It’s no secret that the biopharma industry has been grappling with diminishing R&D productivity. R&D investment more than doubled over the last decade, while new molecular-entity approvals plummeted. The return on investment for a typical biopharmaceutical portfolio today often will not even cover its cost of capital.

In response, industry players have embarked on a range of initiatives—in particular, externalizing more R&D to increase the number of drug projects and thus the chances of getting a major new product to market. In fact, over half of late-stage pipeline compounds are now externally sourced (Exhibit 1).

This externalization has occurred, for the most part, through fairly traditional models—such as product licensing, program partnerships, or company acquisitions—which favor majority control of assets and put primary responsibility for product development and commercialization in the hands of pharmaceutical companies. Structures have evolved to share the risks and rewards over the course of pharmaceutical-product development, but the split is generally proportional to the degree of resources invested and overall operating control. The proportions may change, depending on the competition for an asset (the higher its perceived desirability, the greater risk and cost a licensee is willing to assume) and the financing environment (biotechs with no financing alternative make their own compromises). But by and large, such variations haven’t fundamentally changed the economics of externalization or dramatically improved the return on external R&D investments.