In-house vs. Out-license

Big Pharma.

Big Pharma have the resources to take a project all the way from Target Discovery through to product Launch.  There are several circumstances in which it may be attractive to out-license the project to keep developing value.

a. Insufficient Funds.  No budget is so large that a company can do everything.  Every company no matter how large has to make choices, prioritize, and possibly put aside some assets at almost any stage of Discovery or Development.  It is typically assumed that the assets that “don’t make the cut” in a portfolio funding exercise have issues that make them less attractive than those that do make the cut.  There are circumstances, however, where valuable assets don’t make the cut: i) the company has to decide between two similar assets, both of which are similar in value; and ii) the company has made a strategic determination not to pursue certain kinds of assets (e.g. a few years ago it was anti-infective agents and cardiovascular agents, more recently it has been neurological targets).  Out-licensing could potentially save and enhance the value that has been created in such assets.

An interesting out-licensing example is that of tadalifil, marketed by Lilly as Cialis in the U.S.  As with Viagra, the former GW in partnership with ICOS found some interesting properties in its PDE-V inhibitor, during clinical trials as an antihypertensive agent.  The GW management chose to not develop erectile dysfunction agents, and terminated the agreement with ICOS, who went off and formed an alliance with Lilly to develop the drug. 1  As the market for such agents proved to be enormous, years later now GSK agreed to co-develop  vardenafil, the Bayer drug, and marketed it as Levitra.  An interesting exercise would be to calculate how much value was captured by GSK in this class of drugs compared to Lilly and Pfizer.

b. Back-ups and Follow-ups – Taking Multiple Shots on Goal.

Every project that went through the Lead Optimization stage brought more than one agent behind the lead agent that got to Launch.  It is our opinion that the first agent is rarely replaced by a second-to-Nth agent that came behind it.  It is also our opinion that the second-to-Nth agents kept moving through the pipeline because they had some properties that were superior to the first, and perhaps would have been better drugs.  It’s just that these agents came up “a day late and a dollar short” – at every stage the decision was “we know more about the first agent, so let’s go with it”.  We propose that quite often, the better drug never got to market.

There would be an uphill battle with reimbursability if the company tried to develop such agents, having to argue that the drug they managed to get placed in the formulary of a Payor should be replaced with a newer drug.  But presumably some of these agents, when put to the challenge of late stage development, could show superior benefit to the first agent.  Perhaps such a case could be put forward better by a different company than by the parent company.  So through appropriate out-licensing agreements, a bio/pharmaceutical company might capture the value of more than one asset in the same market.

Issues with the first drug may be insurmountable but the second drug may not, and yet the company may decide it has more interest in other classes of drugs than to bring along the second drug. Out-licensing would allow the company to capture some value in the abandoned class of drugs without having to commit further resources to it.

c. Repurposing.

As a potential drug moves through the pipeline, the set of uses initially envisioned for the drug is ultimately narrowed to one or two indications by the time the drug is proposed to regulators.  Often the first proposed indication is the one most likely to gain approval, with follow-on studies planned to expand the number of indications for the drug later on.   Even when more than one indication is ultimately approved for a drug, the set of indications tends to fall within the same therapy area.

While the company may find it attractive to go after disease indications that fall into other therapy areas, it may be more attractive to out-license the drug to another company to explore such alternate indications.  Such activities may be seen as “squeezing water from a stone” within the parent company, especially if the market for the alternate indications is smaller than had been experienced with the initial indications.  But those smaller markets may be perceived as a fresh opportunity for another company.

Repurposing can include totally serendipitous discoveries that had not been envisioned for the drug, e.g.  the aforementioned realignment of PDE-V inhibitors from hypertension to erectile dysfunction.  The discovery that thalidomide works in leprosy is another classic example. 2  The Pfizer PDE-V example is a case where the repurposing occurred within the parent company, and the GW PDE-V example is a case where changing partners played a role.  Chong and Sullivan argue that the screening of old drugs for new purposes ought to occur via a public collection of all 9,900 drugs approved since 1938. 3

Small Start-up Companies.

Of course, small start-up companies typically lack the resources to take a project all the way from Target Discovery through to product Launch.   If the proposed indication falls into a niche market where larger pharma lack the marketing expertise, it may behoove the start-up to build-in the resources to take the project to Launch.  Most likely the small start-up will see out-licensing as a huge win, even if it means dissolution of the company to keep the asset moving, as most of the employees will benefit from the sale of the company.  Larger companies will have a life after out-licensing and will use the revenues from sale of an asset to keep other assets moving through the pipeline.

  1. Please refer to
  2. “Thalidomide as a novel therapeutic agent: new uses for an old product,” S.K. Teo, Drug Discovery Today 10, 107-114, 2005.
  3. “New Uses for Old Drugs”, C.R. Chong and D.J. Sullivan, Nature, 448, 645-646, 2007.


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