NEW YORK (CNNMoney.com) - With $100 billion worth of branded drugs losing patent protection in the next five years, Big Pharma needs new drugs -- and licensing from smaller companies is proving to be a cheaper, less risky way of securing potential products than buying those companies outright.

"This is the sort of continuation trend we've seen: that they're not doing outright acquisitions, they're doing these licensing deals," said Les Funtleyder, analyst for the trading firm Miller Tabak. "Licensing deals are the most preferred method of corporate development, and it seems to be going up. I think it reflects a recognition on the part of pharma companies that acquisitions have drawbacks."

Pfizer (down $0.15 to $26.25, Research), the world's biggest drug maker, signed a deal Thursday with the German drug maker Noxxon Pharma AG for a worldwide license on the company's Spiegelmer technology to develop weight loss drug NOX-B11, which is in preclinical trials. Pfizer will make upfront payments, as well as payments for research and development and milestones.

Earlier this week, Merck (up $0.20 to $36.43, Research) signed a deal with NicOx SA, a French biotech, to collaborate on a new treatment for high blood pressure, a $30 billion industry. NicOx, which has a market cap of $357 million, develops drugs with a form of technology known as nitric oxide donating.

Merck is paying NicOx $11 million up front to help with development, and has earmarked $340 million for potential milestone payments, as well as royalties on any products that make it to the market. The studies are preclinical, meaning they are in the early stages and there are no humans being tested with potential drugs yet.

"Why spend [$357 million] when you can spend $11 million or $12 million up front?" said Funtleyder, comparing the upfront licensing payments with NicOx's market cap, and noting that Merck is insulated from the risks of acquiring the biotech.

Licensing agreements happen so often that analysts don't consider individual deals to be newsworthy. Merck signed 44 licensing agreements in 2005, 50 in 2004 and 47 in 2003, according to spokeswoman Janet Skidmore.

In comparison, Skidmore said that Merck has made two acquisitions in the last five years. In 2004, Merck bought Aton Pharma, which has a cancer treatment in Phase II testing, which is the next to last testing phase and involves humans. Merck bought Rosetta Inpharmatics in 2001 for its genetic profiling technology.

"It is a trend to look outside large pharma companies to bring other excellent science inside," said Skidmore, noting that the deals range from preclinical to late-stage studies. "We do considerable internal research, but we also recognize there is a heck of a lot of fabulous research going on outside our walls."

Datamonitor reported last year that the top 20 drug companies are becoming more dependant on licensing in the effort to build up their pipelines. In a 2005 report, the research firm said the top drug makers derived 19.5 percent of sales from licensed products in 2004, the most recent year for which figures are available, compared to 17.5 percent in 2002.

Datamonitor projects that the trend will continue, with drug makers deriving 26.1 percent of sales from licensed products by 2010.

"Acquisitions have been a pretty standard way for large cap pharma to acquire products," said Albert Rauch, analyst for A.G. Edwards & Sons.

Rauch said that acquisitions do not affect research and development expenses, and do not have as big an impact on expenses.

"If you acquire a company, you acquire all the expenses of the company," said Rauch. "But if you sign a license, you can use cash on your balance sheet instead of your income statement."

Rauch said that Big Pharma tends to keep ample cash on their balance sheets to pay for licensing agreements. As an example, Pfizer has more than $20 billion in cash on hand.

With licenses, drug companies purchase only the rights for the experimental drugs that they're interested in, and they don't have to take on another companies' problems or unwanted technologies, nor do they spur an exodus in biotech employees who fear changes from their new parent.

"[Big Pharma companies] are only really interested in the product itself, and they're not paying for the stuff they don't want," said Rauch, who expects licensing to increase in coming years. "I think it's less disruptive and more targeted, so I think it's a more effective way of refilling their pipeline."

The analysts interviewed for this story do not own shares of stock in the companies mentioned here, though a family member of Rauch owns shares of Pfizer.

To read about Pfizer's financial health, click here.