Why Pharma Companies Are Betting Big on In-Licensing Strategies Over Traditional M&A

Forget everything you know about how big pharma grows. The industry’s playbook is shifting, and in-licensing deals are becoming the new engine of innovation. Unlike straight acquisitions, in-licensing lets drug companies grab promising experimental drugs without inheriting another company’s bloated balance sheet. That’s why deals like Novartis’ recent $745 million arrangement with Ratio Therapeutics are becoming the norm rather than the exception.

For investors who’ve been tracking pharmaceutical stocks, understanding in-licensing is no longer optional—it’s essential. The strategy is reshaping valuations, profit-sharing arrangements, and how you should interpret a company’s growth potential. Let’s break down why this matters and what it means for your portfolio.

What Actually Is In-Licensing? The Contract That’s Rewriting Pharma’s Rulebook

Think of in-licensing as renting intellectual property instead of buying the whole company. Essentially, one firm (the licensor) grants another firm (the licensee) the right to develop, manufacture, and sell a drug. The deal gets sealed with a contract specifying payment terms—typically upfront cash, milestone payments tied to development progress, and royalties from future sales.

Consider what AstraZeneca pulled off in early 2023. The pharma giant licensed CMG901, a Phase 1antibody drug conjugate targeting Claudin 18.2-positive solid tumors, from China-based KYM Biosciences. AstraZeneca handed over $63 million upfront and committed to an additional $1.1 billion in payments if the drug hits key development and commercial milestones. In exchange, AstraZeneca gets global rights to develop and sell the drug. KYM keeps a piece of the upside through royalties but dodges the massive costs of bringing it to market.

This isn’t just a one-off. AstraZeneca inked a similar deal in 2022 for HBM7022, another Claudin 18.2 cancer candidate. Why? Because these early-stage biotech firms are pumping out promising compounds faster than big pharma can discover them internally. In-licensing lets established companies tap that innovation pipeline without burning R&D budgets.

The Real Appeal: Why Big Pharma Can’t Get Enough of In-Licensing

Risk mitigation is the silent star of this strategy. Unlike traditional drug discovery—where pharma companies gamble millions on compounds with uncertain futures—in-licensing targets drugs already showing clinical promise. You’re funding projects with actual data backing them up, not hopes.

The financial math is compelling too. A drug development program can cost upward of $2 billion and take over a decade. Through in-licensing, multiple companies share that burden. Pfizer discovered this value when it partnered with the Medicines Patent Pool to distribute its COVID-19 oral antiviral globally. Pfizer got access to emerging markets and public health credibility; the nonprofit got a proven therapy for populations that needed it most.

Then there’s the M&A comparison. Acquisitions come with baggage—legacy products, redundant employees, tangled technology portfolios. In-licensing is surgical: you buy the rights to specific drugs and leave everything else behind. That’s why this model is gaining traction. Instead of inheriting a bloated organization, you’re acquiring precisely what you need.

For investors, this flexibility matters. It signals that management is making calculated bets rather than making empire-building acquisitions that often destroy shareholder value. The market recognizes this restraint.

The Dark Side: When In-Licensing Complicates Everything

Here’s the catch that trips up unsuspecting investors: profit-splitting dilutes returns.

Eliquis, the blockbuster anticoagulant from Pfizer and Bristol-Myers Squibb, exemplifies this tension. Bristol-Myers Squibb did the heavy lifting through Phase 2 trials, then brought in Pfizer for the expensive Phase 3 stage. Why? Bristol-Myers Squibb had budget constraints and Phase 3 trials cost hundreds of millions. By the time investors realized Eliquis would be a megahit, two companies were already claiming the spoils.

The reasoning made sense at the time. The anticoagulant market is crowded. No guarantee Eliquis would outperform competitors in development. Why risk it alone? But this scenario reveals the investor’s dilemma: even when a therapy becomes a cash cow, your ownership percentage is permanently capped.

There’s another landmine: accounting complications. In-licensing deals typically don’t show up as tangible assets on balance sheets. Instead, they’re classified as “in-process research and development”—meaning the expenses hit the profit and loss statement, often generating large paper losses. An uninformed investor glancing at quarterly results might think the company is hemorrhaging money, when really it’s just accounting treatment of an intangible asset.

That’s why reading between the financial lines matters. The value of in-licensed drugs doesn’t disappear; it just doesn’t appear in traditional asset categories.

Out-Licensing: The Flip Side of the Coin

Not all pharma companies are buyers. Some are sellers. Out-licensing works the opposite direction: a company grants another firm the rights to develop and commercialize its drug, typically collecting upfront payments, milestone money, and royalties.

Out-licensing is attractive for companies with limited commercialization reach or capital constraints. A small biotech discovering a breakthrough drug might out-license it to a multinational with global sales infrastructure. The small firm gets validated and funded; the big pharma gets a piece of an emerging blockbuster. Merck’s deal with the Medicines Patent Pool for molnupiravir followed similar logic—sharing access and impact while monetizing the asset.

Where This Trend Is Heading: The New Normal in Pharma

The numbers speak for themselves. According to professional services firm EY, roughly 45% of pipeline assets at the top 20 pharmaceutical companies now originate from external innovation via licensing, collaborations, or acquisitions. That wasn’t the case 10 years ago.

What’s driving this? The barrier to entry for biotech companies has collapsed. CRISPR, AI-driven drug discovery, and accessible capital have spawned thousands of early-stage firms generating promising candidates faster than traditional pharma can manage. For big pharma, in-licensing is the answer to that abundance.

But here’s what worries some investors: pharma companies are simultaneously slashing their in-house R&D budgets. The old playbook—discover drugs internally, advance them through trials, launch blockbusters—is being replaced by a licensing-first model. That challenges conventional valuation frameworks. How do you model growth when it’s outsourced?

The answer: adjust your expectations. In-licensing can be more capital-efficient than traditional drug discovery. Pharma companies spend billions on internal R&D, yet only 1 in 10 candidates reaches market. By licensing earlier-stage compounds with clinical validation, companies reduce that failure rate and spread costs across partners.

What This Means for Your Investment Decisions

In-licensing isn’t going away; it’s becoming the dominant mode of pharma expansion. As an investor, that demands a shift in how you analyze these companies.

First, scrutinize pipeline composition. What percentage of a pharma company’s pipeline comes from in-licensing deals versus internal discovery? Higher external innovation suggests access to cutting-edge science but also means profit-sharing.

Second, read the contract fine print when it’s disclosed. Upfront payments, milestone structures, and royalty rates reveal how much of the eventual upside the company retains.

Third, don’t mistake accounting oddities for poor performance. In-process R&D expenses might depress reported earnings, but they’re actually investments in future revenue streams.

The traditional pharma growth model—where internal R&D leads to products and then profits—isn’t obsolete, but it’s no longer the only playbook. Companies embracing in-licensing are making a sophisticated bet: they’re trading some profit potential for reduced risk and faster innovation cycles. Whether that trade-off benefits shareholders depends on execution, market conditions, and the quality of deal-making. Stay focused on those variables, and you’ll make smarter calls on pharma stocks.