Making the Right Bets: How to Identify Pharmaceutical Deals Worth Doing

Until now, there has been no quantitative information pharmaceutical companies can use to select and structure deals that are likely to succeed. Pharmaceutical industry experts have relied largely on qualitative evidence and experience-based generalizations in putting together licensing or collaborative arrangements.

To address this gap, Accenture recently undertook the industry’s first statistically rigorous study and has identified deal characteristics that are likely to predict success. Several factors, the research finds, can indicate which external sourcing arrangements have the best prospects of becoming winners.

We defined success as a deal that increased shareholder value or resulted in eventual FDA approval of the drug compound. The study found four predictors of a deal’s success: phase of development of the compound; deal type; compound type (small or large molecule); and therapeutic area.

Accenture has compiled useful historical data and developed predictive analytics for assessing a deal’s potential for success. This offers new insight on strategic approaches to licensing and business development that can increase a company’s competitive power—and accelerate its drive for high performance.

The pressure on pharmaceutical companies to achieve high performance—and deliver new products—has never been greater. With revenues eroding because of expiring patents and generic competition, companies are in a collective scramble to acquire new compounds. In search of the next innovation, companies have been through a decade of whirlwind dealmaking to bring in products from external sources. Whether through licensing or more elaborate business development investments, the number and value of these deals are only expected to increase.

But the reality is that only a small portion of these deals will result in successful products.

To increase the success of these efforts to feed the pipeline, companies have two strategic options. They can do more deals or they can become increasingly selective and do fewer deals. The industry now relies heavily on the first strategy—raising its level of investment in the hope of yielding a higher absolute number of successful products.

Accenture’s research targeted the second option—increasing selectivity—by pinpointing the characteristics that make a deal most likely to succeed. The goal was to determine which deals will yield the compounds most likely to reach the market and create higher returns for the shareholders of the transacting companies.

Accenture’s study is unique in that it built predictive models using data covering 10 years of historical activity from 355 deals. We examined many different deal characteristics, including prior relationship with partners and transaction frequency.

Our general finding was that the market does indeed respond positively to the heavy investment most pharmaceutical companies are making in licensing and business development deals. In the deals we examined, 55 percent of the buyers and 54 percent of the sellers experienced an increase in excess total return to shareholders (TRS) in the period after the deal was announced.

Many deal characteristics came under the microscope in this study, but only four were found to predict value or FDA approval. They are:

1. Phase of development—The market clearly rewards buyers of Phase III compounds with higher TRS than buyers of Phase I or Phase II compounds. But this higher shareholder return for Phase III compounds does not predict FDA approval, the study found. The lack of correlation between the increase in shareholder value for Phase III compounds and FDA approval may indicate that the market is not adequately differentiating these products. The market is so eager for near-term cash flows that it assumes all Phase III products have roughly equal probability of approval, when in reality they do not.
   
   For Phase II deals, we found a much stronger link between market reaction at deal announcement and the likelihood of FDA approval. This suggests that Phase II deals with higher TRS at the deal announcement have a higher probability of being approved.
   
   
2. Deal type—The Accenture study found that simpler transactions are not necessarily better. Though they may seem to be less costly, easier to explain to management and relatively easy to negotiate and manage, licensing transactions create less shareholder value for the buyer than collaborative arrangements. Also, they have a lower probability of FDA approval.
   
   
3. Compound type—The value that comes of a deal involving small or large molecule compounds depends on whether a company is the buyer or the seller. Deals for small molecule compounds are more likely to generate higher shareholder value for buyers. Deals for large molecule compounds generate more value for sellers.
   
   
4. Therapeutic area—“Blood disease/oncology” is the therapeutic category most favored by the market, at least for early phase compounds. But when it’s a later stage product, the market prefers other therapeutic areas—such as “allergy/infection/anti-inflammatory/pain/dermatology".

The study suggests that analyzing historical data can be useful in selecting and structuring deals that are likely to succeed. Incorporating what has been learned here can improve the effectiveness of a company’s licensing and business development strategy—by sharpening the ability to select from the prospects at hand. But there are short-term and long-term variations on how to do that.

In the short term, the single-most effective way for companies to drive shareholder value and improve the likelihood of FDA approval is to select and form collaborative partnerships. The success of these collaborations is attributed to the confidence in the product expressed by the seller’s willingness to remain financially involved.

In the long term, the answers are more complex—but still clear. If the level of investment required to acquire attractive product innovations continues to grow at the current rate, many companies will find themselves in a continual escalation of licensing and business development investments—and participation will no longer be a feasible option. That means they will have to be skillful in choosing the right deals—making difficult and judicious choices about which ones to pursue. But in that deal selection process, what’s good for the buyer may be different from what’s good for the seller.

Our study here of pharmaceutical deals suggests buyers should:

• Seek sellers who want to partner in the development or commercialization of the compound. It signals a high degree of confidence in the asset, and is especially important in late-stage products.
  
  
• Consider buying Phase III compounds if they can be found, but approach these expensive deals cautiously. While these purchases increase shareholder value in the short term, there is no correlation between the market’s enthusiasm and FDA approval for Phase III products.
  
  
• Buy blood disease/oncology products in Phase I. But be judicious in later phases of development, when these products command a much higher premium.
  
  
• Buy allergy/infection/anti-inflammatory/pain/dermatology compounds in later phases of development. At this point, they are reasonably priced and have lower risk.
  
  
• Be cautious about large molecule compounds because of their high prices.

The study suggests sellers should:

• Raise the price of Phase III compounds even more. The market is willing to reward buyers at this point and sellers should factor that into the price.
  
  
• Sell large molecule compounds in Phases I and II of development.

Building on this study, Accenture will continue to explore the use of advanced analytics to create a competitive advantage for pharmaceutical companies in their licensing and business development. We know that high-performance companies—those that balance present needs and future opportunities and consistently outperform their peers—use fact-based analytics to create competitive advantage.

At Accenture, we are committed to helping our clients find and use that competitive advantage. In this study of pharmaceutical deals, we provide advanced, research-driven insights that strengthen a company’s power to do that—and to achieve high performance in this high-risk, high-rewards game.

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