Tips for structuring a licensing deal between a biotech and a pharma company

By Dr Patrik Frei, expert trainer of Pharma-Biotech Product & Company Valuation
 

The objective of any deal should be to create a win-win deal

To achieve it, business development executives on both sides of a licensing deal must ensure that they strive for a fair deal structure, which means that both sides of the licensing deal have to make sure that:

• The licensor receives payments reflecting the invested money as well as the current product value

• The licensee is compensated for taking the risk associated with the future product development

• The selected valuation model is transparent and the rationale behind the used assumptions is clear and based on solid data 
   

A successful deal structure is based on the following consecutive steps:

1. Determine the product value

   
   The risk-adjusted Net Present Value (rNPV) valuation method is highly suitable and widely accepted for calculating the product value. The model is clear, transparent and allows one to consider different deal structures, while understanding how the value is split between the licensor and the licensee.
    

2. Determine the handover time point

   
   At what point will the asset be licensed out and who is taking over what responsibility from that point onwards. The timing as well as the assigned tasks will have an important impact on the deal terms.
    

3. Determine milestones and royalties

   
   A deal is normally paid in several parts: an upfront payment at signing, development and regulatory milestones at defined points such as the end of phase III and regulatory approval, commercial milestones tied to sales thresholds, and royalties tiered on net sales. The deal value is the sum of the upfront and the milestone payments. Because a payment far in the future is worth much less today once it has been discounted and adjusted for risk, front-loading or back-loading a deal changes what it is actually worth to each side and shifts who get how much from a deal.
    

4. Negotiate until you have a draft of an initial term sheet

   
   The biotech’s share of the deal value typically falls somewhere between 20% and 50%. Where it lands depends on the negotiations, the supply and demand for such a deal, and on the two sides working with different assumptions on cost, time, market and risk, and with a different cost of capital.
    

What is the most important step in the deal-making process?

Even though it is paramount to get each of the 4 steps in the deal-making process right, there is still one that is the key to a successful win-win deal, namely: the product value. Without a realistic product value there is a high risk that the value gap between the licensor and the licensee will be too large to reach a consensus.