Apples v Oranges: Don’t Use BioBucks for Deal Comps

Press releases often grossly overstate the dollar value of life science license agreements. The stated “BioBucks” are adjusted for neither probability of occurring (often slim) nor the time value of money. However, many industry participants refer to these press releases for deal comps when structuring agreements. Upfronts, regulatory milestones, and single or double digit royalties are all teased apart for signs of what is “fair market value”. Below is an explanation of why this is a common yet faulty approach.

Non-disclosure

The detailed financial terms and structure of drug development and commercialization agreements are rarely made public. Private companies don’t disclose them and public companies only do so if they are “material”. License agreements disclosed as Exhibits to regulatory filings often redact key items. It is small wonder that people rely on what is available – carefully tailored press releases.

Complex and Customized Deal Structures

Drug development and commercialization agreements are highly complex and customized. Trying to condense their key terms into one or two sentences is unrealistic.  Some subtle variables that are manipulated to structure a license agreement include:

·         R&D – Some deals require the licensee to pay for near term clinical trials which can easily match or surpass the size of any Upfront.

·         Indications – Some agreements “split indications” and only license a few of a drug’s many potential therapeutic uses or pay indication-specific milestones. The same may apply to a particular route of administration.

·         Geography – While some licenses are worldwide, there has been a recent trend towards ex-US or country-specific deals.

A worldwide deal where the licensee pays for all future clinical trials and the licensor accesses all uses of the drug will have much higher “headline” deal terms than an ex-US deal where the licensor pays all future expenses and only accesses the lead indication.

Drugs Are Not Fungible

Even if two agreements have identical structures, are at the same stage of development and are for the same specific indication (e.g. front-line for stage III lung cancer), their financial terms can and should diverge. The value of a drug depends on many factors including existing and projected safety & efficacy data, route of administration, reimbursement setting, IP life, manufacturing requirements and COGS estimates, etc.  

Because each deal is custom and terms are kept mostly private, the life science partnership market is extremely opaque.  Relying on surface-level press releases is bad practice. Every deal should be properly financially modeled to include all key variables and identify the optimal structure and financial terms that can withstand a variety of future scenarios.  Otherwise, you are just comparing apples to oranges.