Evolving Deal Terms

Biopharma Milestone Payments

Negotiating an Equitable Value Allocation

Mark Edwards Mark Edwards
Since the late 1990s, biopharma development and regulatory milestones have been playing catch-up with richer deal terms. Despite big improvements, many alliance licensors still have a ways to go.
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During the first era of biopharma alliance negotiations, from the early 1980s until the mid-1990s, the most contentious issue in alliance value allocation was cost of capital. Biotechs were small, venture-backed and in constant need of cash infusion – hence biotech’s cost of capital must be high. Pharmas were large, cash rich and able to raise funds via debt – hence pharma’s cost of capital must be low. However, in contemplating an R&D alliance together, the R&D program itself has a cost of capital, and conceptually the program’s cost of capital should align with the commercialization partner’s – i.e. pharma’s low cost of capital.

Cost of capital matters in biopharma alliance negotiations because the higher the cost of capital, the less valuable downstream payments become and, conversely, the lower the cost of capital, the more valuable milestone payments and royalties are in the allocation of value between the alliance partners. Throughout much of the first alliance era, therefore, pharmas argued vigorously that a high cost of capital be applied to all financial projections upon which alliance terms were negotiated. Of course, this had the effect of minimizing a biotech’s incentive to negotiate for higher milestones and, especially, royalty payments. In addition, using a high cost of capital for alliance valuation gave credence to the notion that partnering an R&D program was one more biotech financing event – like a venture round or public offering, wherein biotech’s cost of capital was indeed high – and that upfront and sponsored R&D payments for an R&D program partnered “out” might thereby be made available to support one or more additional R&D programs that remained “in” the biotech.

This negotiation dynamic changed rapidly in the late 1990s, however, as co-development and regional alliance structures increased the visibility of substantial profits from successful biopharma products. Cost of capital in alliance financial projections fell markedly – if not to the 10-12% used by pharma internally, then to the mid-teens (as compared to 30% or higher utilized previously). This had a dramatic impact on royalty rates and overall deal size (so-called “biobucks”) as pharmas began to offer other one-off payments (e.g. sales milestones and payments for additional indications) in lieu of greater royalty or profit sharing.

Somewhat diminished in relative importance in the new “low cost of capital era” were the development and regulatory (Dev/Reg) milestone payments associated with an alliance’s lead R&D program. Dev/Reg milestone payments were one-off, unlike royalties or profit splits which were annuities. Moreover, the achievement and timing of Dev/Reg milestones were typically under the control of the pharma partner – who decided when human testing began, when to commence Phase III, file an NDA or launch a product.

But Dev/Reg milestone payments matter enormously in alliance value allocation. This is because most biopharma alliances don’t result in commercial products but do achieve one or more Dev/Reg milestones. Conceptually, it is useful to think of Dev/Reg milestone payments as upfront payments that are escrowed by the R&D program’s licensee until achievement of the associated milestone event, and are then released to the program’s licensor. In this sense, although the licensor is confident that the R&D program will someday commence Phase III clinical trials, the licensee holds back a substantial portion of the upfront payment until Phase III trials actually commence.

Over the past two decades, Dev/Reg milestone payments have been adjusting to this new role in the “low cost of capital era” for alliance value allocation. For this reason, BioSci has undertaken a comparative analysis of biopharma alliances over the past two decades – to see how Dev/Reg milestone payments have fared under various categories of licensee (e.g top 15 pharma, mid-sized pharma and other biotechs) as well as when the licensor is a research institution versus a corporation. Given that Dev/Reg milestones are second only to upfront payments in timing, and are the most likely to be paid of all downstream payments, how equitably have deal participants allocated value via Dev/Reg milestone payments in biopharma alliances?


For purposes of this analysis, we looked at development stage (discovery through Phase III) alliances commenced since January 1998 that have been SEC-filed with financial terms available on an unredacted basis (typically through FOIA-released contracts), and contain one or more Dev/Reg milestone payments. In all, we classified 1,073 biopharma alliances by stage at signing as well as type and amount of Dev/Reg milestone payment. As shown in Figure 1 and the All Alliances spreadsheet accompanying this article, 39% of the Dev/Reg alliance dataset were clinical stage deals at signing: 153 alliances (14%) were Phase III stage, 176 (17%) were Phase II stage and 88 (8%) were Phase I stage. Preclinical stage alliances were the largest single component of the dataset with 266 deals (25%), followed by Discovery stage deals with 246 alliances (23%). 144 alliances (13%) involved lead stage molecules at signing.

With respect to deal participants, 403 deals (38%) involved one of the 15 largest pharmas (15 Top Pharma) as licensee or acquirer of the licensee, 209 deals (19%) involved a mid-sized pharma or big biotech (Mid Size Pharma) as licensee or acquirer, and 457 deals (43%) involved another biotech (Other Licensees) as licensee. In addition, we classified the deals by licensor, with 179 (19%) having university or research institutions (Univ Licensor) as licensor and 894 (81%) having a corporate entity (Corp Licensor) as licensor.

As with most BioSci analyses, the tags to specific Dev/Reg milestone provisions included in the analysis that follows are accessible directly via the links in the embedded spreadsheets. Subscribers to BiosciDB may also access the full biopharma alliance from which each provision was extracted.

Our definitions of the various financial terms utilized in this analysis are as follows:

  1. Total Development and Regulatory Milestones (Total Dev/Reg) – the total milestone amount to be paid to the licensor through launch in all jurisdictions for the first product indication (sum of 2-12 below);
  2. IND Filing – payment on Investigational New Drug filing, typically with the FDA;
  3. Phase I Start – payment on first human treated in a clinical setting;
  4. Phase II Start – payment on commencement of a human clinical trial to determine safety and preliminary design of additional efficacy studies;
  5. Phase III Start – payment on commencement of a pivotal human clinical trial;
  6. FDA Filing – payment on filing of a New Drug Application with the FDA;
  7. 1st Approval – payment(s) on FDA or other 1st major market approval and/or launch;
  8. EU Filing – payment on filing of a marketing approval application in the EU;
  9. Major EU Approval – payment(s) on EU approval, pricing and/or launch;
  10. Japan+ Filing – payment on filing of a marketing approval application in Japan or other Asia;
  11. Japan+ Approval – payment(s) on Japan or other Asia approval and/or launch;
  12. Other Dev Milestones – typically payments on early R&D, toxicology, development candidate designation or license option exercise;
  13. Deal Size – a summation of all upfront, R&D reimbursement and milestone payments, including Total Dev/Reg milestones, sales milestones and/or milestones for additional products or indications, plus any equity or loan amounts, to be paid to the licensor;
  14. Upfront – the license fee plus any annual payments not based on events (upfront equity was not included, as it is typically based on the fair market value of the securities purchased).

N.B. With respect to the average and median amounts shown in the figures, spreadsheets and table, (1) the Deal Size typically includes additional payment elements, such as sponsored R&D, equity, loans, sales milestones and/or milestones for additional products or indications; and (2) specific Dev/Reg milestone payments apply only to deals for which non-zero dollar amounts were owed for the corresponding milestone.

Total Dev/Reg Milestone Payments have Increased Significantly in Recent Years

As shown in Figure 2, Average Total Dev/Reg milestone payment terms have increased 2-3 fold across all stages of development at signing over time. Preclinical and Phase II stage deals had the highest percentage increase at 260% each – from $10M and $17M, respectively, in the 1998-00 period to $38M and $65M for deals signed since 2008.

Alliances involving the 15 Top Pharma have generally led the way to higher Total Dev/Reg milestone payments. Figure 3 shows that average Total Dev/Reg milestone payment terms for deals licensed by the 15 Top Pharma have increased 3-7 fold across all stages of development in recent years. Preclinical and Phase II stage deals again had the highest percentage increases – from $12M to $88M for preclinical stage deals and $22M to $146M for Phase II stage deals.

Figures 4-7 compare the average and median Total Dev/Reg milestone payments by type of licensee for alliances signed at several stages of development most recently (2008+) versus deals signed from 2004-07. (See also spreadsheets for 15 Top Pharma, Mid Size Pharma, and Other Licensees.) For discovery stage deals (Figure 4), Mid Size Pharma have out-spent the 15 Top Pharma on both an average and median basis since the 2004-07 period. The 15 Top Pharma have led Total Dev/Reg milestone payments for all other stages of development, however, although Mid Size Pharma have largely closed the gap with respect to preclinical stage alliances in the most recent period (Figure 5).

Dev/Reg Milestone Payments Vary Greatly by Top Pharma Partner

As shown in Table 1 and the Top Pharma spreadsheet, average and median Total Dev/Reg milestone payments vary substantially even within the 15 Top Pharma partners – from a high average of $88M by AstraZeneca (AZ) to a low of $28M by Bayer. When viewed as a percentage of total Deal Size, Johnson & Johnson (J&J) is most reliant on Total Dev/Reg milestone payments (44% of average Deal Size), while Novartis is least reliant at 19%. With respect to specific Dev/Reg milestone payments, J&J is most generous at Phase III Start on both an absolute basis ($22M on average) and as a percentage of Total Dev/Reg milestones (30% on average). With respect to payment on 1st Approval, AZ is most generous on an absolute basis ($37M on average), while Lilly pays the highest percentage of Total Dev/Reg milestones at 1st Approval (51% on average). At the other end of the spectrum, Bayer pays the lowest amount on both Phase III Start and 1st Approval (on average $4.5M and $8.2M, respectively), while the lowest percentage of Total Dev/Reg milestone payments for Phase III Start is AZ (at 12%) and for 1st Approval is Roche (at 27%).

University Licensors Make Big Gains, but Still Fall Far Short of Corporate Deals

As shown in Figure 8 and the Univ Licensor spreadsheet, university and research institutions have made large percentage gains in Total Dev/Reg milestone payments in recent years – on average increasing from six-figure to seven-figure payments. By contrast, Figure 9 and the Corp Licensor spreadsheet shows gains in Total Dev/Reg milestone payments obtained by corporate licensors for similarly staged alliances. With the exception of half a dozen university licenses having a Deal Size of $50M or more, there continues to be an order of magnitude difference between Total Dev/Reg milestone payments negotiated by university licensors and alliances commenced at similar stages of development by corporate licensors.


Dev/Reg milestone payments have increased substantially in recent years in response to deal competition from Mid Size Pharma and a flattening of the cost of capital utilized in alliance negotiation. Assuming that the standard for progression of an R&D program from one stage of development to the next is roughly equivalent for all deal participants, it’s unclear why deals done with Other Licensees, or licenses from Univ Licensors, should involve substantially lower Dev/Reg milestone payments than available from 15 Top Pharma or Mid Size Pharma. University licensors in particular have been slower than other biopharma licensors to participate fully in this upward shift in milestone terms, but are likely to benefit from the large inventory of biopharma contracts that are available as comparables for future transactions.