Thursday, July 1, 2010

Valuation trends and Royalty Rates in Biotechnology and Pharmaceutical deals

The Licensing Executive Society of USA and Canada (http://www.lesusacanada.org/MainNav/Resources/biopharmrates.aspx), reports in their 2008 Royalty rate survey (a total of 230 deal responses were submitted, out of which 155 completed deals were analyzed) that:

  • Small Molecule compounds were included in close to 50% of deals 
  • Anti-cancer compounds/drugs comprised almost 33% of all deals reported and analyzed
  • 88% of the deals were exclusive
  • 80% of the deals required an upfront payment, with an average upfront premium for pre-clinical deals hovering at $600,000 and for pre proof of concept at about $900,000
  • 90% of deals included U.S. rights; 70% were worldwide
  • 57% of products subject to the licensing agreement have estimated peak sales of less than $100 million.
  • 54% of the deals included Fixed Royalty, while a sizable 33% included tiered royalty rates, with the popular tiering being 3 tiers
  • Average fixed royalty rates for pre-clinical products was 4.3%; average for pre -proof of concept was  4.6%; average for post-proof of concept was 11.6%
  • Average royalty rates for biological products slightly higher than small molecules
  • The range of tiered royalty rates (proof of concept is typically between Phases II and III of clinical trials) were: 
    • Pre-Clinical: 5-8%; 
    • pre-proof of concept: 7-10%;
    • post-proof of concept: 14-18%
Now comes, the interesting part of the survey: about valuation. Astonishingly enough, NPV or rNPV valuation technique was used only in 19% of the deals. Among that small percent, Pharma deals had the highest share of NPV calculations at 36%. Most of the NPV calculations happened when the compounds/drugs involved were dermatological or gastrointestinal. Our belief is that since the market data and industry size are well established for these industries, it perhaps is easier to use NPV calculations. Only 30% of the anti-cancer compounds, the largest among the deals analyzed, were subject to an NPV analysis. In academic deals, use of NPV analysis was almost absent, despite some of the licensing academic institutions having the best among the financial engineering departments.

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