Only Bristol Bucks Big Pharma's Drive For External Reliance

by: EP Vantage

It is by now pretty much accepted that biotech is pharma's lifeblood, and the latest figures suggest that reliance on deal-making has reached a new high, with nine of the biggest 12 pharma groups showing a declining share of in-house projects in last year's sales.

In fact, of this group of 12, only Bristol-Myers Squibb (NYSE:BMY) is bucking the trend, with in-house R&D making up 35% of its 2016 revenue, up from 17% in 2011, the EvaluatePharma data show. The numbers confirm the usual suspects - Allergan (NYSE:AGN) and Abbvie (NYSE:ABBV), for instance - as the leading deal-makers, but also throw up a few surprises (see tables below).

One surprise is Glaxosmithkline (NYSE:GSK), which has long championed in-house R&D. Its in-house product share has fallen 11 points over the past five years, likely explained by the declining sales of its mega-blockbuster Advair; it will likely take a few more years before Glaxo's own R&D picks up the slack.

Advair is big pharma's third-biggest organically derived product, behind Roche's (OTCQX:RHHBY) Avastin and Herceptin. Of course, both Avastin and Herceptin are Genentech products, but since Roche has owned a majority of Genentech since 1990 this is being considered as an in-house strategy for the purposes of this analysis.

Although Roche has always kept Genentech at arm's length - this is still true today even with 100% ownership - it is undeniable that all Genentech-derived drugs are examples of a long-term big pharma reliance on an external R&D strategy of sorts.

The declining share of in-house sales at Merck & Co (NYSE:MRK) might come as another surprise. Januvia is the company's biggest in-house derived drug, but its importance has been eroded by Zetia and Keytruda - a drug that has helped reshaped the oncology landscape - both of which came via the Schering-Plough takeover.

Share of big pharma sales derived from in-house projects
2011 2012 2013 2014 2015 2016
Roche* 61% 61% 62% 61% 60% 60%
Lilly 73% 70% 68% 60% 57% 57%
Astrazeneca 64% 61% 61% 59% 57% 57%
Novartis 52% 51% 49% 47% 46% 44%
Glaxosmithkline 53% 54% 56% 56% 46% 42%
Merck & Co 40% 41% 37% 38% 38% 38%
Bristol-Myers Squibb 17% 25% 33% 32% 39% 35%
Pfizer 15% 15% 15% 16% 16% 15%
Sanofi 14% 15% 15% 15% 14% 14%
Johnson & Johnson 20% 19% 18% 16% 15% 13%
Abbvie 12% 10% 9% 7% 5% 3%
Allergan 16% 19% 13% 8% 4% 3%
*Products originated by Genentech are counted as organic.

Neither was Keytruda's rival Opdivo derived by Bristol-Myers Squibb - it came via a deal with Ono Pharmaceuticals (OPHLF0 (OTCPK:OPHLY) - but despite this in-house drugs like Sprycel, Daclinza and Baraclude have helped the group buck the overall big pharma trend.

Among other companies, falling sales of Symbicort and Nexium, combined with intense deal-making, have led to Astrazeneca's (NYSE:AZN) share of in-house products declining from 2011 by seven points to 57%.

Meanwhile, groups at the extreme end of the external reliance trend include Allergan, which has grown largely through acquisitions, Johnson & Johnson (NYSE:JNJ), which gained Remicade and Stelara through its takeover of Centocor, and Abbvie, whose two biggest drugs, Humira and Imbruvica, are derived from BASF's pharma business Knoll (NYSE:KNL) and Pharmacyclics (NASDAQ:PCYC) respectively.

M&A fuels the trend

Looking beyond individual company numbers another interesting trend emerges: not only has the share of in-house products experienced a five-year decline, but so has that of products derived from licensing deals.

Instead, it is company acquisitions that have fueled big pharma's move to rely increasingly on outside sources of R&D, with combined sales of drugs derived from M&A surging from $123bn five years ago to $158bn in 2016.

This could give some solace to M&A bankers hankering after the days of rampant biotech acquisitions; if only valuations would come off a little more, perhaps they would be in business again.

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