Transact to Transform: How can Biopharmas use Alliances & Partnerships to Drive Innovation?


Drawing on the findings of EY’s recently published life sciences M&A firepower report, EY Global Life Sciences Deals Leader Subin Baral makes the case for big biopharmas to seek out alliances and partnerships as an alternative to M&A and lists ten considerations that these firms should bear in mind if they want to use strategic alliances and partnerships to accelerate innovation and drive growth.


Life sciences is wrestling with a looming patent cliff as multiple blockbuster drugs lose patent protection. At the same time, the industry’s success in delivering the COVID-19 vaccines has shown that it can respond to crises with great agility and swiftness. Its response has further heightened the already rising expectations of patient-consumers, clinicians and health care providers who are conditioned by the digital age to expect continually better and faster results.

In the past, big biopharmas have tended to do much of their R&D and innovation in-house. To innovate at speed and deliver value to patients and shareholders, as well as intelligently tap novel developments such as cell and gene therapies (CGTs), they will need to change their approach in the future and embrace a strategy of “transact to transform.”

In other words, big biopharmas increasingly need to complement their internal innovation capabilities with external capabilities acquired from smaller, highly specialised and highly efficient biotech start-ups. These external capabilities will enable them to immediately accelerate their innovation processes and drive growth while reinforcing their market positions as global science and technology leaders.


M&A industry impact

The life sciences industry can access external innovation through mergers and acquisitions (M&A). Indeed, the industry has frequently used M&A to externalize innovation and drive portfolio growth.

The recent EY M&A Firepower report How ecosystem participation drives more value for life sciences deals highlights that in 2021, the biopharma industry’s M&A firepower – defined as its capacity to conduct acquisitions based on the strength of its balance sheet – was US$1.17 trillion. This was a level of firepower not seen since 2014.

Yet, despite having considerable firepower at its disposal, the life sciences industry is currently cautious about embarking on M&A. Biopharmas’ appetite for less risky deals is evidenced by the fact that the deals struck in 2021 tended to be smaller “bolt-on” deals. Last year, biopharma companies prioritised assets that were either low scientific risk (marketed assets that command high prices but are unlikely to cash out before generating revenue) or low financial risk (relatively inexpensive preclinical and Phase I assets). They also used structured deals – with earnouts tied to future clinicals and other milestones.

Still, it is not just low appetite for risk that is preventing biopharmas from embarking on an M&A binge. A major challenge is that many of today’s top innovators simply aren’t for sale. They often prefer to remain independent and can access the capital without needing to merge with a larger market player.

The EY M&A Firepower report underlines this point. Between January and November 2021, biopharmas raised more than US$80 billion in follow-on financing, venture funding and initial public offerings (IPOs), second only to the US$90 billion they raised in 2020. Notably, many biopharmas have used special purpose acquisition companies (SPACs) to go public recently.

Even where innovative businesses are potentially up for sale, market valuation is high, especially if their drugs and treatments belong to the new therapeutic classes deemed important for future growth. The existence of this premium puts pressure on buyers to demonstrate quick returns on any acquisitions they make, acting as a deterrent to transactions.


The case for alliances and partnerships

With all of that in mind, it makes sense for big biopharmas to seek out alliances and partnerships as an alternative to M&A. With a partnership, typically two or more parties come together to establish a separate entity that will pursue a specific objective – for example, the development of a new drug with the profits or losses of the enterprise being shared proportionately. With an alliance, the deal parties simply agree to collaborate without giving up their independent status.

In contrast to M&A, alliances and partnerships with biotech start-ups can be a fast, practical and cost-effective way for big biopharmas to foster innovation and access new talent. The EY M&A Firepower report found that in 2021, biopharma companies deployed 13% of their firepower on alliances and just 9% on M&A. This marks a notable shift in capital allocation from 2019, when biopharmas deployed 25% of their firepower on M&A and 9% on alliances.

Through their association with start-ups, big biopharmas become more familiar with emerging technologies and more comfortable with higher levels of scientific risk, while start-ups can gain valuable insights into their larger partners’ operations, culture and capabilities. All deal parties can reap the rewards that arise from innovation whilst offsetting the risks involved by mutually demonstrating value at an early stage in the relationship. An alliance or partnership may be a potential pathway to future M&A.

Few anecdotes better highlight the power of partnerships than the race to market COVID-19 vaccines. Traditionally, the vaccine market has been dominated by a few companies with the knowledge and infrastructure to develop, validate and distribute these products at scale. Yet, companies that looked beyond the industry’s core vaccine capabilities to draw on the potential of nascent mRNA technology, primarily via partnering, have been the early winners of the vaccine race.

What’s more, data suggests that when companies invest capital in alliances and partnerships, rather than M&A, they are rewarded with a greater return on their investment. An EY report shows that the historical return on investment (ROI) for alliances and partnerships is 33% higher than for M&A.


Diverse strategies

In the short term, demand for innovation capability – combined with readily available funding –means that valuations for biotech start-ups are likely to remain high, with major industry players reluctant to pay a premium for an asset that may deliver a poor ROI. As a result, M&A is set to keep playing a supporting role from a transaction perspective.

While alliances and partnerships should form an essential element of any “transact to transform” strategy, big biopharmas should not overlook opportunities to enhance their own internal innovation and infrastructure. As part of their transformation strategies, they may also consider refocusing their portfolios on new or higher-growth opportunities and divesting assets that no longer fit the core business. Divestments are useful for generating cash flow that can be reinvested in priority therapeutic areas that are core to building competitive advantages.

Whether strategic alliances and partnerships are used as a pathway to eventual acquisition, to support product development or to achieve other objectives, these relationships provide big biopharmas with an important route to success in 2022 and beyond.


Ten considerations for big biopharmas that want to use strategic alliances and partnerships to accelerate innovation and drive growth

  1. Set up a dedicated innovation board to advise the executive board on making investment decisions that foster innovation, including decisions on strategic alliances and partnerships.


  1. Set up a corporate venture fund to invest in high-potential start-ups and fund scientific research by leading academics.


  1. Nurture a strong collaboration culture within the organization so that it is well-placed to take full advantage of partnership opportunities as they arise.


  1. Use licensing to make more effective use of existing assets – for example out-license certain products to partner companies that may be able to take them to market quicker.


  1. Invest in sustainability. Potential partners will be more interested in working with companies that acknowledge sustainability as part of their social licence to operate.


  1. Find the right partner. Don’t just focus on financial considerations, but look for talent, knowledge, expertise and organizations with a culture of intellectual curiosity as well as a culture of innovation.


  1. Don’t pursue “innovation on the cheap.” Work to ensure your smaller partner is sufficiently resourced to make good progress and operate as a genuine innovation engine.


  1. Don’t only think of partnerships in terms of partnerships with other life sciences companies. Think about the partnerships you can build with companies in the technology, transport and logistic sectors, along with universities and health care providers.


  1. Balance the pursuit of partnerships with acquisitions, out-licensing and internal innovation. One size strategy rarely fits all.


  1. Treat the partnership like a marriage – prepare to be flexible and keep working at it over a number of years.


The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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