Fundamental Thinking

A Prescription for Growth? Why Pharma Companies Are Testing New Tactics to Refill Their Drug Pipelines

Many pharmaceutical companies are shifting away from large acquisitions, instead opting to buy smaller firms with riskier, earlier-stage drug candidates. Others are experimenting with new strategies altogether.

Key Takeaways

  • As an alternative to developing new drugs through in-house research, pharmaceutical companies can obtain rights to new drugs developed by competitors through licensing or acquiring the drugs, or, in the case of smaller rivals, purchasing the rivals themselves.

  • In recent years, many pharmaceutical companies have shied away from acquiring firms with drugs already on the market, or close to approval. Though such acquisitions involve little scientific or regulatory risk, they are expensive.

  • Instead, many companies are opting to buy firms with drug candidates still in the early stages of testing, most of which will not make it through to market approval.

  • Their rationale for this shift is twofold. First, they believe companies with early-stage drug candidates currently represent better value for money. Second, they can draw upon their familiarity with regulatory requirements to move early-stage drugs through clinical trials more efficiently than their smaller rivals.

  • Japanese pharmaceutical giant Takeda is pioneering a new strategy in which it buys a minority stake in small companies with promising early-stage research. The drug maker recently signed about 200 deals with firms to fund their R&D programs in exchange for exclusive commercialization rights to any successful drug candidates.

Harding Loevner Health Care Analysts Patrick Todd, CFA and David Glickman, CFA talk with Deputy Director of Research Tim Kubarych, CFA about the latest strategies pharmaceutical companies are employing to replenish their drug pipelines. The transcript, lightly edited for clarity, follows.

Tim Kubarych: Like in all industries, pharmaceutical companies have a choice when they’re making strategic decisions about their research and development. They can conduct their own research and hope to find promising drug candidates from which to commercialize, or they can go to the market and acquire the research and development of other companies. How do pharmaceutical companies think about this capital allocation decision policy, and how does the inevitability of patent expiries and the resulting erosion in future revenue from those drugs factor into their thinking?

David Glickman: A lot of that depends on the valuation of these companies. So, in recent years the large pharma companies have said that a lot of these phase-three assets—these are assets that only have one major phase of clinical trials left to go before commercialization—are very expensive and are actually overvalued by the market. So for the most part we've seen few transactions in this area. What we've seen are more transactions earlier on, where there's more risk of failure, and where pharma companies think they can add some value in their assessment and expertise of early stage pipelines.

Investors had thought that, with the recent tax reform bill in the US and the resulting cash coming on-shore, large pharma companies would buy a lot of smaller companies and we'd see a huge wave of mergers and acquisitions. That hasn't really happened, and that’s been good allocation on the part of the larger companies not to say, "Now that we have cash in the US, let's just spend indiscriminately." They've been just as discriminating as they were before that cash came onshore.

“The [mergers and acquisition] model has definitely shifted more toward innovation and away from cost-cutting.”

Patrick Todd: But I think it’s also dependent on how successful the current company is and how reliant they are on a single drug. So if you take the example of AbbVie, a few years ago almost all their revenue came from Humira sales. But Humira will soon face competition from biosimilars when it loses patent protection. So AbbVie needed to go to the market and buy something very big that had a longer duration of growth. So they bought Pharmacyclics, which is a company that had a product called Imbruvica for cancer. Their thinking is that Imbruvica will help offset some of the Humira erosion that they will experience in the future.

TK: How is the current M&A landscape different to 10 or 20 years ago, and where do you think it may be headed?

PT: The market has definitely changed. If you look back over the past decade, the mergers and acquisitions were really about bringing big companies together to cut costs and drive value through the cost savings. Today, it’s more about innovation. So doing partnership deals, focusing on patient needs, and concentrating on core therapeutic areas. So the model has definitely shifted more toward innovation and away from cost-cutting.

DG: An additional interesting model is what Takeda’s management discussed at its most recent R&D day. They've come to realize that a lot of Takeda’s early research wasn't terribly productive. So the company signed about 200 deals with small, very early-stage companies where they're taking equity stakes and funding the R&D all the way through. So it's kind of a VC-outsourced pipeline model, if you will, and that's another thing to keep an eye on.


Deputy Director of Research Timothy Kubarych, CFA and Analysts Patrick Todd, CFA and David Glickman, CFA contributed research and viewpoints to this piece.


The “Fundamental Thinking” series presents the perspectives of Harding Loevner’s analysts on a range of investment topics, highlighting our fundamental research and providing insight into how we approach quality growth investing. For more detailed information regarding particular investment strategies, please visit our website, Any statements made by employees of Harding Loevner are solely their own and do not necessarily express or relate to the views or opinions of Harding Loevner.

Any discussion of specific securities is not a recommendation to purchase or sell a particular security. Non-performance based criteria have been used to select the securities identified. It should not be assumed that investment in the securities identified has been or will be profitable. To request a complete list of holdings for the past year, please contact Harding Loevner.

There is no guarantee that any investment strategy will meet its objective. Past performance does not guarantee future results.

© 2020 Harding Loevner

Fundamental Thinking


Get some "Fundamental Thinking" in your Inbox

To regain market share lost to nimble competitors, established footwear and apparel brands are taking steps to accelerate design, production, and sales.

As top-selling biologics begin to lose patent protection, some drug makers are investing heavily to meet anticipated demand for biosimilars. Yet the high cost and complexity of these new drugs pose a risk to expected profits.

In-store apps and “digitized” brick-and-mortar stores point to a future where online and offline shopping is highly integrated.

You are using an old version of Internet Explorer. It may not display all features of this website. For the best experience, please update your browser.

The information on this website is issued by Trust Company (RE Services) Limited (ABN 45 003 278 831; AFSL 235150) as Responsible Entity of, and issuer of units in, the Harding Loevner Emerging Markets Equity Fund ARSN 604 215 296 (“Fund”), and approved by Harding Loevner LP (“Harding Loevner”), as the Investment Manager of the Fund. Harding Loevner is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) in respect of the financial services it provides to wholesale clients, and is not licensed to provide financial services to retail clients, in Australia. Harding Loevner is regulated by the Securities and Exchange Commission of the United States of America under US laws, which differ from Australian laws.

The information on this website is provided for general information purposes only, and is not investment advice or research, nor is it to be construed as solicitation of an offer to buy or sell any financial product . Accordingly, reliance should not be placed on this website as the basis for making an investment or other decision. A product disclosure statement (PDS) issued by the Responsible Entity is available for the Fund. You should obtain and consider the PDS, and related materials, and consult your professional advisers before making any investment decision.

Statements of fact on this website have been obtained from and are based upon sources that the Responsible Entity and Harding Loevner believe to be reliable. Neither the Responsible Entity nor Harding Loevner gives any representation or warranty as to the reliability or accuracy of the information contained on this website. All opinions and estimates included on this website constitute judgements of the Responsible Entity and Harding Loevner as at the date of this website and are subject to change without notice.

I am an Australian wholesale client or a New Zealand eligible investor and agree to the terms above and wish to proceed.

Click "Continue" to visit the general pages of the adviser to the Funds, Harding Loevner LP.
Click "Continue" to visit the pages for Harding Loevner Funds, Inc., a family of mutual funds for US investors.

Harding Loevner is not responsible for the content, accuracy, or timeliness and does not make any warranties, expressed or implied, with regard to the information obtained from other websites. These links are provided for your convenience and for navigational purposes only. They should not be considered a recommendation to buy or sell any securities. It should not be assumed that investment in the securities identified has been or will be profitable.

By clicking on the "I Agree" button, you acknowledge that you have read and understood this disclaimer and wish to proceed.

Terms & Conditions

Please confirm that you have read and understand the following terms of use of this website.

You are about to access the pages of Harding Loevner Funds plc, an Irish umbrella type open-ended investment company (the "Company"), which contains information about the Company and its sub-funds (each a "Fund"). These pages are for informational purposes only. It is not investment advice, nor is it intended to be relied on as a forecast or research and does not constitute an offer, recommendation or solicitation to buy or sell shares in any Fund. Access to and the information contained in these pages are restricted to persons who are residents of jurisdictions in which the distribution of the information herein is permitted. Please consult your professional advisers if you have questions about a particular investment or are unsure of the laws and regulations applicable to you.

Investment in any Fund may only be made in accordance with the terms of the relevant offering documents, and subject to the laws and regulations applicable in which the offering documents are distributed. Please further note that not all Funds are available for distribution in all or the same jurisdictions. No information regarding the offering of shares of the Funds is intended for, nor will offers or sales of such shares generally be made to, residents of the United States of America, its territories or possessions. In particular, neither the Funds nor any shares are or will be registered under the U.S. Securities Act of 1933, as amended, the U.S. Investment Company Act of 1940, as amended, or otherwise in the U.S. and may not, except in a transaction which does not violate U.S. securities laws, be directly or indirectly offered or sold in the U.S. or to any U.S. persons.

By clicking on the "I Agree" button below, you acknowledge that you have read and understood this disclaimer and wish to proceed to these pages.