Buying vs. R&D: Is it Cheaper to Acquire Existing Biotechs or Invest in Your Own R&D?

The quest for the next blockbuster drug is a high-stakes game in the pharma industry. Two main paths lead to this coveted prize: internal R&D, the detailed but potentially rewarding journey of developing drugs from scratch, and acquisitions, the quicker but pricier route of buying into existing biotechs with promising pipelines. Which is the smarter bet? The answer, like most things in life, is that it depends.

Deloitte found that the average cost of developing a new drug among the top 20 global biopharmas it studied rose 15% ($298 million) last year to approximately $2.3 billion. That figure includes the average cost of developing a candidate from discovery through clinical trials to the market.

R&D expense per asset remains slightly below the nearly $2.5 billion peak reported by Deloitte in 2019, before the onset of COVID-19. The pandemic led to lower R&D per-asset costs as developers brought their vaccines and drugs against the virus to market in months. Total R&D spending by the top 20 biopharmas stayed relatively flat, dipping 1% from $141 billion to $139.2 billion—but still 63% above the $85.47 billion calculated in 2013.

Worse for drug developers, the return on investment reaped by biopharma for new drugs and vaccines plunged last year by 82%, to 1.2%—the lowest percentage recorded in the 13 years Deloitte launched its annual reports on biopharma R&D—from 6.8% in 2021 and 10.1% in 2010, the first year studied by Deloitte.

The Case for R&D:

  • Potential for home runs: Developing a blockbuster drug internally could bring in billions, far exceeding the cost of R&D. The satisfaction of creating something unique also holds intrinsic value.

  • Complete control: You own the intellectual property, giving you complete control over development and commercialization.

  • Deep pipeline building: A robust internal R&D pipeline mitigates the risk of relying on a single drug candidate.

The Case for Acquisitions:

  • Faster to market: Buying a biotech with late-stage drug candidates puts you closer to reaping the rewards, potentially saving years of development time.

  • Reduced risk: Acquisitions spread risk across existing pipelines, minimizing the impact of failures in individual projects.

  • Access to talent and expertise: Acquiring biotech brings its team of scientists and experts on board, accelerating your internal capabilities.

The Cost Equation:

R&D costs are notoriously high. Estimates for developing a single drug range from $1.2 billion to $2.6 billion, with a whopping 90% failure rate in clinical trials. Acquisitions aren’t cheap, either. Biotech valuations can soar into the billions, depending on their pipeline and stage of development.

Choosing Your Path:

Ultimately, the decision concerns your risk tolerance, resources, and strategic goals. Here are some key considerations:

  • Stage of development: If you need a quick win, acquiring a late-stage biotech might be more appealing. R&D is better suited for long-term investments and building a diversified pipeline.

  • Financial muscle: Developing drugs internally requires deep pockets and sustained investment. Acquisitions can be expensive but affordable if you have the cash or access to capital.

  • Internal capabilities: Do you have the scientific expertise and infrastructure to nurture R&D projects from inception to market? Acquisitions can fill these gaps.

The Hybrid Approach:

Many big pharma companies adopt a hybrid model, combining internal R&D with strategic acquisitions. This allows them to balance risk, leverage synergies, and maintain a robust pipeline.

There’s no one-size-fits-all answer to the “buy vs. build” question. Both acquiring biotechs and investing in R&D have their pros and cons. The key is to carefully assess your situation, conduct thorough due diligence, and choose the path that aligns best with your long-term vision and risk appetite. Remember, the next blockbuster drug could lurk in your lab or be a savvy acquisition away.

Additional Points to Consider:

  • Emerging technologies like AI and machine learning are transforming drug discovery, potentially reducing R&D costs and timelines.
  • Regulatory hurdles and intellectual property challenges can impact both R&D and acquisitions.
  • Public perception and market dynamics can influence the success of internally developed and acquired drugs.

This blog post is just a starting point for a complex and nuanced discussion. I encourage you to do your own research and seek professional advice before making any investment decisions.