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First LES Survey of Biopharma Licensing Terms Finds More Value in Downstream Tech

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The further down the development pipeline a biomedical technology is, the more money companies are willing to pay to in-license it, both up front and later in the form of royalties, according to survey results released this month by the Licensing Executives Society.
 
In addition, the report also revealed that the majority of biopharmaceutical licensing deals involving academic institutions involved upfront payments and development milestone payments as opposed to sales milestones; and academic institutions were far less likely than companies to calculate the net present value of a licensed technology.
 
The survey, entitled the LES Biopharmaceutical Royalty Rates and Deal Terms Survey, was the first of its kind. LES said it conducted it in an attempt to provide data and insights about licensing deals in the biotechnology and pharmaceutical sectors that have in the past been difficult to obtain.
 
Specifically, LES, in conjunction with Veris Consulting, interviewed its members from October 2007 to January 2008 on licensing deals they had participated in over the past several years.
 
The purpose of the survey was to provide a detailed analysis on fixed royalties, tiered royalties, deal valuation, and therapeutic areas in biomedical licensing; and provide a “more current perspective on licensing royalty rates and deal terms than the Freedom of Information approach allows,” LES said.
 
LES’s Royalty Rate Committee presented preliminary findings from the survey at the LES Spring meeting in Chicago in May 2008; and issued a final report in electronic format only to LES members in June. LES officially released to the public selected results from the survey this month.
 
According to the report, a full copy of which LES provided to BTW, 230 total deal responses were submitted, of which 157 responses were complete. The report excluded a pair of outliers, bringing the total number of biopharmaceutical licensing deals analyzed to 155.
 
Seventy-seven percent, or 120 of those deals, were completed in 2006 or 2007, and 70 percent of the deals were reported by the technology licensors as opposed to licensees, according to the report.
 
Of the 86 organizations that responded to the survey, 36 percent identified themselves as associated with a pharmaceutical company; 37 percent with a biotech firm; 13 percent an academic institution, and 15 percent “other.”
 
Of the deals analyzed, 28 percent involved licensing to or from a pharmaceutical company; 26 percent to or from a biotech company; 35 percent to or from an academic institution; and 11 percent “other.”
 
According to the report, small-molecule compounds were included in more than 50 percent of all deals submitted, with anticancer, CNS, and “other” being the most prevalent therapeutic area types submitted. The report also noted that 88 percent of deals were exclusive, with 90 percent including US rights and 70 percent worldwide.
 

“As projects move from pre-clinical, through proof of concept in humans, to regulatory approval, the royalties do increase, reflecting the incremental value being created from these activities.”

In terms of royalties, 54 percent of deals included a fixed royalty and 33 percent included tiered royalty rates. Meanwhile, 80 percent of deals included an upfront payment.
 
Added Value
 
One of the key findings of the survey related to how the development stage of a biopharmaceutical affected royalty rates in licensing deals for those products.
 
According to the report, fixed royalty rates were used for most deals with preclinical products, with an average fixed royalty rate of 4.3 percent. In addition, average royalty rates for biological products were slightly higher than small molecules.
 
Higher valued assets generated both higher upfront payments and higher average royalty rates: preclinical assets had a royalty rate range of 5 percent to 8 percent; assets licensed in the pre-proof-of-concept stage had rates of 7 percent to 10 percent; and post-POC technologies garnered royalty rates of 14 percent to 18 percent.
 
“As predicted, this survey found an increase in the value of transactions proportional to the stage of development at the time of the deal,” Jim McCarthy of Alabama-based biopharmaceutical firm Expression Genetics and chairperson of the Royalty Rate Survey Committee, said in a statement.
 
“As projects move from pre-clinical, through proof of concept in humans, to regulatory approval, the royalties do increase, reflecting the incremental value being created from these activities,” McCarthy added.
 
This result also underscores the common lament of academic institutions related to difficulties in licensing their biomedical technologies to companies when they are in their very earliest stages. Just as companies are willing to pay more to license biopharmaceuticals that have progressed further down the development pipeline; so too are companies more likely to license technologies at all from academic institutions if they have been developed to at least the pre-clinical stage.
 
Although LES’ membership comprises more industry than academic representatives, the survey revealed a few interesting trends about biopharmaceutical deals that involved academic institutions.
 
Other data indicate that academic licensees do appear to be more concerned with the progress of a technology to market than they are with reaping large rewards from sales of those technologies once they are commercialized, as development milestones were much more prevalent than sales milestones in deals reported by academic institutions.
 
According to the LES report, 74 percent of deals reported by academic institutions involved an upfront payment; 68 percent involved development milestones; and 19 percent involved sales milestones. In addition, 9 percent involved some sort of research funding, and 9 percent involved equity investment.
 
In terms of deal valuation, a net present value of a technology was calculated in only 19 percent of total deals reviewed, with licensees computing NPVs nearly three times as often as licensors.
 
In addition, NPVs were calculated by pharmaceutical and biotech companies much more frequently (36 percent and 26 percent, respectively) than academic institutions, which reported calculation of NPVs in just 4 percent of deals.
 
Certain therapeutic areas triggered companies to more frequently calculate NPVs. These included dermatological, gastrointestinal, and cardiovascular. Other findings from the valuation portion of the survey included the fact that NPVs were computed for non-platform technology deals more frequently than they were for platform technology deals; and the frequency of computing NPVs does not appear to be related to the size of the company.
 
According to LES, the survey review committee members were “pleasantly surprised” by the percentage of deals submitted on pre-clinical compounds, as those deals are very early in the development cycle and have traditionally been the most difficult to gather information on.
 
LES said that the full survey report, with more than 100 pages of data and analysis, is available exclusively to LES members in the US and Canada. Excerpts from the report can also be found on the LES website.

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