Closing the innovation gap – Proper R&D externalization as a lever to pipeline growth

Externalization has been a frequently discussed topic and increasingly employed R&D strategy within Life Science for the last decade. It is estimated that as much as 58% of the life science R&D spending this year will be on sourcing external innovations – up from 33% in 2011.

A rapid increase in external R&D spending (Source: Atrium Research and Challenge)

Only last year Accenture released a report stating that 60 % of innovator small molecules and 82 % of innovator biologics during the last ten years have their roots outside of big pharmaceutical companies. What has caused this decline in internal R&D productivity, is the rapid decline part of a deliberate strategy by Big Pharma and in that case – what are the drivers behind it?

Chris Viehbacher, former CEO of Sanofi earlier commented on the companies shift in R&D strategy:

[What Sanofi is doing is reducing its own internal research capacity. The days when we locked all of our scientists up in a building and put them on a nice tree-lined campus are done. We will do less of our own research. We’re not going to get out of research. We believe we do certain things well in research but we want to work with more outside companies, startup biotechs, with universities.

It is cheaper, and the reality is the best people who have great ideas in science don’t want to work for a big company (…) So, in other words, if you want to work with the best people, you’re going to have to go outside your own company and work with those people.

The struggle to stay innovative and disruptive as a big multinational corporation is not restricted or limited to life science but something that most industry-leading organizations, regardless of industry, are faced with. So, what are the underlying factors of Veihbacher statement and the drivers of this surging trend?

##The underlying drivers of external R&D The drivers of external R&D vary with company specific context, but in general, the rationale falls into one or several of these categories:

  • Access to new ideas and innovation that you would not get in-house
  • Lower costs of development
  • Access to additional expertise and more eyes on the issue/problem
  • Lowering and/or sharing risk
  • Talent development
  • Financial leverage and increasing capital efficiency
  • Operate closer to where the patients are

With scale acting as a barrier to creating value in internal R&D, how should you approach external R&D and what models should you consider? We work with a range of frontrunners within pharma and life science to empower them with tools they need in the process of sourcing new external innovations. Here we use the framework of Bruce Booth to try to shed light on the constituent parts that make up an external R&D strategy and the tools you should have (at least consider) in your external R&D tool belt to help boost your pipeline.

Going beyond the conventional models

Both historically and to this day, most of the industry has focused on extracting value through conventional models of partnering – M&A, licensing and R&D collaboration. Sure, these are all essential tools to help build your pipeline, but they are only scratching the surface of the value that external R&D models can bring to your business – especially if you are explicitly seeking early stage innovations. The more non-obvious and creative complementary models can be divided into three groups:

Direct external innovation models

There are variations of this model, but all revolve around the same concept – partnering around a single company or mutual concept and developing it in a start-up context. As initiator and investor in these models, you are able to stipulate and enjoy pre-specified right as well as the power to shape the venture. Models within this category include: * Venture co-creation are initiatives to bring together complementary expertise with the purpose of launching a new company. If executed successfully, this model can accelerate innovation by enjoying parts of the founding companies infrastructure while avoids its conformity. A recent example of such efforts is the launch of Galvani Bioelectrics, a joint-venture between GlaxoSmithKline and the Alphabet company Very Life Science. Or the launch of the digital surgery platform company Verb Surgical, through the joint efforts of Johnson and Johson and Verify Life Science. * Built-to-buy-deal is another version of the direct model and an increased trend, exemplified here by the startup alliance of venture capital firm Avalon Ventures and GSK, in which the UK-based giant enjoys pre-defined acquisition rights. Or Celgene’s acquisition of Quanticel through the collaboration with Versant Ventures.

Fund-related portfolio approaches refer to models in which Pharma companies either set up their own- or working closely with a fund structure that invests in early-stage assets. Ideally, this will allow you to decrease the bandwidth used internally for these types of activities while expanding your reach and exposure to external innovation. The most notable forms include: * Corporate venture capital funds, we have seen a surge in the last two decades, as displayed in the timeline below. And today, most big pharma operates with this in-house corporate venture funds in some capacity.

Timeline and fund value of the corporate venture capital funds of Big Pharma (Source: [Nature] (
  • Option funds: Novartis, with is Novartis Option Fund, was one of the first actors to employ this model, which is generally an in-house fund that makes exceptionally early equity investments that come with a time-limited option to exclusive license and product rights for a specific therapeutic program.

Open Innovation Models

Open Innovation is mainly geared towards academic collaborations. Truly successful models within this bucket generally require more than a mere injection of capital for value extraction. Instead, and when set up in the right way, open innovation models bring valuable capabilities and underleveraged resources from Pharma, such as screening methods or compounds libraries, into the hands of external researchers in exchange for rights to internalize discoveries. In the last five years, a number of publicly and privately funded spaces have emerged to provide scientists with the help they need to bring their research from bench to bedside, such as Astra Bio Venture Hub, GSK Discovery Fast Track, Pfizer’s Center for Therapeutic Innovation.

Do you have what it takes to remain competitive?

It is evident that converging R&D efforts are the future of pharma and a collaborative approach is required to remain competitive and survive. But only 25% of companies have a clear strategy on how they will approach externalization. Meanwhile, the competition for external innovators and collaborators is rapidly increasing in the fast-paced industry of Life Science. All companies – big and small – must work continuously to address a range of critical questions related to this issue, such as:

  • Which external companies, institutes and researchers should we be collaborating within a specific target?
  • Which universities and research groups worldwide are performing the most cutting-edge research within our specific area of interest?
  • What processes should we have in place to identify and uncover valuable hidden assets before our competitors?
  • How can we monitor the global landscape and track the moves of our key competitors?

Monocl applies a new approach and works to empower our customer with the capabilities necessary to answer many of these questions. Do you have what it takes to remain competitive? Stay tuned for more.