The competition among biopharmaceutical companies for externally sourced assets is heating up. Despite recent successes delivering innovative therapies at a faster pace and achieving solid returns for shareholders, demand persists across a range of unmet needs. And yet, companies are increasingly pursuing the same disease areas and targets.1 This “herding” behavior makes it less likely that any company can outperform. Further, the breadth and complexity of all available targets and modalities make it impossible for any given company to rely solely on internal R&D innovation.
Our analysis reveals that external innovation—which we define as assets that were externally sourced prior to launch—has been a reliable source of pipeline expansion, diversification, and value for biopharma companies. Since 2018, more than 70 percent of new molecular entity (NME) revenues have come from externally sourced products. Of these products, roughly 45 percent were sourced before launch.
The dealmaking strategy has helped some companies outpace the industry’s anemic R&D productivity; as we will explain later, external innovation outperformers are three to eight times more productive (based on revenues from their externally sourced assets divided by invested deal values) than their peers. Although sourcing external innovation can be a high-risk, high-reward exercise—and no single winning formula exists for getting it right—we can draw lessons from companies that have done it successfully.
In this article—which details the fifth ingredient (out of eight) for sustained R&D success introduced in our flagship article, “Making more medicines that matter”—we outline four practices that can help companies identify and secure external assets and beat the industry odds:
- harness artificial intelligence/machine learning to identify and assess external innovation early
- streamline decision-making processes in both dealmaking and asset integration
- collaborate with the external innovation ecosystem to maximize the value of your partnerships
- build deep expertise with a laser focus on a therapeutic area (TA) or pathway biology
Across all four capabilities, internal R&D teams play a critical role: from identifying promising assets to crafting comprehensive plans for asset strategy and evidence generation that aim to position their companies as a “partner of choice.” Effective collaboration among R&D, business development, and other contributors to a company’s innovation efforts is essential for maximizing the potential of sourced assets and maintaining a competitive edge.
Investment trends in pharmaceutical dealmaking
The pharmaceutical dealmaking landscape has shifted in recent years, partly in response to the surge in innovation and collaboration during the COVID-19 pandemic. Here are three investment trends that have occurred over the past five years.
Deal volume is down post-COVID-19, but in-licensing deal values are up
In 2020, deal volume stood at 4,900; in 2023, that number fell to about 3,200. Concurrently, deal values declined by 11 percent, from $465 billion in 2019 to $413 billion in 2023, including a sharp dip to $330 billion in 2022. Meanwhile, non-M&A deal values reached an all-time high of $215 billion in 2023, with in-licensing accounting for a cumulative $187 billion.
The number of partnership deals for assets in the discovery and preclinical stages is decreasing
In previous decades, competition made it necessary to explore novel modalities and biologies early, which led to dealmaking at earlier stages of R&D. Since 2020–21, that trend has shifted in the opposite direction, a signal that companies want to derisk their pipeline bets in the current challenging economic environment or are facing late-stage pipeline gaps. Between 2019 and 2023, the volume of partnerships2 at the discovery and preclinical research stages shrank by a CAGR of 9 percent and 4 percent per year, respectively, while the volume of partnerships for assets that were either in the preregistration or postlaunch phase grew at a CAGR of 6 percent per year.
Oncology and select derisked modalities remain deal hot spots
The distribution of external innovation across TAs remained stable from 2018 to 2023. According to our analysis, oncology and infectious disease assets account for sizable shares, at 30 to 40 percent and roughly 15 percent, respectively, in terms of deal numbers, while the shares for cardiovascular and metabolic (CVM) and central nervous system (CNS) assets stayed flat at 5 to 10 percent and 15 percent, respectively,3 despite a rise in industry-wide exploration of the internal portfolio for candidates targeting these TAs.4
Although partnering activity in small-molecule modalities remained high during this period, antibody drug conjugates (ADCs) garnered the most excitement. In 2023, ADC deals accounted for 30 percent of the total invested deal value for partnerships, a significant increase from 13 percent in 2022. Small molecules claimed 25 percent and other (nonconjugated) antibodies accounted for 14 percent. Partnerships for less established modalities, such as cell and RNA therapies, experienced a twofold decline from 2021 to only about 5 percent in 2023.
Key drivers of external innovation productivity
External innovation sourcing has become essential for ensuring a robust and differentiated pipeline. The most successful companies integrate dealmaking into their core strategy to increase their probability of success and enhance overall R&D productivity.
One measure of a successful external innovation portfolio is its productivity—the ratio of future revenues of externally sourced assets to invested deal value. However, determining which deals drive higher external innovation productivity can be challenging given the many variables involved in dealmaking, including the deal type and scope, the time lag between investment and revenue generation, and the additional R&D spend required to turn externally sourced ideas into patient benefits.
How external innovation affects overall R&D productivity
External innovation plays a pivotal role in boosting R&D productivity by enabling companies to adapt strategically, such as by entering new disease areas or modalities, rapidly expanding their pipelines, or pursuing potential blockbuster opportunities. Our analysis assesses the impact of external innovation across five levers of R&D productivity factors (Exhibit 1).
Volume
The sustainability of a large pharmaceutical company’s pipeline hinges on its ability to manage attrition. On average, around 8.5 Phase I assets are required to successfully launch one. That is why many companies increasingly rely on externally sourced assets to expand or maintain pipeline volume and innovation throughput: roughly 65 percent of new molecular entity launches in 2023 came from external sources.
Probability of success
Partnered assets demonstrate a higher probability of success from Phase I to launch, nearly doubling the success rate of nonpartnered assets (19 percent versus 9 percent) from 2015 to 2022 (Exhibit 2). These improved odds can be partly attributed to selection bias (available assets tend to be more objectively scrutinized, which leads to nonpromising assets failing to secure partners) and to the objective, unbiased, and diverse perspectives of external investment decision makers.
Value
Although dealmaking does not directly influence the intrinsic value of individual assets, 60 percent of the top 20 blockbusters today were acquired through external innovation, a testament to the importance of external ecosystems for fueling blockbuster innovation. Companies that outperform (on overall revenue growth and profitability) invested, on average, 28 percent more in deals from 2018 to 2023; they typically made fewer larger deals instead of taking a shotgun approach.
Time to market
Externally sourced assets experience longer times to market, often due to integration challenges such as sponsorship transitions or additional decision-making hurdles. Typically, assets codeveloped from Phase I to launch take approximately 3.6 years (46 percent) longer to reach the market than internally developed assets. However, when clear responsibilities are established and efforts are made to overcome the “not invented here” bias, these delays can be minimized.
Cost
Although external innovation may appear more expensive due to premiums paid on assets (75 percent of biopharma deals averaged one-month-prior premiums for transactions exceeding $50 million in 2023), the overall costs can be offset by the higher probability of success for partnered assets.
To identify which dealmaking behaviors correlate with high external innovation productivity, we analyzed data from the top 50 pharmaceutical companies between 2000 and 2019. Our findings show that the external innovation outperformers were 3.4 to 8.2 times—depending on the period analyzed—more productive than their peers (see sidebar, “How external innovation affects overall R&D productivity”).
The analysis5 identified ten deal features that drive external innovation success. These factors can be grouped under three themes: when to partner, how to partner, and what to partner on.
When to partner
Early dealmakers enjoy higher productivity (exhibit). Three of the top five deal features contributing to success are associated with early-stage dealmaking. Late-stage deal sourcing is often more reactive, aiming to patch existing pipeline gaps—this approach further limits the target, and bargain, options for latecomers. Conversely, companies with clear therapeutic focus and expertise are better equipped to spot and evaluate external opportunities earlier, especially if the acquirer also has a reputation as a partner of choice based on their previous TA and dealmaking history.
How to partner
Collaborative hands-on deal types, such as codevelopment, offer higher-productivity advantages than financing deals. On average, asset-level partnering through codevelopment or in-licensing outperforms M&A, although measuring performance solely based on revenue from sales of an acquired asset may fail to account for other meaningful benefits, such as the addition of new talent and capabilities.
What to partner on
External innovation outperformers excel at identifying winning assets before they become unavailable or overpriced. They are also strategic and selective about the TAs they pursue, as opposed to engaging in opportunistic and less focused dealmaking. And they frequently partner with biotech firms and engage in dealmaking within novel modalities rather than small molecules.
Four practices to maximize external innovation success
Increasing competition for emerging innovation among pharma companies makes it challenging to strike successful deals. While there is no single winning formula, our analyses show that some companies consistently outperform others on external innovation productivity. Based on the insights gained from these companies, we have identified four practices that can increase the productivity of external innovation sourcing and position dealmakers as the partners of choice.
Harness artificial intelligence to identify and evaluate external targets early
To win in the competitive pharma external innovation space, companies will need to identify future breakthroughs ahead of the pack. Outperformers do this by leaning on their scientific expertise and business acumen, along with AI and generative AI (gen AI), to identify promising assets. They also utilize those tools to verify the strength of evidence for potential drugs and to generate insights on pathways, drug targets, efficacy, and safety predictions. These insights can be derived from a wealth of data sources, combining publicly available data (scientific articles, patents, disclosed clinical trial results, real-world data, “omics” repositories) with internal unpublished data (preclinical results and disease and target exploration) to offer a competitive edge within a company’s TA expertise and accelerate assessment, even for assets that have not yet generated clinical results.
For instance, gen AI and large language models can be used to explore emerging science while knowledge graphs of diseases and biological pathways help quickly validate external opportunities by analyzing the likelihood of causal relationships and the strength of underlying biological hypotheses. These explorations and validations could be fed into a real-time decision support tool, enabling a prioritization approach that combines scientific assessment with commercial viability, predicted deal value, and overall portfolio impact.
Streamline decision-making processes in both dealmaking and R&D
Decision-making speed and agility are enabled by three key factors: operating model, talent, and seamless execution. Given the high competition in external innovation, there is an imperative to assess deals quickly, using a multidisciplinary team that can easily tap into the relevant expertise (for technical and scientific evaluations as well as commercial forecasting). The governance structure should allow the company to make investment decisions quickly while ensuring the right expertise is brought in. Some of the most effective setups rely on lean but empowered teams, where entrepreneurial business development leaders can effectively draw from the company’s therapeutic and technical expertise as needed. It is then important to have a clear path to act swiftly on their recommendations to reach the final decisions quickly, with separate and well-defined paths for priority “make or break” deals (which are escalated directly to the CEO level) versus smaller and less disruptive but also important choices. This enables companies to make an offer within two to three weeks after identifying a target, and some are aiming to cut the time gap further to avoid missing opportunities. After the deal is made, it is critical to effectively mobilize the R&D resources to bring the asset successfully and quickly to market, with seamless handovers where needed and avoiding the “not invented here” bias.
Partner with your external ecosystem to maximize value
Private equity and venture capital firms put mechanisms in place to support the success of their portfolio companies—an approach we see emulated by some biopharmaceutical companies. These mechanisms include the following:
- Review rigor and tracking. Portfolio review meetings should track both internally and externally sourced assets with the same rigor, using the same evaluation processes and metrics, such as value to patients, level of evidence, the timely completion of trials, and enrollment rates. Doing so ensures a level playing field when making investment decisions and deciding which assets to move forward. And it optimizes the productivity of all the company’s assets.
- Functional and operational support. Some biopharmaceutical companies have replaced the traditional alliance management approach of biannual progress check-ins with a more hands-on approach, offering their portfolio companies access to their functional capabilities in clinical development, regulatory affairs, and intellectual property (IP), while also deploying operational talent to troubleshoot emerging challenges.
- Cross-fertilization. When biopharmaceutical companies enter partnerships, they can acquire access to enhanced capabilities, technologies, and additional data. These capabilities could be used to maximize the value of their other portfolio companies and assets. However, doing so requires greater transparency (and hence might also require the establishment of additional checks and safeguards) and incentives that encourage alliance managers to actively identify and pursue such opportunities.
Build deep expertise with a laser focus on a therapeutic area or pathway biology
In recent years, outperformers have prioritized depth of knowledge in a chosen TA over breadth. That focus enables better decision making and increases their ability to identify winning—or weak—deals. Experienced and successful actors in the industry often have either dedicated teams or well-functioning interfaces between the business development and TA organizations to leverage a set of critical capabilities: effective scientific due diligence to rapidly assess the technical validity of targets, regulatory and IP expertise to evaluate the risks, and the skills to identify the commercial potential early.
In today’s environment, internal focus and external reach can be true differentiators in becoming the partner of choice. TA specialists can often secure attractive deals despite competing with significantly larger companies because the original asset owner sees them as better equipped to recognize and make the most of their innovation. The ability to pull in the right expertise also makes it easier to identify any potential flaws in the underlying biological hypothesis or technological approach and avoid external assets that are bound for failure. While having a laser focus is crucial for successful dealmaking to support TA leadership, tapping into external innovation also allows companies to hedge risk by placing strategic bets in the lesser-known areas and leveraging deals to expand beyond the core area.
Against the backdrop of intense competition across therapeutic areas and modalities, coupled with growing pressure on R&D productivity, pharmaceutical companies can gain an edge by refining their external innovation strategies, operations, and capabilities to ensure their investments deliver much-needed healthcare innovations.
