Understanding Pharma Licensing: From rNPV to Deal Terms

What a billion dollar deal is actually worth

In the webinar, Patrik shows an example of two real deals in the public domain:

The billion dollar deal is worth roughly a third of the smaller one. Almost all of its value is the upfront payment, because the milestones behind it sit seven to ten years out and carry a probability of being reached estimated by Patrik at around 4%.

Early-stage deals produce the biggest headlines precisely because a preclinical asset has more milestones left to pass, and deals get pushed over round numbers because a billion reads better than $900 million. But there is no guarantee that the milestones will be reached.
 

Price is not value

"Price is what you pay, value is what you get."
Warren Buffett

A valuation tells you what an asset is worth. What someone pays depends on supply and demand, and is settled by negotiation. Valuation is the basis for that negotiation, not a substitute for it.
 

How rNPV works

Risk-adjusted net present value estimates what a product is worth today, based on the profit it might make in the future. It is built in three steps.

• Map the money over time. What each trial costs and how long it takes, through to the market. Then what the product earns once it is sold, for as long as the patent protects it.

• Take out the risk of failure. Each stage has a probability of success, estimated on historical data by indication and modality. Chained together, those probabilities mean roughly one product entering phase 1 in ten reaches the market, so most of that future profit has to come off the table.

• Discount for time and for everything else. Money far in the future is worth less today, and the discount rate carries that along with the risks that never disappear: pricing, competition, manufacturing, IP.

What comes out is a single number: what the product is worth now. And because a trial that succeeds removes risk, that number steps up at every stage. The same asset can be worth $8m at the start of phase 1 and several hundred million as it approaches the market. Timing counts as much as size, so blockbuster sales ten years out are worth far less today than the same sales three years out.
 

What is in a licensing deal, beyond the money

The payments get the attention, but the clauses around them decide how much of that money you ever see. Each one settles a question:

• What exactly is being licensed? The patent, the data, the know-how, and whether the partner gets it exclusively or not.

• Where does the licence apply? Worldwide, or one region. Everything you do not license out stays with you.

• What must the partner actually do with it? The diligence and performance obligations, which set the pace they have to develop at.

• Who runs development and who handles the regulator? Named clearly, so neither side assumes the other is doing it.

• Who owns what comes next? New IP appears as the product develops, and someone has to own it.

• Can the partner license it on? If they can, agree now what share of that income comes back to you.

• How does the technology move across? The transfer of materials, methods and know-how that makes the licence usable.

The performance obligations are the ones most often written too lightly. They protect you against a partner who shelves the asset, or who hands it back when the strategy changes, which is one of the most common reasons a licensed product stops moving.

The money itself usually comes in three parts: a non-refundable upfront paid at signing, development milestones (defined precisely enough that they cannot be argued about later, and set at the points where the value genuinely steps up), and commercial milestones, often tiered by sales. Equity can form part of the package too.
 

Which offer is actually better?

Once you can value the asset, you can value each part of an offer separately. A $1m upfront is worth $1m. A $1m milestone on completion of phase 2 is worth a fraction of that, because it is both distant and uncertain. A royalty point might be worth several hundred thousand in present value.

That is what lets you compare offers that look nothing alike. A $25m upfront with a 5% royalty and a $5m upfront with a 12% royalty can carry exactly the same value, which is impossible to see by reading the terms alone. It also lets you shape an offer around what each side needs: a biotech that wants cash now to fund its other programmes can trade royalty points for upfront, and a biotech comfortable with risk can load the deal towards the back.

About the expert:

Patrik Frei, expert trainer of Pharma-Biotech Product & Company Valuation, is widely recognised as Europe’s leading expert on the valuation of high-growth life sciences companies.

• Founder & CEO of Venture Valuation, a firm specialising in independent assessments and valuations of high-growth biotech and life sciences companies, and owner of Biotechgate, the global business development database for the life sciences industry.

• Author of "Assessment and Valuation of High-Growth Companies".

• Has carried out valuations for organisations including the Novartis Venture Fund.

• A CELforPharma faculty member since 2007, consistently praised by participants for his clarity, expertise, and engaging teaching style.