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The Remarkable Growth of Upfront Payments in Biopharma Alliances
Over the past two decades, upfront payments in biopharma alliances have increased 4-12 fold. Which licensors are leading the way, and what kinds of deals fetch the highest payments on signing?
Six months ago, BioSci undertook a comparative analysis of two decades of development and regulatory (Dev/Reg) milestone payments in biopharma alliances. This analysis showed that average total Dev/Reg milestone payment terms have increased 2-3 fold across all stages of development at deal signing. We argued that Dev/Reg milestone payments matter enormously in alliance value allocation between licensor and licensee precisely because most biopharma alliances don’t result in commercial products. We also suggested that conceptually it’s useful to view 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.
To understand how biopharma alliance value allocation has evolved over the past two decades, however, we must also consider changes in upfront payment terms. For this reason, therefore, we analyzed changes in upfront payments, both with and without inclusion of purchased equity, by stage of development at deal signing. For early stage alliances (Discovery, Lead & Preclinical stages) we then considered subsets wherein the licensor is a research institution (Univ Licensor) versus a corporation (Corp Licensor). For clinical stage alliances (Phase I, Phase II and Phase III at signing) we analyzed subsets wherein the licensee pays all development costs post-signing (No Co-Dev) versus those deals wherein the licensor has development cost obligations post-signing (Co-Dev).
For purposes of this analysis, we looked at development stage (discovery through Phase III) alliances commenced since January 1998 that have been publicly announced and/or SEC-filed as material contracts. We excluded acquisitions, asset purchases and simple supply agreements, but included all other arm’s length relationships intending the development and commercialization of therapeutic or prophylactic products. This is a much larger cohort than was used for the Dev/Reg milestones analysis, since that analysis required disclosure of milestone events and payments on an unredacted basis (typically through FOIA-released contracts). By contrast, many biopharma alliances disclose the upfront payment terms voluntarily, even if no other alliance terms are disclosed. Since such disclosures are likely to impact industry perceptions of upfront payment terms, we thought it best to include the largest available cohort of alliances for this analysis.
In all, we classified approximately 5,500 biopharma alliances by stage of development at deal signing. As shown in Figure 1 and the All Alliances spreadsheet accompanying this article, 36% of the total alliance dataset were clinical stage deals at signing: 577 alliances (10%) were Phase III stage, 778 (14%) were Phase II stage and 645 (12%) were Phase I stage. Discovery stage alliances were the largest single component of the dataset with 1,843 deals (33%), followed by Preclinical stage deals with 1,280 alliances (23%). 420 alliances (8%) involved Lead stage molecules at signing.
With respect to deal participants, we classified early stage deals by licensor, with 887 (25%) having university or research institutions (Univ Licensor) as licensor and 2,656 (75%) having a corporate entity (Corp Licensor) as licensor. For clinical stage deals, we classified these alliances based on whether the licensee pays all development costs post-signing (No Co-Dev) or shares on-going development expenses with the licensor (Co-Dev). Overall, there were 1,517 (76%) No Co-Dev alliances and 483 (24%) Co-Dev alliances.
As with most BioSci analyses, the upfront payment provisions included in the analysis (along with other deal attributes) are accessible directly via the embedded spreadsheets. Subscribers to BiosciDB may also access the deal press release and/or alliance contract and analysis (if available) from which these provisions were extracted.
Our definitions of the financial terms utilized in this analysis are as follows:
- Upfront Payment – the license fee plus any annual payments not based on events;
- Upfront Equity Payment – cash received in exchange for ownership shares issued by the licensor;
- 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;
N.B. With respect to the average amounts shown in the figures, as well as the average and median amounts shown in the spreadsheets, average or median Upfront Payments and Upfront Equity Payments apply only to deals for which non-zero dollar amounts are known for each corresponding alliance.
Average Upfront Payments have Increased Dramatically in Recent Years
As shown in Figure 2, average upfront payments have increased 4-12 fold across all stages of development at deal signing over the past two decades. Preclinical and Discovery stage deals had the highest percentage increases at 1280% and 1040%, respectively. Upfront payments for clinical stage alliances increased 5-6 fold, with Phase III stage deals having the highest percentage increase at 630%. Lead stage alliances had the smallest percentage gain in upfront payments, but at 460% it was still a substantial increase.
We ran this analysis a second time, including both Upfront Payments and Upfront Equity Payments in an expanded definition of total upfront cash. Surprisingly, the inclusion of Upfront Equity only made a meaningful difference to average and median amounts in each time period for Discovery and Phase II stage deals. These differences are shown in Figure 3. (All average and median figures for each time period and development stage are available in the Summary spreadsheet.) Since Upfront Equity Payments entail an exchange of cash for ownership shares in the licensor which may be more or less valuable over time, we decided to set aside Upfront Equity Payments for purposes of the subset analyses described below.
Corporate Licensors Have Made Greatest Dollar Gains in Early Stage Upfront Payments
Figures 4 thru 6 show the gains in upfront payments achieved by corporate licensors (Corp Licensors) and research institutions as licensors (Univ Licensors) for Discovery, Lead and Preclinical stage alliances, respectively. For Discovery stage deals, upfront payments to corporate licensors increased by 970%, versus a 300% increase to university licensors. However, for both Lead and Preclinical stage deals, upfront payments to university licensors had higher percentage (but not dollar) increases than payments to corporate licensors: for Lead stage deals, university upfront payments increased 2150% versus 290% for similarly staged deals with corporate licensors; and for Preclinical stage deals, university upfront payments increased 24-fold, versus as 12.7-fold increase for similarly staged deals with corporate licensors.
Clinical Stage Co-Development Deals Show Greatest Dollar Gains in Upfront Payments
As shown in Figures 7 thru 9, clinical alliances involving co-development obligations of the licensor (Co-Dev) showed consistently higher average upfront payments than deals wherein the licensee pays all development costs post-signing (No Co-Dev). In terms of percentage gains in upfront payments, Phase I and Phase III Co-Dev deals outpaced similarly staged No Co-Dev deals: a 640% increase versus a 460% increase for Phase I deals, and an 870% increase versus an 830% increase for Phase III deals. However, for Phase II stage alliances, the percentage gains were higher for No Co-Dev deals, with a 750% increase as compared to a 730% increase in upfront payments for similarly staged Co-Dev deals.
Upfront payments have increased dramatically in recent years, led by dollar gains made by corporate licensors of early stage programs, and co-development deals for clinical stage compounds. Although the absolute dollar amounts associated with Dev/Reg milestones continue to exceed upfront payments in the vast majority of alliances, recent gains in upfront payments combined with risk-adjustment for achievement of one or more Dev/Reg milestones, suggests that the upfront payment on signing is likely to be the single largest component of financial consideration to the R&D program’s licensor.