FROM THE ANALYST'S COUCH

The fragmentation of biopharmaceutical innovation

McKinsey & Company, Wroclaw, Poland.
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In the pharmaceutical industry, there are typically 50–120 consolidative deals each year through which two companies become a single entity (Fig. 1). So, it could be reasonable to assume that the industry is consolidating over time. However, in this article we present data that indicate that this is not the case. We also analyse the drivers and discuss the implications for the industry.

Fig. 1 | M&A activity related to innovative pharmaceutical products. Non-consolidative deals are those classified as mergers and acquisitions (M&As) but not leading to consolidation (such as business unit swaps, asset acquisitions and divestments). Consolidative deals are mergers and company acquisitions resulting in industry consolidation. Deals related to medical devices and delivery technology, generics, over-the-counter products and animal health are excluded. See Supplementary Box 1 for details. Source: IQVIA PharmaDeals 2018.

Analysis of fragmentation

First, when we look at pharmaceutical revenue, we can see that the top 10 companies by revenue in recent years account for only ~40% of the industry total, down from ~50% in the early 2000s (Supplementary Box 1). The top 10 companies’ contribution to industry’s R&D expenditure has also decreased in general over the same period — from ~45% to ~40% (Supplementary Box 1) — although it peaked at 48% in 2010 following a series of major mergers and acquisitions such as Pfizer–Wyeth and Merck–Schering-Plough. R&D fragmentation is most visible, however, when we look at the sponsorship of phase I–III trials by industry, for which the share of the top 10 companies declined from over 50% in the 2000s to 27% in 2017 (Fig. 2a).

Fig. 2 | Analysis of industry fragmentation. a | Share of the top 10 pharma companies as sponsors of phase I–III clinical trials, based on all commercial trials started in a given year. b | Contribution of different groups of companies to industry’s R&D productivity over time. The ‘vintage index’ reflects revenues coming from new drug (new molecular entities and original biologics) approvals divided by an approximation of the corresponding R&D expenditures, including a time lag (for a detailed methodology description, see Nat. Rev. Drug Discov. 14, 455–456; 2015). c | The share of organic revenues in novel product sales has been decreasing. The graph shows total annual revenue from novel products (excluding generics, over-the-counter products and biosimilars) by product sourcing strategy. Acquired revenues include company and product acquisitions. Partnered revenues include in-licensing and joint ventures; for partnered products, a portion of sales might be attributed to the originator company (organic) and part to the licensee (partnered). See Supplementary Box 1 for details. Sources: ClinicalTrials.gov and EvaluatePharma 2018.

As a result, a decreasing proportion of new products is brought to market by large pharma companies on their own (Supplementary Box 1). Looking at R&D output and productivity over the past 20 years (Fig. 2b), the top 10 companies used to be the driving force of the pharmaceutical industry’s R&D output until the early 2000s. By then, a new modality — the monoclonal antibody (mAb) — was moving from the periphery to the centre of drug innovation, and blockbuster mAbs were launched by a new breed of biotechs. Big pharma also adopted mAbs in a series of deals in the 1990s and early 2000s, with varying degrees of success. Then, between 2005 and 2011, the industry experienced a slow-down (exacerbated by the more general tightening of capital availability at the time), with a real R&D productivity crisis and multiple restructurings. Since 2012, we see signs of innovation bouncing back, with mid-sized companies (outside the ranks of the top 10) playing an important role.

Looking more closely at novel products and their revenues, the share of FDA new drugs approved from sponsors among the top 10 companies was >50% in the 1990s (Supplementary Box 1). This has steadily declined since, and is only 26% in the last 3 years. A growing share of total pharmaceutical revenues also comes from external sources (Fig. 2c). In 1997, acquisitions were a source of 10% of pharmaceutical sales, while in 2017 they accounted for 45%.

Drivers of fragmentation

Several factors appear to be driving the observed fragmentation. First, there are many more companies engaged in biopharmaceutical innovation than in the past; the number of companies with a visible pharmaceutical pipeline or revenue has grown from fewer than 300 before 2000 to over 1,000 in recent years (Supplementary Box 1). These companies are also covering a broader range of medical needs than in the past; for example, with smaller companies working on pioneering products for diverse rare diseases.

Second, the increasing ‘democratization’ of biomedical R&D that results from a broadening range of technology platforms is enabling smaller companies to succeed. Third, the maturation of the industry providing outsourced drug development services such as manufacturing and clinical trial conduct means small companies can manage full-scale drug development programmes with minimal infrastructure. The greater ease of accessing capabilities and capacity through partnerships and outsourcing also means that the relative benefits of scale in drug development have decreased. Finally, the greater availability of capital in recent years means smaller companies can go further in bringing products to market on their own.

Implications

One implication of the observed trends and drivers is that it is wrong to attempt to analyse R&D productivity by only considering the large companies in the industry. As we observed in the past (Nat. Rev. Drug Discov. 14, 455–456; 2015), aggregate R&D productivity at the industry level has been on a long decline (with some signs of recent improvement). However, individual companies can outperform and bring valuable innovation to the market, and such innovation often emerges from smaller companies.

For smaller companies, the option to go it alone is more realistic than it has been in the past. This is especially so where the final patient populations are modest. However, it is not always the most value-creating option, given that product development and commercialization are becoming more complex.

There are also important implications for larger companies seeking partnerships with smaller companies. Their historical strength in traditional developmental and manufacturing capabilities is of decreasing relevance with the maturation of the drug development services sector, but larger companies do still have advantages. They benefit from greater data ownership and access to uncover innovation opportunities and improve R&D productivity through new predictive methods. Bigger companies are often more advanced in the collection and use of real-world data and they have more experience in the use of newer clinical trial designs such as adaptive trials. Indeed, in areas such as these, the combination of expertise, global reach, regulatory capability and reputation could create a substantial advantage. The future development of digital commercial capabilities including digital patient engagement and digitally enabled sales interactions could create further reasons for partnerships, as payer access becomes more complex and the experimentation with value-based arrangements continues. Overall, however, bigger companies may have some way to go in articulating the scale and scope of the advantages they bring.

doi: 10.1038/d41573-019-00046-3

Acknowledgements

The authors thank A. Halczuk for help with some of the analyses.

Supplementary Information

  1. Supplementary Box 1

Competing Financial Interests

All authors of this article are employees of McKinsey & Company, a management consultancy that works with the world's leading biopharmaceutical companies on innovation issues. The analysis in this study was funded by McKinsey's Pharmaceuticals and Medical Products practice and undertaken independently of any other organizations.

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