Key takeaways

  • Decreasing R&D productivity is leading biopharma companies to focus portfolios on therapeutic areas where category leadership can be preserved or achieved
  • Non-core assets that were previously discontinued, out-licensed or otherwise divested are now being managed through innovative funding models that retain access to future revenue streams while reducing cost and risk
  • Five funding models are available: self-funded R&D, out-licensing, spin-out, strategic co-development, and special purpose vehicle
  • The right model depends on the answer to three key questions: desire to maintain a role in the development of the asset, whether the asset could form part of a bundled approach, and the relative attractiveness of different revenue profiles
  • A critical factor for the biopharma company and funding partners is the scale of the commercial opportunity, which must be a significant enough to justify the clinical risk and investment required


Shareholder value creation in biopharma is best served by focusing on core areas where leadership can be preserved or attained. To do so, companies must be receptive to divesting “non-core” assets in order to reduce risk and cost to the business. We observe that biopharma companies are increasingly utilizing innovative funding models to retain access to future revenue streams of non-core assets while still reducing cost and risk. In this Executive Insights, we discuss some of the innovative funding models available and identify the key strategies for optimizing these types of deals.

R&D and commercial pressures on non-core assets

Biopharma companies, particularly big pharma, are increasingly focusing their portfolios on key therapeutic areas where category leadership can be preserved or achieved. This move toward specialization is driven by an ongoing decrease in R&D productivity, leading to higher average costs to develop an asset while the average forecast peak sales of newly approved therapies remains flat due to growing competition and price pressure. As a result, it is increasingly difficult for assets to reach the profitability thresholds considered commercially viable. In addition, assets that are not aligned with the strategic and therapeutic area focus are often not considered for investment.

Historically, these non-core assets have most commonly been discontinued, out-licensed or otherwise divested to avoid costs and clinical. However, in doing so access to future revenues has also been reduced. In recent years, biopharma companies have been increasingly willing to try innovative funding models for non-core assets in order to gain more control over their development and access to revenues while reducing exposure to cost and risk.

Funding models for non-core assets

L.E.K. Consulting has identified and analyzed five funding models available for individual assets (see Figure 1), which biopharma companies may select to balance cost and risk exposure with decision rights and revenue potential (see Figure 2).

Figure 1
Funding models for core and non-core assets

Figure 2
Funding model trade-offs between cost and clinical risk exposure, decision rights and revenue

1. Self-funded R&D

The traditional model for clinical trial funding uses internal R&D budgets and is rarely applied to non-core assets. Within this model, biopharma companies maintain control of the asset and there is an ongoing effort to evaluate the commercial opportunity in light of trial results and the changing competitive and regulatory environment. However, in this model, the company takes on all clinical risk, and the impact on the P&L can impede other critical investments. Suboptimal assets may be discontinued after significant investment because the business case no longer justifies further funding.

2. Out-licensing

Historically, out-licensing has been the focus of biopharma for non-core assets. For example, from 2014 to 2018, AstraZeneca executed 169 deals, of which 66 were out-licensing or divestments. While many of the out-licensing deals occur between big or midsize biopharma, there are a number of emerging players looking to benefit from the rationalization of non-core assets. For example, Boston Pharmaceuticals Inc. was created to develop and commercialize assets discovered by big and midsize biopharma. Since 2016, the VC-backed company has created a portfolio of about 15 assets through a series of acquisitions from Novartis, GSK, AstraZeneca, Daiichi Sankyo and Pierre Fabre. These types of companies typically rely on a network of providers to outsource most steps of drug development.

With an inflow of capital and the opportunity to pursue the development of otherwise discontinued assets, out-licensing is appealing to biopharma companies in many aspects. However, the loss of decision rights can be a major drawback of this model.

3. Spinouts

One solution for funding clinical trials outside of a biopharma’s P&L is to spin assets out into new VC-backed entities. In this model, the biopharma company typically holds equity in the newly formed company in exchange for the assets. This model alleviates clinical risk for the biopharma company while securing potential future inflow of cash through dividends if the assets are commercialized. One example is Mereo Biopharma, which was created in 2015 with three assets from Novartis and VC funding of approximately $100 million. Since its inception, the company has collaborated with AstraZeneca and acquired Oncomed Pharmaceuticals to build a pipeline of six drug candidates. Although spinning assets out is not new, it is expected to be increasingly sought after in the coming years, driven by the imperative to focus on core assets.

4. Strategic co-development

Out-licensing and spinouts share the same limitation for biopharma companies — they lose control of decision rights over the asset. In recent years a model has emerged in which a strategic co-development partner takes the full cost and risk associated with a clinical program in exchange for payments in the form of milestones or royalties if the asset reaches the market. With this model, biopharma companies de-risk mid-to-late-stage clinical programs and may maintain a degree of control over the asset while benefiting from the co-development partner’s expertise and oversight of the clinical trials. Co-development companies rely on wide networks of development experts and relationships with contract research organizations, and can potentially utilize the biopharma’s commercialization capabilities if trials are successful.

Notable players in this area are Avillion LLP and SFJ Pharmaceuticals Inc., which are both backed by VC funding. Both companies offer to finance and conduct mid-to-late-stage trials for biopharma companies; for example, Pfizer outsourced Bosulif’s clinical program in patients with chronic myelogenous leukemia to Avillion LLP, and both parties were rewarded when the FDA approved the new indication in December 2017. Avillion LLP has a therapeutic area-agnostic approach, as illustrated by partnerships with AstraZeneca in asthma and Merck KgaA in psoriasis. In contrast, SFJ Pharmaceuticals Inc. has been involved in about eight development programs to date, the vast majority in cancer. The most recent success was the FDA and EMA approval of VIZIMPRO in non-small cell lung cancer (NSCLC).

5. Special purpose vehicle — “build to buy”

While co-development partners often focus on mid-to-late-stage programs, some companies have been looking earlier. For example, Atlas Venture and Versant Ventures have been funding special purpose vehicles (SPVs) headed by clinical development experts with the sole purpose of advancing early stage assets through proof of concept. With this model, the biopharma company assigns the asset to the SPV and retains priority rights to buy back the asset at a fixed price. Similar to strategic co-development, it gives the option for the biopharma company to commercialize the asset if approved.

In 2010, Eli Lilly externalized galcanezumab for chronic migraine to Artaeus Pharma, a company funded by Atlas Venture. In January 2014, Eli Lilly bought back the therapy after completion of Phase II.

Figure 3
Innovative funding models provide biopharma the opportunity to avoid development costs whilst keeping the option to commercialize or re-acquire successful

Strategic considerations

Once a biopharma company specifies an asset to be non-core, there are several strategic considerations that determine the most attractive funding model, including:

  • Would the company like to maintain optionality over its role in the clinical development program and/or the commercialization of the asset?
  • Is the asset part of a group of similar assets that could favor a bundled approach (e.g., into a special purpose vehicle or spinout)?
  • Given the biopharma’s current portfolio and pipeline, what is the relative attractiveness of near-term lump sums versus longer-term revenue streams?

Understanding the commercial opportunity is critical for both the biopharma company and funding partners, for which there must be a significant enough market opportunity to justify the clinical risk and investment required. We observe that U.S. and European opportunities typically drive these partnerships due to the size of the market potential and consequently most funding for innovative models comes from these regions.

By considering the different funding models available and the key questions outlined in this paper, biopharma companies can optimize their portfolio management by de-risking clinical trials and keeping control of the more promising assets.

Related Insights