Partnership & Licensing Deals | Topic of The Week
A ubiquitous challenge for developmental-stage biopharma companies is raising capital to advance their assets through clinical trials with the hope of one day realizing a return on investment through sales revenue. Two popular non-dilutive alternatives to equity financing (i.e. issuing and selling more stock) and taking on debt are licensing out assets to other companies to develop and/ or partnering to co-develop one or more assets. In either case, the company licensing out the asset takes in an upfront cash payment with terms that provide for future cash payments if/when certain clinical and commercial milestones are hit (i.e. completion of a successful Phase 3 study, FDA approval, first $50M in sales, etc.). Furthermore, the licensor typically is to receive single to double-digit royalty payments on future sales revenue. Something you will see frequently is licensing out the rights of compounds for specific territories. For instance, a company may license out its lead asset to a biopharma company in China or Korea to develop the asset in that territory while retaining the right to commercialize it in the U.S and elsewhere. Another common scenario you will see is a small-cap clinical-stage biopharma company teams up with a large-cap big pharma company.
The drawback is that the company is giving up a significant portion of the rights to the compound. Companies that license out their most high-value assets are a less attractive buyout targets. Below we will take a look at a couple of different examples of licensing/partnership deals. But first, let’s go over the components of these deals.
Licensing and partnership deals come with upfront cash payments. The amount can vary significantly from a couple of million dollars to several hundred million dollars or more.
An example of a favorable cash upfront deal which many of you are familiar with is Biocrysts deal with Royalty Pharma and Athryium Capital after the approval of Orladeyo. As an initial part of the deal, Biocryst received $125 million from Royalty Pharma in order to successful launch Orladeyo in markets such as Europe and progress promising pipeline candidates such as BCX9930.
Milestone payments are sums of cash (or potentially shares of a company) that are paid from the licensee when certain predefined goals are met. These are often broken down into development, regulatory, and sales milestones. The specific goals and monetary amounts are not always publicly released to investors. Development milestones often involve goals such as the FDA’s approval of an investigational new drug application (IND) or the initiation of a clinical trial. Examples of regulatory milestones involve the approval of a new drug application (NDA) or biologics license application (BLA). Finally, sales-based milestones involve payments when certain sales thresholds are achieved after FDA approval.
Continuing on the Biocryst example, the recent Japanese NHI price listing of Bicorysts drug “Orladeyo,” triggered a $15 million milestone payment from Torii Pharmaceuticals. Additionally, this deal included a royalty agreement in which the company receives tiered royalties.
Sometimes (especially with partnerships between small and big pharma companies) the bigger company will take an equity stake in the smaller company. This serves multiple purposes. One, the smaller company takes in more money upfront while simultaneously reducing the number of shares of its stock available on the market (less supply = higher price, broadly speaking). It further serves to incentivize a mutually beneficial relationship where both companies prosper. Usually, there are limits to how many shares the bigger company can purchase as a measure to protect against a hostile takeover.
An example of a deal including an equity agreement you may be familiar with is GILD and GRTS deal on 2/1/21. Under the terms of this agreement, GRTS received $30 million in a cash up front payment and $30 million in an equity investment at a premium. As in many deals of this nature, the larger company (GILD) carries the burden of Phase 1 and has an option to exclusively license to develop and commercialize the HIV-specific therapeutic vaccine beyond Phase 1. As the relationship progresses (and hopefully the drug), GRTS is eligible for an additional $725 million if the option is exercised and if certain clinical, regulatory and commercial milestones are achieved. Under the agreement, GRTS will also receive mid single-digit to low double-digit tiered royalties on net sales if/when the HIV asset is approved.
A royalty rate is when a licensee pays a percentage of sales revenue to the company from whom they licensed the drug from. This only occurs after the drug is approved for marketing. The royalty rate may be fixed, meaning it is the same regardless of revenue, or tiered, meaning that the royalty rate changes after certain sales thresholds.