It’s 2019: Do You Know What Your Biopharma Royalty Rates & Deal Terms Are?
Monday, June 10, 2019
One of the most significant benefits of LES membership is having access to the Royalty Rate and Deal Terms Surveys that LES conducts, analyzes, and reports on. These surveys provide current, objective, quantitative information about licensing activity not available anywhere else.
Results of the 2018 Global Life Sciences (LSS) Royalty Rates and Deal Terms survey—the sixth edition for this sector—debuted on May 9, 2019. A collaboration of LES and LESI, the survey was global in scope and looked at royalty rates and deal terms conducted in the last four years. Data collection occurred between August and October, 2018. The survey targeted LES and LESI Life Sciences Sector members in biotechnology, pharmaceuticals, diagnostics, and drug delivery.
A webinar on the survey report was moderated by Dana Matzen, Chair-Elect of the LES Life Sciences Sector. The presenters—all members of the survey core committee—were Beth Gildea, co-chairperson, of GE Healthcare; Arpi Siyahian, survey instrument sub-committee, of NUtech Ventures; and Sean Sheridan, promotion/recruitment sub-committee and analysis sub-committee, of Charles River Associates. Vault Consulting, a survey research firm near Washington, D.C., helped committee members with the survey.
Profile of Responses
Beth Gildea opened the survey webinar with an overview of the data and participants. Of 178 deals submitted, 101 were complete and qualified for analysis, see chart for Organization Type. Survey respondents represented 10 of the 31 LESI societies. While the size of organizations reporting deals varied greatly, the majority were organizations with annual pharmaceutical sales of zero to $100 million.
There was a marked change from 2016 in the global distribution of respondents. In the 2016 survey, 87 percent of respondents were from LES, and 13 percent from LESI. However, in 2018, 60 percent of survey respondents were from LESI, while 40 percent were from LES.
Respondents tended to report the most recent deal: 40 percent of submitted deals were completed in 2018; 43 percent in 2017; and 18 percent in 2016. Similar to past surveys, the 2018 survey revealed that 64 percent of all deals submitted were still in the pre-clinical stage of development. Most deals (76 percent) were reported by the licensor. In over 50 percent of deals—licensor and licensee—reported deals combined—the partnering organization was a pharmaceutical or biotech company. The top reasons for a deal were:
- new chemical entity (32 percent);
- platform (24 percent);
- drug delivery (8 percent); and
- other (19 percent).
Royalty Rate and Deal Terms
Arpi Siyahian’s presentation followed with an analysis of royalties, see chart on Page 3 for Royalty Structure. Among tiered deals, the most common was a three-tiered structure. Most deals in both flat (48) and tiered (19) categories were based on net sales.
Comparing data from past surveys revealed a notable increase in royalty rates for assets that have reached the proof of concept (POC) stage. Between 2009 and 2018, the average fixed royalty rate for the earliest stage products was about 5 percent, while for products that had passed POC, it was 13.3 percent. The 2018 survey shows that early-stage assets in infectious diseases had the highest royalty rates, with a range of 2 to 10 percent, a median of 5 percent, and an average of 5.3 percent. While 75 percent of the deals in the 2018 survey had royalty rates of less than 4 percent, when this figure is compared to deal data in previous surveys, no trend of increasing or decreasing royalty rates can be seen. Looking at combined survey data, the higher the peak sales potential, the greater the share of deals with a tiered royalty structure. Combined survey data also show that royalties increase as products mature through the pre-clinical, pre-POC, and post-POC stages.
Approaches to Valuation
Sean Sheridan made the final presentation, discussing valuation methods. Of the 101 surveys analyzed, 55 provided financial information, and 55 percent were financially modelled. That is, respondents answered “yes” to the question, “As part of the deal process, did you (or someone at your company) financially model the deal?” The 2018 survey shows a change in awareness of financial modeling of deal value. The percentage of “Yes” answers were greater than in 2016, 2014, and 2009, while “Not applicable/don’t know” responses decreased. While some valuation methods (IRR, multiples, and EFR) have not always been included as options on the survey, data from 2009 to 2018 show that use of all types of valuation methods, except comparables, decreased. Valuation methods can be found in the chart below. These statistics represent a dramatic change from the 2016 survey: a 127 percent increase in the use of comparable valuation, and a 59 percent decrease in the use of NPV.
There were some differences in how organizations valued the potential of financing components. Among both academic and biotech and pharmaceutical organizations upfront payments and development milestones were most prevalent. For compound deals, upfront payments were the most frequent. Valuation of deal terms also differed by company size: Deals between large companies (more than $500 million in sales) involve more frequent and higher upfront payments.
The full report of the 2018 Global Life Sciences Royalty Rates and Deal Terms survey is available to LES members at www.lesusacanada.org/page/royaltyrates.