-ups.

However since these activities are truly open, the path to IP, assets and value is less direct than other Open Innovation methods. So though it is of great benefit to scientific progress, it is harder for pharma companies to directly monetise. The consequence is that participation in terms of resources and money is generally skewed towards the largest pharma companies that have the scale that allows them to provide in-kind resources and funding for such efforts. By contrast mid-sized and smaller players have less resources and a harder time justifying the return on investment given the typically very long-term outcomes from the work as well as difficulties in securing IP.

Shared Assets and Capabilities

Many Big Pharmas are promoting direct interaction of internal scientists and biotech start-ups by locating them together in open campuses. Examples include Pfizer’s €145m investment in its Grange Castle site in Dublin and GSK’s Stevenage Bioscience Catalyst hub in the UK. Smaller and mid-sized companies are following in their footsteps.

As is the case with pre-competitive consortia, the directly monetisable outcomes from openly sharing assets and capabilities are not as clear as they are with traditional partnering arrangements. However they do have “softer” benefits in exposing scientists to outside models and thereby developing internal capabilities, as well as improving visibility for the company in the pharma ecosystem. So mid-sized companies are following their Big Pharma peers by now initiating Open Innovation efforts in this way. In December, Pierre Fabre launched its Open Nature Library that will share Pierre Fabre’s private plant collection, as well as its “expertise of the phyto-industrial value chain”. Additionally, LEO Pharma established an Open Innovation platform that provides non-binding, no-questions-asked access to a suite of their cell-based in-vitro assays.

Investing in Venture Funds

Venture funds have a window on innovation that some pharma companies can only dream of. Biotechs and academic spin-out companies are particularly interested in getting attention from such funds, and pharma has to compete with the funds for access to such innovation. So although corporate venturing has been going on somewhat under the radar for decades, but more latterly the concept of pharma working with venture partners has ramped up significantly. 19 of the top 25 pharmaceutical firms are investing directly, or as limited partners in, venture funds. These funds predominantly make strategic investments to secure access to external innovation. Like Big Pharma, a number of Europe’s mid-sized pharmaceutical companies have more latterly chosen to establish venture funds as one way of understanding what is available. Examples of such funds include Norgine, Morphosys, Lundbeck, Merz and Pierre Fabre; interestingly, all have gone it alone so far rather than investing as a Limited Partner in other funds, as some Big Pharmas have chosen to do in addition to their own corporate venturing activities.

Three important challenges for effective Integrated and Open Innovation

The reality of pharma R&D today is therefore one of a spectrum of activities with partner companies or institutions involved in almost all innovative activity, and diverse partners providing value in different ways across the spectrum:

The Integrated and Open Innovation Spectrum for Pharma Companies

The key to success is integrating these diverse methods of innovation in a way that gets the most out of each. This presents three important challenges: finding quality, embracing the outside, and managing the integration of outside and inside. All require skills and expertise internally to the organisation that have not necessarily been developed through the organisation’s history, where a culture of “success-from-inside” can take a long time to adjust.

The first challenge of finding the external quality that is needed is significant. It is often hidden in an abundance of companies and institutions and service companies that are more than happy to promote their perceived advantages but less willing to discuss their “Achilles Heels”. The sheer abundance can create complexity and overload in search and evaluate activities, both in terms of the capacity to search and the skilled internal R&D/Commercial capabilities to triage and evaluate.

Secondly, to secure value from partners that have been found in an “open” way, internal pharma executives must genuinely embrace the value of external innovation and the associated notion that innovation performed outside of their own organisations can be of higher value than innovation performed inside. If this is not a widely shared and reinforced cultural belief, internal organisations can directly or indirectly stifle partners’ innovation.

Finally to be fully integrated, pharma executives must manage the realities of multiple partners that are not fully controlled and have very different cultures, management systems and points of view. This requires leadership and influence skills as well as bespoke processes to make sure that the best is brought out of every partner that the company engages with.

Embedding Integrated and Open Innovation successfully

Addressing the three challenges of embedding truly Integrated and Open Innovation that are described above is easier said than done. The leadership, project management and partner-oriented competencies required are very different to the competencies that are traditionally developed through moving up the ranks in large R&D centres. To add to this, the sheer volume of external opportunities creates organisational complexity.

One solution to the challenges is to create entirely separate and dedicated open innovation business units or entities such as Johnson & Johnson’s JLabs and Pfizer’s Centers for Therapeutic Innovation. With Big Pharma scale this can be done, and the philosophy of creating focused and dedicated teams with all the skills needed to address the challenges is sound. However the question is how this leverages the internal capabilities that can understand and create more value from the external partners’ capabilities or assets or technologies. If these are separated organisationally, the company risks working at two speeds, internally and externally. Without internal and experienced eyes on external opportunities the risk is first that external efforts are not triaged well or given the best chance to succeed and second that internal capabilities are not constantly enhanced by wiring to the external world.

Companies must therefore foster a strong external/open innovation culture throughout R&D by carefully managing the interfaces between external innovation groups/entities and internal groups/entities, as well as the R&D-Business Development interfaces when both parties are involved in searching for partners. The interfaces challenges are particularly acute in mid-sized and smaller companies that do not have the scale to create large internal units dedicated solely to open/external innovation. But the opportunity for integrated internal/external innovation is greatest when these challenges are addressed head on rather than separated organisationally.

We expect pharma companies to continue to apply their significant R&D resources and financial muscles to search for and bring in external innovation, going out of their way to be seen as both open to outside sources of innovation and partners of choice for other companies. Not all of the investments will pay off and the integration with internal resources will be difficult, but the competition for quality innovation is so intense that the Open and Integrated Innovation that is required to succeed is here to stay.

Aligning R&D activities with commercial realities is an issue as old as the pharmaceutical industry itself. The importance of a commercial perspective in R&D is increasing as the downward pressure on drug prices and limitations on market access from private and public payers continue to increase. This is particularly pressing in areas where medicines do not offer differentiated advantages over existing treatments. In parallel, as pharmaceutical organisations have become more complex, regions have become more fragmented, and organisational functions have become larger, it has become increasingly difficult to ensure integrated and holistic commercially-oriented behaviour in R&D. Our experience is that this causes significant frustration in both R&D and Commercial functions, not to mention unrealised value creation. In this Novasecta Note we explore the R&D-Commercial interface and what can be done to improve it.


Every year, the pharmaceutical industry spends in the region of $140 billion in the pursuit of innovation, yet productivity has fallen consistently over the last 60 years. Much has been made of this decline, with Scannell et al. proposing Eroom’s Law –  “the number of new U.S. Food and Drug Administration (FDA)-approved drugs per billion U.S. dollars of R&D spending in the drug industry has halved approximately every nine years since 1950, in inflation-adjusted terms” (Nature Reviews Drug Discovery 11, 191-200, March 2012). Regardless of where one stands on the productivity debate, most will agree that opportunities for improvement exist within any R&D organisation, and internal effectiveness is paramount to preventing the already-high cost from soaring out of control. In this Novasecta Note, we ask how can pharmaceutical companies ensure that the increasingly expensive costs of drug development will result in assets that get patients, physicians, and payers excited?

Novasecta believes that improvements can be made by actively fostering better relationships between the right Commercial and the right R&D colleagues. Solidly connecting the R&D organisation to the realities of the market and customers can seed the development of products that will meet stakeholder needs in the future. This requires persistence and patience: it is as much a people issue as it is a technical issue, and as such delivering impactful change requires appropriate effort, focus, and a long-term perspective.

A Conversation Culture

Despite significant investments and substantial experimentation with different R&D models, the delivery from R&D of value-enhancing products that are commercially successful remains inconsistent. That is not to say that reorganisations or operational excellence initiatives lack merit – they can, of course, add value. It is simply that these approaches often fail to address the underlying problem: the culture and ethos of the organisation. How do the people who make up the company interact with one another, seek input from colleagues, and approach decision-making?

In our experience, critical decisions are often left unaddressed until a development checkpoint is reached. While these milestones are necessary for good governance, they should never become the sole forums for decision-making. Rather, major milestone gates should serve to ratify decisions made by an on-going series of conversations between the people with the relevant expertise and perspectives, armed with relevant commercial and scientific data and insight. This will create an organisational understanding of the end-to-end process of R&D and commercialisation and, crucially, bring that understanding to day-to-day decision-making.

Speaking the Same Language

It is possible to create better commercial instincts and capabilities for decision-making in any R&D organisation. This involves bringing clear commercial thinking into the process at the very early stages, well before clinical proof of concept. Importantly, this dialogue must flow in both directions, for commercial functions to understand the R&D process and future assets.

Across the pharmaceutical industry, many intelligent and well-intentioned employees operate in systems that consign them to generate sub-optimal outcomes. Insight into the commercialisation process and deep corporate knowledge of payers, regulators, clinicians, and patients is lost in translation between the often highly diverse and somewhat disconnected market-facing functions where these insights are captured, and the R&D organisation that must apply them to capture future value.

Commercially-Oriented R&D

In our experience, commercially oriented R&D requires three core enablers:

These enablers are deliberately focused on people, process and capabilities; as we have found these are the ultimate keys to success. Deep knowledge of, and existing relationships with, external stakeholders is the foundation. To unlock the power of this knowledge, companies must systematically translate and incorporate the explicit and implicit knowledge into the thinking and decision-making processes of the organisation. This way, sizable investments can generate outcomes that are relevant to, and valued by, the market place.

In time, organisations can be evolved to make better choices related to both R&D and commercialisation. R&D can be better enabled to generate more products of value, while commercial functions can be afforded the time necessary for optimal launch planning. There are many benefits from making the effort to understand one another.

Artificial intelligence is one of the hottest topics in the pharmaceutical industry and there seems to be an almost daily stream of stories about its benefits. This is leading to questions about whether the hype is justified, and if it be shortly replaced by something else. To get an insider’s perspective, Novasecta interviewed Don Van Dyke, Chief Operating Officer of Cloud Pharmaceuticals to hear his thoughts on what the potential of AI is and whether the hype is justified.

To read our whitepaper on “What Pharma Should Do About AI” click here

Pharmaceutical companies are increasingly entering into R&D collaborations with external parties that create Intellectual Property (IP) and competition law considerations. The pharma companies’ legal teams have a critical and important role for the success of such collaborations. They are the “risk gatekeepers” between the internal and external worlds, ensuring success through a balanced approach to risk mitigation. An excessively risk-averse approach can hinder the potential outcomes of a collaboration or at worst terminate it before an agreement can be reached. On the contrary, limited effective risk assessment and mitigation can endanger the company’s unique advantages. To explore good practice in this area we have explored the “voice of legal” based on a set of targeted interviews with internal and external lawyers and our experience. Our conclusion shows that if innovation teams partner with legal up-front, “legal” can be a force for success in R&D collaborations rather than the stereotypical obstacle to closing partnership deals quickly and effectively.

In this paper, we cover the important legal considerations that R&D teams must consider as they engage with external parties such as industry consortia, academic institutions and other pharma/biotech companies. First we review how best to manage and own the Intellectual Property (IP). Then we explore how to deal with contamination and spillovers, and finally we will look at compliance and jurisdiction laws that can have an impact on R&D collaborations. We have based our paper on a set of interviews with lawyers at pharmaceutical companies and external lawyers who work across industries including pharma/biotech.

Clarify IP ownership and licence arrangements early on

In the Pharma industry, the management and ownership of Intellectual Property (IP) can be highly complex and challenging issues for companies and their partners when embarking on R&D collaborations. Pharma companies tend to hold on to their IP very tightly as it is considered to be its main value creator and an entry barrier to other competitors. In that respect, Pharma companies can be quite traditional when it comes to IP: they are very IP rich, aware of it and are not willing to share it or open it easily. To address this frame of mind, companies need to look at their IP with fresh eyes and draw the line between sharing and giving access to what is not critical while retaining a competitive advantage by protecting what is considered their own and should therefore remain a black box to the partners. This can require a change of mindset with regards to what is important IP and what is not.

When initiating a partnership it is critical to start with the difficult discussion first and agree with all parties how new created IP will be managed and who will own it. Questions to answer include: who is responsible of filing the patent? Who is going to pay for the costs? Who is protecting it? Will it be used in different fields of activity between the partners? What happens when it is licensed to others? What are the rules and royalty payments? What happens when it is sold? The innovation team needs to think about all aspects of the collaboration and have a discussion with the partner upfront about such matters.

It is also important to note that IP ownership is not always necessary, especially if a broad and strong license is negotiated. A licence can be good enough and in some cases may be better than ownership, as it carries lower risks. This is often the case when partnering with academia: pharmaceutical companies can prefer to access IP through licensing or options from the academic scientists to build trust. Academics are motivated by doing cutting edge research, publishing papers, filling patents and accessing funds, while sharing the risks and rewards, which should be considered when negotiating the partnership. The fear over IP is increased if the partnership involves parties of different sizes: it is important to be transparent to nurture a trusted relationship with the partners of all types. In the special case of co-ownership of IP all details from the logistics of the filling to the split of the potential reward should be defined, clarified and settled early on.

Some companies prefer to work with the same partner once the trust and ways of working are agreed, as it makes the following collaborations easier. In the case of multiple parties partnering with an academic institution or centre, it is important that the industry partners have a common approach to simplify the complexity from having multiple parties involved.

For IP, pharma companies should therefore ensure alignment across the organisation regarding IP considerations as follows:

  1. Involve the legal and patent team early on in partnership discussions
  2. Develop a clear risk mitigation plan and share it with the senior management and the partnership team to make sure that the IP risks are clearly understood and accepted
  3. Ensure that good internal governance is in place to address IP risks

Manage contamination risks proactively

A commonly mentioned risk when working with external partners is contamination. In the excitement of research and motivation to solve problems, won’t scientists divulge more than what it is in scope for the collaboration?

For this specific risk, the legal team has the opportunity to play an important role in helping the company to protect its critical secret sauce, its value creation engine and its technological differentiation. Education of the innovation team and the scientists working directly with the partners on the legal risks associated with the specific project is indeed the first safeguard to be put in place against spill-overs and contamination.

Scientists need to be on top of what is specifically in scope for the partnered project and what is not. The awareness should cover all workforce and not be restricted to senior staff. In the case of technology transfers, the confidentiality agreement needs to define and clarify the remit and set up good working practices. The Stevenage Labs is a good example of successful collaborative research between GSK scientists and external scientists that can come and use the lab. One of the reasons for its success is the dedication of space to the specific scope of planned collaborations to avoid contamination. A data repository related to each collaborative project can also be separated and ring-fenced from other proprietary data.

To avoid contamination and negative spill-overs:

  1. The legal team should be very proactive, drafting policies, frameworks and procedures
  2. The organisation should be clear from the start of the collaboration about what information data, methodologies, processes, capabilities and technologies are to be shared and how
  3. Scientists should record and track their work to ensure traceability in the case of future litigation

Stay on top of competition law changes and jurisdiction variability

Competition laws are designed to ensure competition between companies, so R&D collaboration agreements between pharmaceutical companies can raise compliance issues. This is therefore a dimension that needs to be considered carefully when entering into an R&D collaboration. Even if EU competition law and US antitrust law are similar, it is important to understand national competition law subtleties when partnering outside of those geographical areas.

As an example, the European Commission document “Intellectual property and legal issues in open innovation in services” raises a number of questions in connection with Open Innovation and competition law. The use of intense networking between companies to develop the creative commons and positive spill-over effects implies a concentrated market structure, and significant cooperation between companies. This prompts legitimate antitrust concern and can result in calls for a competition analysis. The document does also recognise the complexity of Open Innovation projects and generally does not have a problem with research and specialisation agreements, and in fact positively encourages them in the framework of research programmes (e.g. Horizon 2020). Competition law will always be modernised as new creative partnership agreements are signed, and innovation teams need to work closely with their legal teams to ensure that the agreements are compliant with the latest competition laws in place. For example one such modernisation of competition law occurred with the European Community Merger Regulation adopted in 2004.

There is a perception from some pharmaceutical companies that the UK politically has always pushed for innovation, and promoted partnership and collaboration with academia. This is probably a reflection of the UK succeeding in creating a ripe environment to bring academia and industry together by facilitating access to funding from non-governmental organisations (such as Cancer Research UK and Medical Research Council, as well as the European Commission. On the other hand, US regulation is typically perceived to be less favourable, though this may change in the future. The Leahy–Smith America Invents Act (AIA) was implemented in 2013 and it switches the US patent system from ‘First to invent’ to ‘First inventor to file’. This aims to reduce the patent protection but potentially reduce the number of IP litigations.

In summary, the innovation teams of Pharma companies should work closely with their legal and patent teams to understand and keep up to date of the regulation of the territories in which their R&D collaborations will be active, be it for competition laws or patent regulations or both.


Many Pharma companies are now seeing the benefits of R&D collaborations, and those that have not yet done so are typically looking for ways to do more. Pharma companies tend to be more comfortable with taking higher risks as they have more funding and money than their smaller biotech counterparts. Smaller biotechs tend to be less well funded and are therefore more protective, using R&D collaborations and consortiums to plug their funding gaps. In this context he biggest challenge for Pharma companies is to accept that in R&D collaborations some control may be lost, and to put in place mechanisms to mitigate the risks.

Pharma companies’ innovation teams therefore need to collaborate with their legal teams early on. If teams are not able to collaborate internally with each other effectively, external collaborations become even more challenging. Nurturing a collaborative mindset across functions and departments is critical: with this mindset, the legal team can be a force for good in delivering successful R&D collaborations through:

  • Clarifying IP ownership and licence arrangements early on
  • Managing contamination risks proactively
  • Staying on top of competition law changes and jurisdiction variability

In 2010, Morgan Stanley urged pharmaceutical companies to “Exit Research and Create Value”: an attractive proposition for those executives who had been seeing R&D consume enormous resources while generating limited returns. The reality today is more complicated. Integrated pharmaceutical companies remain dependent on R&D to create their future products, but they know that their R&D model can always be better. For all but the very largest pharmaceutical companies the option to acquire de-risked or near-market assets is unattractive given prohibitive capital requirements. So excellent R&D is as essential to pharmaceutical companies’ success as it always has been. It is simply too dangerous to hope that others will constantly produce compounds and drugs in your chosen commercial area at a price that is affordable to in-licence or acquire. Pharma companies need to manage R&D to create value.

Managing pharmaceutical R&D is hard. It is a complex system that integrates science, people and money in the hope of creating amazing medicines. Potential products can and do simply fail completely after years of work and tens or hundreds of millions of Euros of investment. This makes R&D both extraordinarily valuable when it works, and frustratingly disappointing when it doesn’t. Every pharmaceutical company knows deep down that its R&D could be better, and wants it to be better. The temptation is then to see the “grass as greener” outside the internal organisation, and somehow solve the R&D problem by buying it from outside. Novasecta firmly believes that an excellent internal R&D organisation has the potential to create better products faster than leaving R&D to others. Pharma companies need to actively manage R&D to create value.

Management of R&D requires attention to strategy, action plans, and the management system

Managing R&D effectively requires us to find ways to “eat the elephant in bite-sized chunks”. Clearly having a reality-based and dynamic strategy is pivotal, but it is only when strategy moves from fine words to action plans with concrete measures and goals that it becomes effective. And such action plans need a coherent management system to move the action plans into reality. Through these three layers of managing R&D we see five particularly difficult dimensions that drive R&D productivity, as illustrated in the figure above. Below we discuss these in turn.

1. Create a dynamic R&D strategy in your own reality

Great strategies are clear, communicated and understood within the organisation. They are also realistic and feasible. It is imperative that an R&D strategy accounts for the strengths and weaknesses of the organisation, so that strengths can be fully leveraged and weaknesses addressed acknowledged and dealt with. It must also constantly adjust to rapid changes in the market environment. Dynamic strategy is the hallmark of sustainable success.

The Swiss mid-sized pharmaceutical company Actelion is one example of a company with a clear R&D strategy that was built on a deep understanding of its distinctive R&D capabilities. Actelion’s R&D was built from combining world-class expertise in rational drug design, cardiovascular research, an understanding of the endothelium, and small molecule development. This was initially successfully applied to develop strong product offerings in the pulmonary arterial hypertension (PAH) space. On the back of commercial success in PAH with Tracleer and Opsumit, Actelion then dynamically changed: leveraging its R&D platform to develop assets across multiple new therapy areas through a single R&D centre that uses a high degree of medical input to select attractive future franchises. Such a repurposing and amplification of an organisation’s existing strengths are the foundation of effective R&D strategy, and can significantly improve the chance of repeating single-product successes.

2. Good strategy must cascade to action plans

The two most important areas where translating R&D strategy into action plans can be most effective are portfolio balance and sources of innovation. The focus on a balanced portfolio is deliberate: an R&D organisation that is not centred around and constantly planning its portfolio and projects is one that will have difficulty bringing products to market. And the importance of engaging diverse sources of innovation internally and externally cannot be underestimated.

Clear action plans, practical things that the organisation will do differently, are therefore required to define the set of activities that will enable the R&D organisation to access multiple sources of innovation and place them into an appropriately balanced portfolio.

One example of an organisation that has sought and brought in ideas from a multitude of sources is family-owned Boehringer-Ingelheim. Following successes through external collaborations, in November 2015, Boehringer-Ingelheim publicly pledged an investment of €11 billion into R&D over five years, with 30% of its planned €5bn pre-clinical investment earmarked for collaborations with external partners. Taking action with a clear goal to increase collaborations through open innovation while maintaining internal R&D capabilities increases speed, flexibility and provides rapid access to new technologies and therapeutic areas.

Shaping the fruits of innovation into a well-balanced portfolio is crucial to managing risk and productivity in R&D. Genmab has built a balanced portfolio on the back of its recognised strength in antibody technologies. This consciously planned technology platform approach has generated numerous unique assets at each phase of clinical development, and almost all have multiple additional indications. The intention is to partner these assets during later stage development, capitalising on a partners experience in various medical areas.

The actions of companies like Boehringer-Ingelheim and Genmab are evidence that inspiring strategic words can and do get translated into action plans that drive action to create value. Whether sourcing external innovation of building a balanced R&D portfolio, pharmaceutical companies can and should specify concrete action plans to make sure this happens.

3. The management system will make or break any strategy and action plan

The best strategies and plans need a management system that enables them to get done. A management system is a complex combination of organisation, processes, culture, governance and people. But there are two dimensions that have the potential to make or break good strategy and action plans: project leadership and governance.

Successful companies have broken the perhaps inexorable habit of people in organisations creating functional silos by putting in place strong project leadership. This is certainly easier said than done: old habits die hard and the comfort of a line management position with functional responsibility is a different world from the uncertainty and accountability of project progression.

Successful R&D organisations therefore adopt a project-led mindset, recognising projects as the source of true value in R&D. In these organisations, functional resources are deployed on an as needed basis to secure project success. Creating a culture that recognises the inherent value of projects over functions is crucial. Without naming names we have helped several pharmaceutical companies to make this mindset shift, for example through a lean R&D model with significant levels of externalisation and very senior and capable project leaders. These leaders are fully supported by slim senior governance bodies to get the necessary resources required to drive projects forward. Importantly the whole organisation appreciates that this flexibility is an absolute prerequisite for speed and success.

Similarly fit-for-purpose governance may sound simple but is frustratingly hard to pull off. Even the word “governance” has overtones of bureaucracy, too many people, and endless committee meetings and powerpoint. Fit-for-purpose governance on the other hand brings only the right people to the table at the right time, and has a dynamic flavour that enables decisions to be made with the speed and quality that they deserve. Done right this can drive continuity, reinforce the R&D strategy and measure progress against the agreed action plans. We have worked with several companies to re-create and simplify R&D governance mechanisms to maintain clear oversight of progress and speed-up decision-making. Crucial to the success of these new decision-making groups is an extremely focused remit and buy-in and communication with senior corporate management.

Addressing the five dimensions of managing R&D will increase value

The essential job of managing R&D to create value means (a) creating a reality-based strategy, (b) making it real through action plans for the portfolio and sources of innovation, and (c) creating a management system with strong project leadership and fit-for-purpose governance.

So managing R&D to create value is not as quick or simple as “exiting research to create value”. But it is for sure a more powerful way to create the fantastic medicines that will benefit patients and sustain the future of a pharmaceutical company. It is well worth the effort.

While our industry continues to find diverse ways to ensure cash is applied to early-stage R&D – for example venture funding, option-based partnerships, acquisitions, and more recently IPOs again – funding clinical development is becoming tougher, particularly the later and more expensive stages. We are beginning to face a new funding shortage: pharmaceutical companies and their investors appear to be less willing to finance clinical development through their P&L accounts than they are to find cash for deal-making and M&A. How can pharmaceutical companies secure funding for their most important clinical development projects? Alternative funding models have started to emerge in recent years that can provide access to capital with control over the asset and its development. In this paper we classify the available funding options today, and then discuss the key attributes and risk implications of each. We offer our views on how MidPharmas can explore funding arrangements which are best suited to their stability, scale and long-term strategic goals, ensuring the right balance between accessing capital today and giving up value tomorrow.


The capital-intensive nature of drug development means that securing adequate funding for R&D remains a central challenge for the pharmaceutical industry. Published average R&D costs per new medicine indicate an upward trend over the last decade, with the most recent estimate from Mestre-Ferrandiz et al.1 standing at approximately $1.5 billion. While such figures are full of debatable assumptions regarding capital costs and attrition, there is no doubt that the cost trend is upwards. Coupling this trend with the ongoing concerns related to R&D productivity places companies under constant fiscal pressure to justify their R&D expenditures.

Whether return on investment or NPV or other measures are used to assess the value of clinical projects and prioritise between them, two fundamental issues must now also be considered: the source of funding and how to mitigate the associated risks. Are there sufficient internal funds to support the development activities? Alternatively, what are the additional sources of finance that can help to relieve P&L pressure?

In this paper we classify the various types of available funding for clinical development in the pharmaceutical industry. We also discuss the key attributes and nuances of these options, and what they mean in practical terms for companies in search of capital flexibility and de-risked clinical development.

Alternative ways to fund clinical development

Historically, sources of additional funds for clinical development were limited to debt, sale of equity and/or out-licensing assets through deals that share the value of the innovation with a partner. Alternative models have emerged in recent years that offer more tailored financing and risk management solutions for pharmaceutical companies. There are now five main types of clinical development funding for pharmaceutical companies (Figure 1):

  1. Internal budgets.
  2. Conventional finance.
  3. Revenue-based finance.
  4. Asset-centric finance.
  5. Asset-centric entity.
Figure 1. Five types of funding for clinical development.

We describe the characteristics of each funding type in turn:

Internal budgets: Financing from within the organisation is usually preferred in cash-rich companies with a steady profitability stream from marketed products. In this instance, the core functions of R&D, Corporate and Commercial need to be aligned on budget allocation, balancing strategic goals with appropriate use of internal cash, and avoiding excessive burden on the company’s P&L.

Conventional finance: This comprises borrowing with potentially high interest costs or raising funds by selling equity. A number of implications arise for both private and public companies including dilution of equity, financial risk spread over the entire organisation, and whether the increased R&D spend that would result is an acceptable rationale for the financiers providing debt or equity.

Revenue-based finance: This involves selling some or all of current or expected product revenues in exchange for capital to invest in either clinical development or other priorities. The most familiar form of this funding is termed ‘royalty financing’, involving the sale of an existing royalty stream, which would have been created as part of a separate licensing or partnership deal. Another variant includes creating a synthetic royalty where none had previously existed, also known as ‘revenue interest financing’. A synthetic royalty is derived from revenues for products that are developed and marketed internally (as opposed to by a licensee or partner), and the revenue interest is sold to the capital provider. In both instances, the capital provider assumes a share of the commercial risk whilst the royalty seller retains full control over the product(s). The products in question are usually near or at commercialisation stage. Although revenue-based finance provides a non-dilutive source of capital, the seller may risk losing substantial upside in cases where the products that create the revenue or royalty streams exceed sales expectations.

While revenue-based financing is technically feasible for companies to use on any product’s revenue stream, transactions to date have been most common for supporting well-defined and near-term capital requirements, as exemplified in the AstraZeneca – Royalty Pharma deal2. In 2006 AstraZeneca acquired Cambridge Antibody Technology (‘CAT’) including its passive royalty interest related to Abbott’s Humira. The $1.3 billion transaction triggered mixed reactions from industry analysts and investors, questioning the balance between strategic fit and the seemingly high price premium that was paid. AstraZeneca’s subsequent move to sell the Humira royalty stream to Royalty Pharma effectively reduced the net acquisition cost to $300 million (after adjusting for $300 million existing cash in CAT and the $700 million value of the Humira royalty stream).

Asset-centric finance: This encompasses most archetypal licensing and co-development partnerships to further develop specific clinical assets. In addition to securing funds, this enables the licensor to leverage the licensee’s expertise and development resources, as both parties have a vested interest to progress the product’s development. Although upfront payments provide cash infusions to fund existing operations and defer the need to obtain capital from the equity or debt markets, such transactions also involve giving up all or partial control over product development and downstream financial benefits. Often deals can be designed to incorporate option terms, thereby increasing flexibility in managing risk profiles and providing leeway for unexpected strategic decisions by either partner.

Though the providers of asset-centric finance have traditionally been larger pharma/biotech companies, over time various types of clinical research organisations (CROs) have experimented with this model. Solvay’s pioneering risk-sharing deal with NovaQuest (then part of the Quintiles group) in 2004 was one example3. More recently SFJ Pharmaceuticals (‘SFJ’) has entered the area. With capabilities rooted in both financing and providing CRO services, SFJ provides funds and resources to assist with Phase 3 trials in exchange for future royalties4. However providing finance means taking risk, and SFJ recently announced mixed results from their two partnered Phase 3 trials in oncology. The disappointment and potential loss in investment from its Pfizer trial (dacomitinib) may be offset with the good news from its Eisai partnership (lenvatinib) with anticipated downstream rewards once marketing approvals are achieved. To maintain momentum, SFJ will need to recoup a hefty premium from future successful programmes.

Asset-centric entity: In this model, a company places the rights to an asset in a separate entity that is part or sole funded by other investors. Asset development is carried out in the new entity, and the donor company can have the option to re-acquire the asset and the entity after a pre-determined milestone, usually after achieving proof-of-concept. Each party benefits: the investor can have a pre-determined exit strategy to obtain sufficient returns, and the donor company obtains funding for development that does not hurt its P&L yet retains an option to re-acquire the asset and thereby replenishes its R&D pipeline. The lean and nimble setup of an independent entity can also reinforce objective decision-making in driving asset development.

This type of model is well illustrated by Arteaus Therapeutics (‘Arteaus’)5. In 2011 Lilly granted rights of its monoclonal antibody drug LY2951742 to Arteaus. Established as a private company with $18 million investment from Atlas Venture and Orbimed, Arteaus’ sole purpose was to investigate the drug’s potential in preventing migraines. Following promising results from a Phase 2 study, Lilly exercised its option to re-acquire LY2951742 in January 2014. Here the investors successfully exited from their initial investment and Lilly can now accelerate the subsequent development of a promising drug candidate.

Though the concept of asset-centric entity is sound, it is tough to execute. The initial suspicion of external investors is generally that they only get to invest in the projects that pharma/biotech does not want, which increases perceived risk. A strong and credible strategic rationale for creating the entity (rather than own-development or licensing) is therefore essential. This is arguably easier for MidPharmas that have to be commercially focused and by definition create valuable non-core assets than it is for Big Pharmas that can usually fund and commercialise any asset with potential.

MidPharma experiences with new funding models

Despite the almost universal P&L pressure we are hearing from our R&D clients, the number of published examples of more novel alternative clinical development funding activities has been limited to date. We suspect this is simply a matter of time: there is no imminent sign of a return to the days of pharmaceutical companies generating reliably high profits that allow internal funding of a wide variety of promising projects. However there are already interesting examples that provide some pointers to the future (Table 1).

The reasons for each of these deals are diverse, just like the companies that are executing them. It is interesting to note that in each case the proportion of revenue that was being spent on R&D at the time of the deal was generally higher than conventionally assumed to be the appropriate level in the industry. This points to more usage of external financing in future as companies increasingly face pressures to reduce R&D spending and move clinical development spending off their P&Ls.

Table 1. Published examples of different financing options.

Source: Company annual reports and 10-k forms. Currency conversion with annual average exchange rate from

How should MidPharmas address funding issues?

In our previous white paper15, we discussed how MidPharmas could benefit from combining their ambition and stability with the mentality of biotechs to achieve R&D efficiency and productivity. Could MidPharmas embrace a biotech-like mentality when it comes to financing? Inherently the funding requirements and long-term strategic goals differ considerably from their biotech counterparts: MidPharmas, often privately held or family owned, can be averse to public markets and corporate acquirers.

For MidPharmas there is a fine balancing act to deliver value from the internal portfolio while satisfying financial budgets. In some instances this can lead to the misallocation of funding between projects due to misalignment of organisational goals. Critical financing decisions must be made to ensure that the most value-generating projects flourish and those that are not are discontinued on a timely basis. To supplement traditional business case analysis, five core drivers must be considered when making financing decisions:

  1. Financial resources.
  2. Risks.
  3. Revenue impact.
  4. Control of the asset.
  5. Development capabilities.

We describe each of these drivers in turn below:

Financial resources: Each company must constantly assess the best use of all its financial resources, including how these are allocated to R&D projects (linked to portfolio management). From the perspective of a CFO, one concern could entail the best use of surplus cash reserves; retain cash for future acquisitions or expense it in additional R&D efforts? On the other hand, increased borrowing could relieve a lack of sufficient cash reserves in the short-term but could result in the company being vulnerable during a recession or susceptible to takeovers. Transactions for funding clinical development can affect the health of the company’s balance sheet and P&L, and such implications should be considered carefully.

Risks: These include (but are not limited to) regulatory risks, financing risks, execution risks and reimbursement risks. Can the most relevant risks associated with a particular business model be identified and mitigated accordingly? How much of these risks can be shared with a partner? Conventional financing (debt and equity) could lead to financial risk being spread over the whole organisation. Revenue-based financing allows a portion of the commercial risk to be transferred to a capital provider. In asset-centric financing, depending on the deal terms, all or part of the development risk can be mitigated to a partner, financial risk can be reduced, and option terms can offer flexibility in terms of risk sharing. In asset-centric entities, financial and development risks can be mitigated by transferring them to a new entity.

Revenue impact: Selling part or all of future sales revenues in exchange for capital today will improve cash reserves in the short-term but at the cost of future upside potential, i.e. reducing future profits once the product is commercialised. This approach is particularly advantageous to cash-starved companies and minimises commercial risk, however corporate sustainability is consequently put at risk.

Control of the asset: In exchange for funding, the loss of ownership of an asset and IP can often occur. The extent of this loss must be considered in the context of several factors, for example whether the asset represents a core or a non-core asset, the company’s strategic focus, and the company’s culture.

Development capabilities: In addition to gaining funds, it is advantageous to simultaneously gain access to development capabilities that may be lacking in-house. A suitable partner will both provide those capabilities and set a platform for potentially later integrating new capabilities to ensure future commercial success.

A flexible and integrative approach to funding

To date the creativity that has been applied to financing early-stage projects and companies has not been as widespread in the more expensive area of clinical development. Companies should continue to exploit multiple financing models to provide options and flexibility in funding. Assets should be valued using appropriate and rigorous methods to facilitate negotiable deal terms and risk profiles. Creative alternatives should be identified and explored, and the key R&D, Corporate and Commercial functions must align behind clear and justifiable choices. This all represents a significant technical and managerial challenge. And as funds for R&D become tighter, pharmaceutical companies that need to fund their next product breakthroughs must confront this challenge head on.


  1. Jorge Mestre-Ferrandiz et al. “The R&D cost of a new medicine” Office of Health Economics, December 2012
  2. Royalty Pharma Press Release, 26 October 2006 (
  3. NovaQuest Press Release, 1 September 2004 (
  4. SFJ Pharmaceuticals website (
  5. Eli Lilly Press Release, 13 January 2014 (
  6. Eisai Press Release, 7 September 2011 (
  7. Exelixis Press Release, 5 June 2008 (
  8. Symphony Capital LLC website (
  9. Paul Capital Press Release, 1 April 2008 (
  10. Paul Capital Website (
  11. Paul Capital Press Release, 21 December 2009 (
  12. UCB Press Release, 9 January 2009 (
  13. Vertex Press Release, 20 November 2013 (
  14. Healthcare Royalty Partners Press Release, 3 June 2008 (
  15. “A biotech-like mentality in MidPharmas: The winning combination?” Novasecta White Paper, January 2014 (

Dilraj Judge, Euvian Tan, John Strafford, John Rountree

In an effort to address declining R&D productivity in the pharmaceutical industry, many companies have looked to the innovative entrepreneurialism that characterised the original “biotech” companies of the 1970’s and 80’s. This has resulted in numerous restructurings and changes to processes and culture. But what is the real “biotech-like” mentality that the industry is seeking? In this paper we offer our views on what sets the best biotechs apart: focus, flexibility, capital discipline, external oversight, project orientation and culture. We then use a simple, directional set of parameters to assess a group of MidPharmas on these attributes, with some expected and unexpected outcomes and plenty of interesting questions. We offer our views on why MidPharmas provide the ideal environment in which stability and scale can complement the dynamism of the original biotechs, providing a winning combination for long term success.


The pharmaceutical industry as we know it today is rooted in the pharmacies, fine chemicals and dye trades of the late 19th century. The following years saw an era of unprecedented growth as the industry pioneers revolutionised the face of medicine and reaped the rewards. The industry agglomerated, benefiting from economies of scale and giving rise to some of today’s Big Pharma. In the 1970’s and 80’s the breakthroughs in molecular biology and genetic engineering then gave birth to biotechs, causing a splintering of the industry and the biotech bubbles of the 1990’s and 2000’s.

40 years on from the biotech revolution, we are in the midst of another major turning point for the industry. Despite increased spending on R&D, productivity is down, resulting in extensive introspection and reassessment. In simpler industries, increased scale and process optimisation are enviable attributes because they promote efficiencies. Unfortunately, in the pharmaceutical industry these same attributes appear to stifle innovation.

One solution would be to disaggregate the industry into smaller, “biotech-sized”, organisations. Many Big Pharma have adopted this approach, with varying levels of success. Unfortunately structure is only part of the solution, it is mentality and not just size that creates real impact. We see evidence of this among the “grown-up” biotechs, some of which have managed to retain high levels of innovation and productivity despite their large size.

The innovative entrepreneurialism of the industry pioneers and the early biotechs continue to be an aspiration, and to be more like a biotech has now become an industry mantra. In this paper we therefore discuss the issue of scale and provide our definition of the “biotech-like” mentality. We also use publicly available information to rank European MidPharma on their “biotech-like” attributes.

Is scale inversely related to R&D productivity?

Many analyses have sought to establish whether there is a connection between scale and productivity in pharmaceutical R&D. Unfortunately, long development timelines, high attrition rates and the wide variety of business models make such analyses incredibly complex and challenging. Not surprisingly results have been mixed and inconclusive.

Despite these challenges, we were struck by a recent analysis by Matthew Herper1 that took a very simple approach to the problem. This analysis sought to measure the cost of bringing a new drug to market by taking the total spent on R&D over a ten-year period and dividing this by the number of new drugs launched. This was carried out for 100 companies with striking results. Companies that spent over $20bn on R&D over the period spent a median of $6.3bn per new drug launched (14 companies in total). Those that spent between $5bn and $20bn on R&D spent just $2.9bn per new drug launched (11 companies in total).

Although such analysis is crude and fraught with pitfalls, these limitations cannot explain the huge difference in cost between the two groups. All of these companies include R&D spend on post marketing safety studies, and all carry the weight of failure in their R&D costs. Bigger companies chasing larger indications may drive some of the difference, but we don’t believe that this explains all of the increase. It seems more likely that as companies grow to huge scale, innovation and efficiency in R&D suffer.

Big Pharmas appear to agree that size has limited their productivity and ability to innovate and most have already taken steps to attempt to be more “biotech-like” (Table 1). This has often involved disaggregation of the large R&D organisation into smaller biotech style units.

Table 1. Strategies adopted by Big Pharma to be more “biotech-like”.

Sources: Novasecta analysis of company websites and press releases, ordered by sales 2012.

For smaller companies the solutions are not so obvious. European MidPharmas typically spend between €50m and €1bn on R&D, a small amount relative to the Big Pharmas described above. Yet despite their smaller size, many still lack the innovative entrepreneurialism of true biotechs. Many of these companies represent the vestiges of the old pharmaceutical industry, with similar origins in the pharmacies and fine chemicals trades. Unlike “grown-up” biotechs that had to fight for capital, many are still family owned. Such stability has advantages, for example providing a long-term outlook, but it also creates a sense of comfort that can lead to complacency. For these companies we need to look beyond scale to understand the more fundamental aspects of a “biotech-like” mentality.

What is a biotech-like mentality?

What “biotech-like” means in practical terms is open to interpretation as it is used to denote a multitude of metrics, processes and cultural norms.

When George Scangos, then the CEO of a small biotech Exelixis Inc., was recruited by Biogen Idec to be the new CEO in 2011, he swiftly executed a series of steps to “revitalise” the company and make it “more like a biotech”. Some of the key issues he raised were the limited interactions between employees in large companies, the lack of correct incentives and a risk-averse culture 2.

Frank Douglas 3 identified similar themes when he interviewed 26 former and current leaders of R&D departments at major pharmaceutical and biotechnology companies to discuss entrepreneurship in R&D. This research identified several common themes that limit entrepreneurial behaviour in the R&D departments of large organisations. These included: a focus on “shots-on-goal”; inflexible and bureaucratic R&D groups; homogenised rewards systems; underperforming middle management; and a lack of interaction between R&D Heads and the CEO.

Through extensive experience with European MidPharma companies, Novasecta has identified, in practical terms, the six key attributes that are required to achieve a “biotech-like” mentality in a pharmaceutical company context:

  1. Focus.
  2. Flexibility.
  3. Capital Discipline.
  4. External Validation.
  5. Project Orientation.
  6. Culture.

We describe each of these attributes in turn below:

Focus: Focus in biotechs relates to two aspects: that of focusing on distinctive capabilities, and that of having a focused organisational structure. Biotechs will focus on a single or selected number of activities in order to reinforce and build up a selected set of distinctive capabilities. This allows the biotech to differentiate itself from competitors and also attract the top talent within its chosen area of expertise. Focus also applies to the organisational structure. The co-localisation of employees at a single site creates opportunities for employee mingling, the easy exchange of ideas and an energetic culture formed around a single purpose.

Flexibility: Biotechs consist of lean R&D headcounts with smart balancing of internal and external capabilities. This allows for flexibility around capacity arising from pipeline demands without the burden of large fixed costs or the temptation to “make work” for internal employees. Lean organisations also generally result in less bureaucracy, greater ownership and the freedom to act entrepreneurially.

Capital Discipline: Often funded by venture capitalist / private equity companies, biotechs must operate extreme capital discipline in order to survive to the next funding round. Not only this, they must ensure the capital spent produces the type of result that will continue to impress the investor community. A “% of sales” is not allocated routinely into R&D and it is not viewed as a “right” by the R&D organisation.

External Validation: The presence of external advisors and investors on the Boards of biotechs brings valuable external viewpoints and expertise. It provides sparring partners for the management, challenging and championing programmes and increasing the value of the final output. This minimises potential impact from promoting pet projects and limited viewpoints, and forces each program to be assessed more objectively.

Project Orientation: The fate of biotech employees is closely linked to that of projects and the company itself, creating a driver for success. In contrast to function-focused structures found in larger organisations, the internal structures and processes of a biotech are oriented around projects and geared towards supporting progression with a “project is king” mentality. There is a high level of accountability, with an individual with considerable clout usually leading projects and taking ownership of their progress. Further, employees will typically have an equity stake in the company through share options, adding to the sense of “skin in the game” and further promoting a sense of ownership and a desire to push for project success. With increased scale the personal accountability and sense of urgency diminishes and can result in complacency setting in.

Culture: aside from structure and process, the culture of a biotech plays a significant role in its success. This encompasses attitudes stemming from the attributes described above, for example, from a lean structure arises less hierarchy, greater empowerment and decision-making flexibility. The capital discipline means every experiment is significant and project prioritisation becomes paramount, resulting in the direction of resources towards performing the “killer experiments”. These rigorous checks coupled with dispassionate decision-making ensure the fast-cull of assets that do not deliver. This is a stark contrast to resistance to change from “how we have always done R&D” at times found in pharma companies. These aspects, coupled with a can-do attitude are often at the heart of successful biotechs.

How “biotech-like” are European MidPharmas?

Understanding the extent to which a company possesses these attributes requires a detailed exploration of company structure, governance, culture and strategy. This level of analysis is impossible from public sources of information; however, we have identified three directional “biotech-like” parameters that can be assessed from publicly available data:

  1. Deal count: the number of out-licensing deals and joint ventures for internal products per R&D spend over the last five years.
  2. Visibility: newsflow per R&D spend over the last five years.
  3. R&D flexibility: R&D headcount per R&D spend in 2012.

These are classic “biotech-like” behaviours and represent proxies for some of the attributes we describe above. Deal count and visibility both reflect the drive to gain external validation and/or financing through deals and enhanced newsflow. A lower R&D headcount relative to R&D spend suggests increased flexibility and smart balancing of internal and external capabilities. All three parameters have been normalised by R&D spend to account for the wide variation in the companies evaluated.

Using these parameters, we ranked 30 MidPharmas with diverse ownership structures, business models, histories, capabilities and cultures for their “biotech-like” mentality (Table 2). Although it is impossible to draw definitive conclusions from such a crude approach, we believe that the ranking provides plenty of food for thought and raises some important questions for all companies to address.

The high ranking of the top two companies – Denmark-based Genmab and Swiss-based Helsinn – seem to us to represent well the success that comes from a biotech-like mentality. Founded in 1999, Genmab is a quintessential “grown-up” biotech that recently saw its stock price soar due to the progress of flagship oncology products ofatumumab (Arzerra®) and daratumumab, the latter a recipient of the FDA’s Breakthrough Therapy Designation. Family-owned Helsinn, with its lean internal structure and an interesting business model that requires in- and out-licensing, has also grown its business strongly and has demonstrated both a strong track record in FDA approvals as well as confidence in its R&D: 32% of sales were invested in R&D in 2011, with an R&D investment CAGR of 23% over the period from 2007-2011.

Table 2: MidPharmas ranked by biotech-like mentality measured from an external perspective.

Sources:Novasecta analysis of Medtrack, company websites and annual reports.
Notes: 30 selected revenue-generating MidPharmas (2012 revenues below €4bn) were analysed on three parameters as proxies for a biotech-like mentality. The companies were ranked on each parameter independently, and aggregated to provide the final score. Deals analysis was based on Medtrack data on Partnership deals within the last five years where company of interest was listed as Target/Source company. The number of out-licenses for products (each product included once) and joint ventures were counted from this. Visibility was measured through a manual count of the number of press releases (excluding regulated releases) over the last five years. Number of deals and newsflow over the five years was normalised to the total R&D spend over a five-year period. R&D headcount data was taken from company websites and annual reports where publicly disclosed. For the total ranking a median R&D headcount / €1m R&D in 2012 spend was allocated to companies where figures were not available for ranking purposes (marked as n/a in table).

However, other rankings were more unexpected, including those of Shire and Actelion. Low ranked on our parameters, UK-based Shire is well regarded by the markets and continued growth in R&D investment (15% CAGR, 2007-2012). However Shire started with a search-and-develop model prior to acquiring and then developing its own R&D, which is not incorporated in our quantitative assessment. Similarly, Swiss biotech Actelion has been a biotech to pharma success story since its founding with ex-Roche assets in 1997, and had a successful 2013 with the FDA approval of Opsumit® (macitentan) for pulmonary arterial hypertension. However it did come under significant investor pressure in 2011, and its revenue growth appears to be slowing down (1% CAGR 2010-2012). We were also surprised to see UK-based Oxford Biomedica being so highly ranked, yet having decreased its R&D investment over the last five years (-12% CAGR, 2007-2012) and having had a share price drop by almost 70% over the last 5 years.

Our simple ranking methodology of course has its flaws. Counting disguises the fact that some deals and press releases (and indeed R&D heads) clearly have more quality and importance than others. Counting the number of outlicensing deals and joint ventures also favours business models that place a strong emphasis on business development and we can only count those deals that are published. We have included deals for developmental as well as commercial products so our normalisation by R&D spend will favour companies with more commercial deals. Although we excluded regulated releases, visibility still favours public companies. However, we believe all companies should strive to do deals with suitable partners and maintain their visibility and communicate value inflection points. Comparing R&D spend and headcount between different companies is complicated by multiple factors including: tax incentives driving R&D cost inflation, differing commitments to post marketing safety studies, different costs per R&D head in different countries, and different classifications of an R&D head. Finally, as all of these parameters are normalised by R&D spend, our ranking favours companies that spend less on R&D.

Despite these limitations, we believe that our ranking demonstrates well the diversity that we experience in MidPharmas in how biotech-like they really are. It also raises some interesting questions. For example, would companies that are ranked low benefit from behaviour that appears to be more biotech-like to the external world? Would more flexible capacity support their growth ambitions? Could more deals be struck to gain external financing and validation for in house projects? Similarly, are the high ranked companies capitalising enough on their apparently biotech-like behaviours and translating this to increased productivity in terms of both quantity and quality?

Biotech-like mentality in MidPharmas?

While Big Pharma may benefit from being more like biotechs, it is our belief that MidPharmas are better positioned to use biotech-like attributes to their advantage. A difficulty faced by most biotechs is the constant need to raise financing, often putting a strain on management energy and effort. Financial pressures and focus on single asset or technology can also mean that good structure, processes and attitudes are wasted in biotechs.

In MidPharmas, revenue from own sales or royalties, relatively smaller scale, a surviving entrepreneurial spirit and often-family ownership can be combined to provide greater financial stability, amenability to adapt to change and a longer-term outlook. Harnessed properly, this can be the ideal environment for a biotech-like mentality to thrive. While care must be taken to adapt for scale, for example excessively flexible organisations may lose alignment and overly lean structures may lose critical mass, the best aspects of biotechs and MidPharmas can be leveraged to build highly efficient organisations. Some MidPharmas may already appear to be in possession of biotech-like attributes, however, as our ranking shows, the key is using these for greater output. Therefore MidPharmas should explore how to apply the attributes in their own unique contexts, and then drive the changes required to do this. The answer to industry’s constant search for R&D efficiency and productivity may lie in combining the ambition and stability of such MidPharmas with the mentality of the original biotechs.


  1. Matthew Herper “The cost of creating a new drug now $5 billion, pushing big pharma to change” Forbes 11th Aug 2013.
  2. Tony Clarke “Biogen Idec CEO shakes up culture as stock price soars” Reuters, 10 May 2011.
  3. Frank Douglas et al “The case for entrepreneurship in R&D in the pharmaceutical industry” Nature Reviews Drug Discovery 9, 683-689 September 2010.

Hasini Wijesuriya, John Strafford, John Rountree, Tony Sedgwick