Licensing Deals Still Backloaded In 2013, But Biotechs Could Gain Leverage

An analysis of alliance deals in 2013 shows pharmas’ continued reliance on heavily structured deals, a strategy that has often frustrated biotechs looking to partner. But the appetite for new IPO listings may be giving them more options, provoking competitive deal terms from licensors.

For biotechs looking to partner drug candidates, deals have been increasingly scarce over the past few years. That trend continued in 2013, as alliances barely inched up from recent lows while licensors’ up-front commitments shrank further, thanks to continued proliferation of structured deals that deliver payouts only when drugs succeed in the clinic and the market.

But the tide may be turning: With capital increasingly available from public markets, some biotechs are holding onto mid-to-late-stage assets instead of partnering them, and looking to fund further development on their own. Dealmaking also shifted subtly toward early stage tie-ups in 2013 compared to 2012, one reason for the heavily structured deals where up-front payments represented a small percentage of total value.

An analysis of alliance deals struck between 2007 and 2013 revealed up-front spending by licensors reaching a low, while a larger percentage of their commitments hinged on milestone payments. Our data set, culled from our Strategic Transactions database, consisted of alliances valued above a relatively arbitrary floor of $10 million in up-front and milestone payments combined, including both pre-commercial and commercial milestones. We chose to exclude “reverse licensing” deals in which a pharma licensed a drug to a smaller company as well. We examined similar trends last year, but used a modified data set; this year’s analysis applied our new parameters to past years, yielding different historical numbers (Also see "In 2012, Buyer’s Market Made Alliances Rarer" - Pink Sheet, 7 Jan, 2013.).

“Pharmas have been much more careful in spending during the past few years,” explained Randall Sunberg, co-chair of Morgan Lewis & Bockius’s life sciences transactions practice. “Their own revenues were down, and biotechs had fewer [partnering] options. [Pharmas] offered smaller [up-front] terms in back-ended deals, with milestones that were more spread out and relied more heavily on sales.”

Only 90 deals in this category were announced in 2013, just a few more than the 88 and 87 alliances in 2011 and 2012, respectively (see table below). Licensors committed $3.15 billion up front in 2013’s deals, representing an average of just over $35 million per partnership. The total outlay was a low in recent history, and the average up-front was among the smallest in recent years. But about half the deals were for assets in pre-clinical and Phase I stages of development, a higher proportion than last year; many of those were heavily structured.

Dealmaking Holds, But Up-Fronts Are Even Smaller
Year	Deals >$10m total value	Average up-front (millions)	Total up-front commitments (billions)	Average potential value, including up-front & milestones (millions)	Total potential value (billions)	Average portion of deal committed up front
2007	178	$33.10	$5.88	$164.60	$29.29	20.1%
2008	137	$42.84	$5.87	$172.23	$23.60	24.9%
2009	142	$45.15	$6.41	$212.81	$30.22	21.2%
2010	106	$44.54	$4.72	$252.96	$26.82	17.6%
2011	88	$38.04	$3.35	$267.55	$23.54	14.2%
2012	87	$44.48	$3.87	$230.30	$20.04	19.3%
2013	90	$35.05	$3.15	$244.70	$22.02	14.3%
Source: Strategic Transactions

Sofinnova Ventures general partner Jim Healy said he had observed a multi-year trend toward fewer but larger deals; pharmas have demonstrated an appetite for later-stage deals with reduced risk over the past several years. Indeed, the licensors in these deals are still demonstrating that for successful products, they’ll pay top dollar. Counting milestone payouts, the 90 deals’ potential value totaled more than $22 billion – an uptick from 2012’s $20 billion, and not far below the $23.5 billion in 2011. The average potential value of a 2013 licensing deal was $244.7 million; that figure rose from $230.3 million in 2012, though it was off from $267.6 million in 2011.

The figures show that licensing deals are as heavily structured as ever, if not more. Just 14.3% of the value of these partnerships was committed up front in 2013, down from 19.3% the previous year and essentially flat from 2011. In the 48 deals worth $100 million and up, including milestones, just 11.4% of the value arrived in an up-front payment – another low in recent history (see table below).

Although the numbers have fluctuated somewhat in the past three or four years, they represent a drastic change from the later years of the 2000s decade. Total deal flow has been roughly halved since 2007, when 178 partnerships were completed; licensors spent $5.88 billion up front that year, about 87% more than they did in 2013. And in 2008, licensors committed about a quarter of deal value up front – $5.87 billion of the $23.6 billion they promised to spend if the programs they licensed hit all of their milestones. (Rarely are all of the milestones, or even most of them, attained.)

Bigger Deals Continue To Be Heavily Structured
Year	Deals >$100m total value	Average up-front (millions)	Total up-front commitments (billions)	Average potential value, including up-front & milestones (millions)	Total potential value (billions)	Average portion of deal committed up front
2007	78	$55.92	$4.36	$335.61	$26.18	16.7%
2008	60	$75.52	$4.53	$345.51	$20.73	21.9%
2009	76	$68.38	$5.20	$362.42	$27.54	18.9%
2010	63	$62.98	$3.97	$401.51	$25.30	15.7%
2011	51	$53.64	$2.74	$430.60	$21.96	12.5%
2012	41	$75.09	$3.09	$449.10	$18.41	16.7%
2013	48	$48.48	$2.33	$424.80	$20.39	11.4%
Source: Strategic Transactions

Though they’ve committed less up front lately, some pharmas are still believed to have large appetites for deals. The richest, including Pfizer Inc., Amgen Inc., and Johnson & Johnson, are hoarding massive amounts of cash, but mostly shied away from big licensing deals in 2013 (Also see "Pharmas Among Biggest Cash Hoarders, Moody’s Finds" - Pink Sheet, 20 Mar, 2013.). Megamergers on the scale of Pfizer’s $68 billion purchase of Wyeth and Merck & Co. Inc.’s $42 billion buyout of Schering-Plough in 2009 were also absent last year [See Deal][See Deal].

Biotech giant Celgene Corp. was among the year’s most active licensors, closing several large deals. It paid OncoMed Pharmaceuticals Inc. $177.3 million up front in a stem cell therapy tie-up, and closed a deal with MorphoSys AG for mid-stage multiple myeloma candidate MOR202 for $153.7 million up front . The early-stage OncoMed deal’s unusually large milestones could deliver it more than $3.3 billion, were they all to be paid out. (If it were excluded from the overall statistics, the low up-front total as a percentage of potential deal value in 2013 would be more similar to figures from other recent years.) Celgene also entered into an arrangement with gene therapy company bluebird bio Inc. concerning a T cell therapy program, and an option deal with Array BioPharma Inc.[See Deal][See Deal].

Some biotechs and their investors have complained that pharmas have held too much leverage in negotiations, leaving them with poor dealmaking options. Those seeking to partner have been met with terms they deem onerous, with a payback to shareholders that barely refunds the cash they’ve invested to bring product candidates into the clinic and toward proof-of-concept. Instead, they’re looking elsewhere for liquidity.

The IPO window has been especially friendly to new listings for about a year, giving biotechs at least one good option besides partnering on unfavorable terms (Also see "On The Road And Through The Window: Inside Three Biotech IPOs" - Scrip, 22 Nov, 2013.). Flexion Therapeutics Inc., for example, reversed its partnering strategy, and is now attempting to go public. Launched in 2007, Flexion was built to partner; it intended to in-license drugs, taking them to proof-of-concept, and forge pharma alliances serially. But potential partners offered backloaded deal terms the company deemed unsatisfactory, so Flexion elected to raise additional capital in late 2012 to support late-stage trials on its osteoarthritis drugs (Also see "No Longer Aiming To Partner At Proof-of-Concept, Flexion Raises $20M For Late-Stage Trials" - Pink Sheet, 4 Dec, 2012.). And earlier this month, Flexion filed for an IPO [See Deal].

Sunberg said that if the window remains open, some recent trends may reverse somewhat. Licensors may have to compete more aggressively for deals, and offer larger up-front payouts. Option deals, popular recently but not usually favored by biotechs due to their capped upside, may be on the wane, he added.

Healy said the opportunity for new listings creates a “healthy tension” between biotechs and licensors, as well as potential buyers. With capital more accessible, biotechs have “more optionality,” he said, and given the choice, most entrepreneurs will lean toward going it alone and conducting an IPO, rather than partnering or selling outright.

If a reversal is indeed in progress, the changes aren’t likely to be permanent, and the late-2000s deal environment may never return. Sunberg said industry consolidation has left fewer buyers for both acquisitions and licensing deals, leading to less competition regardless of the IPO window’s state. Meanwhile, biotechs and VC investors have avoided early-stage drug discovery somewhat, choosing to invest in de-risked product candidates instead, thereby reducing future partnership deal flow.

Still, Sunberg pointed to increased dealmaking from certain sources, specifically mid-sized Asian and European pharmas, often with an interest in rare diseases. Healy added that while the industry has consolidated, certain mid-cap biotechs have grown larger, and now approach the size of traditional Big Pharmas – for example, Gilead Sciences Inc., whose market capitalization exceeds $125 billion. “There are more buyers on a global scale,” Healy said. (Also see "Biopharma M&A In An Era Of Elusive Growth, Capital Triage, and New Competitors" - In Vivo, 19 Jun, 2013.)

“We’ll see a rebound [in licensing deal flow] when biotechs do move back toward better-funded, more robust drug discovery,” said Sunberg. That will take investment, whether by VCs or other parties. He pointed to pharmas’ in-house research and development groups entering into agreements with research institutions and hospitals, sometimes creating incubators that have edged into what was once the province of privately-held biotechs.

A handful of sizable alliances have already been announced in 2014. They include Jazz Pharmaceuticals PLC’s licensing of Aerial BioPharma LLC’s narcolepsy compound ADXN05, Alexion Pharmaceuticals Inc.’s equity-and-option deal with Moderna Therapeutics LLC for messenger RNA therapeutics that treat rare diseases, and the expanded alliance between Alnylam Pharmaceuticals Inc. and Genzyme Corp. covering RNAi treatments [See Deal][See Deal][See Deal].