A License to Cure

Drug companies are more and more likely to license promising pharmaceutical compounds from other companies rather than develop their own. But does licensing pay? Competition to license pharmaceutical compounds is becoming fierce. Drug companies used to rely solely on their own discoveries to deliver the next miracle cure. Nowadays, they are increasingly likely to license compounds discovered by others. These companies resort to licensing to beef up their product ranges and to satisfy their investors' growth expectations, and because the risk-adjusted cost of doing so, their executives believe, is less than that of developing alternatives in-house. But as licensing grows more popular, the number of competitors vying for deals increases, negotiations and accords become more complicated, and costs rise. Just getting a seat at the bargaining table can be difficult because the price is often so high, and organizations with compounds to license want to deal only with the strongest potential partners. Rockefeller University limited the number of contenders in the final round of negotiations for licensing rights to an obesity-related gene discovered by its scientists, and it then used an auction-style mechanism to push up the price to $20 million. Pfizer is expected to shell out $225 million, including an up-front payment of $85 million, as part of a 1998 agreement with Searle (Monsanto's pharmaceutical division) to develop the promising anti-arthritis treatment celecoxib [1] and its second-generation compound and to co-promote it in the United States. Analysts estimate that the final cost to Amgen of its deal to license neurotrophic agents from Guilford Pharmaceuticals could be as high as $450 million. Competition will grow still more intense and prices will rise. But, our research indicates, corporations expect in-licensed products (those one company licenses from rather than to another) to generate an ever larger share of their business--in some cases, as much as half. Licensing certainly meets some short-term needs. It can bolster product pipelines that executives regard as insufficient to satisfy the expectations of growth implied by their companies' sky-high valuations in financial markets. It helps big companies exploit innovations in biotechnology and other areas that complement homegrown products. And it supplies companies that have large sales and marketing forces with a wider flow of new compounds. But does it pay? Our interviews with licensing executives at 25 leading pharmaceutical manufacturers, several midsize pharmaceutical firms, and a number of biotechnology operations revealed that companies can reap significant rewards from pharmaceutical licensing. Indeed, more than 90 percent of the respondents expected revenues from in-licensed products to increase over the next five years. Most licensing executives assert that investing in externally developed compounds is at least as beneficial financially as investing in internal research. Yet there is scant evidence for these conclusions, because few of the companies we surveyed bother to track the relative profitability of in-licensed products. With pharmaceutical executives diverting a greater share of corporate resources to licensing (Exhibit 1), it is fair to question whether and when overbidding might begin to turn it into a money-loser. Although there is no sign that this has happened to date, the companies that avoid this trap would probably be those applying superior scientific and commercial insights, deal-making skills, and organizational abilities to the mechanics of licensing. Tapping the promise of licensing in an ever more heated environment will be neither cheap nor easy. The rise of licensing No doubt there has been method to the licensing madness, for of late some of the most promising and celebrated drugs have been licensed compounds. The cholesterol-lowering Lipitor, for example--expected to be the world's top-selling drug by 2005--has been comarketed by its developer, Warner-Lambert, and Pfizer. …