How Biopharma Can Accelerate Innovation and Sustain Growth

The biopharma industry has recently innovated at a dizzying pace with the rapid delivery of the COVID-19 vaccines as just one example. Yet, a major challenge looms: how to sustain growth.

Petra Jantzer, PhD, Senior Managing Director and Global Life Sciences Lead, Accenture

Due to pipeline expectations and loss of patient protection, the top 20 biopharma companies are entering a period of low growth. For some companies, this is not just a plateau but a decline with some exceptions. While the rest of the industry is projected to grow at a 12% CAGR between now and 2028, the top 20 companies are projected to trail behind with only 3% growth—presenting an underlying growth challenge that looks and feels quite different from the pandemic year growth.

Biopharma companies have traditionally grown by relying heavily on mergers and acquisitions. More than 60% of the top 30 biopharma companies’ marketed assets have come through acquisitions over the past 15 years. But M&A activity slowed considerably in 2021 and 2022; and while M&A deal costs have come down slightly, they remain high, with average deal premiums around 69%.

Add to that, the past decade of low-cost capital is over. To combat persistent inflation, central banks are steadily increasing interest rates. In May 2023, the U.S. Federal Reserve Bank approved an interest-rate rise of .25 percentage points, the 10th time they’ve done so since the start of 2022 totaling an increase of 5 percentage points during that time.¹ Impacts have rippled across markets, driving new uncertainty and volatility and, most significantly, increasing the cost of capital for all players, public and private alike.

The good news, however, is that there are clear pathways that biopharma companies can take to remain competitive. In early 2022, we analyzed more than 300 M&A deals by the top 30 biopharma companies between 2010 and 2021 to identify four growth strategies that these companies leveraged. In addition, we evaluated which of these strategies shows the most promise in the years ahead.

Growth pathways

Selen Karaca-Griffin, Senior Principal and Global Life Sciences Research Lead, Accenture

Biopharma companies use a mix of growth pathways to achieve their goals. Selecting the right pathway depends on the company's size, agility, and time horizon to achieve growth.

Four potential growth pathways include:

• Architect pathway. Early-stage asset acquisitions—often with a biotechnology platform that enables companies to expand their pipeline across therapeutic areas.
• Builder pathway. Biopharma’s traditional way of bolstering pipeline assets by bolting on late-stage acquisitions.
• Controller pathway. Deals that support geographic expansion or vertical integration, such as growth markets, control supply, raw material, distribution, and/or point-of-sale.
• Ecosystem pathway. Deals focusing on acquisitions of know-how and capabilities that enable faster innovation or reaching customers in new ways via analytics, artificial intelligence (AI), data, new devices, and/or companions.

We found that 70% of all deals in the last ten years focused on asset-based M&A (the builder pathway), which is trending toward unsustainable over the long term, and the architect pathway. Ecosystem pathways are infrequent, with only 16% of the volume of M&A deals and 1% of the deal value. Instead, biopharma companies have been pursuing partnerships with small companies, such as Recursion, Exscientia, and Insitro to access AI-drug discovery capabilities. Finally, only 14% of deals focus on geographic expansion or vertical integration (the controller pathway).

High-cost builder pathway

The $4.1 billion acquisition in 2022 by Bristol Myers Squibb of Turning Point Therapeutics, Inc. is an example of the builder pathway. Another recent example is Pfizer Inc.'s buyout of Global Blood Therapeutics, Inc., a sickle cell disease-focused biotech company, for $5.4 billion. The acquisition, completed in October 2022, is intended to drive growth by bolstering Pfizer's existing hematology portfolio and pipeline.

While we will still see these types of late-stage asset acquisitions, particularly in cases when a biopharma needs to improve short-term revenues and growth, we expect these deals to be highly competitive with high premiums. That's because a target asset likely to pass the next stage of clinical trials is relatively low risk.

Biotech transaction premiums reached record highs in 2021, making inorganic growth increasingly expensive. The average takeout premium in the top 30 biopharma grew from 66% in 2018 to roughly 101% in 2021. This is partly due to the increasing amount of venture capital flowing to biotech companies, with total investments in biotech nearly doubling in 2021 compared to 2019. While the market cooled off and premiums decreased in 2022 to 69%, the builder pathway still remains costly.

Our event-study analysis also found that the builder pathway (late-stage asset acquisitions) has seen adverse short-term market reactions compared to announcements executed from other growth pathways. According to the biopharma executives we interviewed, creating value from late-stage asset acquisitions became almost impossible due to record-high transaction premiums in 2021.

Architect pathway gains traction

Architect growth pathways (M&A transactions involving an early-stage asset) are gaining traction. The number of architect pathways grew 30% in the past five years compared to the previous five years. We expect this pathway will continue to be used, but the primary motivation will shift from getting access to early-stage assets to access to bio-platforms. In fact, roughly half of the few M&A transactions in 2022 were architect pathways.

An example of this pathway is the recent Gilead Sciences acquisition of MiroBio, a privately held UK-based biotech company, for $405 million, which provides Gilead with MiroBio’s pipeline of immune checkpoint agonists and proprietary discovery platform.

The unprecedented pace of innovation in 2020 and 2021 is just the beginning of what we view as a significant and lasting shift in the life sciences industry. Advancements in various emerging biotechnology platforms (such as mRNA, gene editing, and protein degradation) coupled with the application of increased computing power (such as AI and machine learning) are propelling the industry into the fast lane and making it possible to discover treatments for previously undruggable targets.

Leading companies are already beginning to translate complex biological problems into computational ones, fundamentally shifting the traditional approach to innovation (“multiple shots on goal”) into a strategy that leverages technology and data to support the entire pipeline.2 Firms that master this approach will be able to thrive within the unprecedented pace of innovation, but it will require increasing investments in bio-platforms and capabilities, such as AI, to innovate faster.

Increasingly, architecture pathway deals involve bio-platforms. Investing in a bio-platform, understanding the technology behind it, and mastering the repeatable operations enables efficiencies, speed, and lower costs, yielding a competitive advantage over firms following a traditional asset strategy.

Ecosystem partnerships

We also expect ecosystem growth pathways to be leveraged more often, either in the form of partnerships or M&A, to access capabilities, such as AI, that accelerate innovation and time to market.

The increasing shift in drug discovery from labs to computers represents a significant change to pharma’s core business. Today, the nearly 200 small companies focusing on AI-drug discovery are receiving much attention from biopharma companies. Indeed, in the past two years, we’ve seen potential commitments of approximately $27B in AI-drug discovery from biopharma companies. For example, Sanofi and Insilico Medicine, an AI-drug discovery company, signed a multi-year collaboration in November 2022 worth up to $1.22B, covering up to six new targets.

Three steps to take

We believe future growth will increasingly focus on bio-platforms (architect) and capabilities such as AI that support accelerated innovation (ecosystem). To get there, companies should consider taking these key steps:

1. Combine bio-platforms and capabilities. Different bio-platforms can evolve together in new directions and create value. For example, the combination of mRNA and lipid nanoparticle delivery bio-platforms enabled mRNA vaccines to be developed in record time. Additionally, ecosystem growth pathways that provide access to computational power, data, advanced analytics, and digital and automation technologies help power bio-platforms to develop treatments faster. For example, protein degradation platforms and AI were combined to predict how proteins will interact optimally, which was critical to developing Amgen's KRAS inhibitor, a previously undruggable target.³
2. Transform into a cross-platform company. Bio-platform approaches often include novel modalities, which may require different considerations for manufacturing, clinical trials, and regulatory compliance. Successful companies will learn to enter new modalities faster by evaluating these considerations early on, such as being able to clarify new manufacturing processes—thereby overcoming resistance to developing new modalities. As companies develop additional assets using bio-platforms, they will learn how to create them faster and more efficiently. This learning can be applied to other bio-platforms and various therapeutic areas (TAs) to increase speed. Biopharma companies currently have TA verticals and have built disease expertise supported by capabilities, relationships, and in-house experts specific to each area, which can sometimes be detrimental to cross-TA learning. As bio-platforms and capabilities cut across TAs, biopharma companies will need to adjust their operating model, organization, and culture to realize the total value of their bio-platforms.
3. Create a science and technology incubator reporting to C-suite. When executed properly, the bio-platform strategy will lead to a proliferation of assets in various TAs. Since constantly building new TA verticals is inefficient, biopharma companies should source external experts, skill sets, capabilities, and relationships on demand. A dedicated team of research and development experts with an entrepreneurial mindset and direct access to a C-suite leader can orchestrate this effort. Like a venture capital operating model, this team would incubate novel science and technologies while evaluating and managing various collaborations with external resources.

Biopharma companies who want to stay ahead of the competition should take note that the biopharma industry M&A landscape is rapidly changing. With record high transaction premiums, significant biotech venture capital investments, huge biopharma cash reserves on hand, high inflation, and a potential economic downturn, we will likely see a shift away from deals focused on late-stage assets towards platform-based ones and ecosystem collaborations.

References

1. Board of Governors of the Federal Reserve, “Open Market Operations,” accessed June 2023. https://www.federalreserve.gov/monetarypolicy/openmarket.htm
2. Afeyan, “2022 Annual Letter,” Flagship Pioneering, Jan. 13, 2022. https://www.flagshippioneering.com/stories/2022-annual-letter
3. Jackson, M., “Amgen Rebuilt R&D Platform To Focus On Speed And Access,” Scrip, Feb. 11, 2022. https://scrip.pharmaintelligence.informa.com/SC145883/Amgen-Rebuilt-RD-Platform-To-Focus-On-Speed-And-Access

*Note: The information, data, and other research in this article that are not specifically referenced are from Accenture Research Analysis, leveraging Evaluate Pharma data.