Bridging the Valuation Gap
The amount of potential sales milestone payments in biopharma alliances has increased substantially in the past decade.
Late November is primetime for biopharma alliances. With strategic goals to be met, performance metrics to be attained, and the holidays looming, development stage biotechs and their prospective commercialization partners are pouring over term sheets and contract drafts with gusto. Oftentimes there are gaps, large gaps, between the valuations ascribed to a compound or technology platform by its originator and its suitor. More often than not, when November negotiations get intense, sales milestone payments(1) become the bridge that closes the gap.
Using BiosciDB, we’ve analyzed approximately 200 biopharma alliances signed over the past two decades that have included sales milestones as part of the financial terms. As shown in Figure 1, the average level of potential sales milestone payments has increased substantially in the past decade – from approximately $75 million for deals struck in 2004-05 to more than $200 million in the most recent alliances. Median sales milestone payments have doubled in this same period, from $45 million to almost $90 million.
This upward trend is most pronounced if the analysis is limited to biopharma alliances involving established pharmaceutical companies or big biotechs as alliance partners. For the 150 biopharma alliances shown in Figure 2, the average sales milestone payments have more than tripled – from $85 million in 2004-05 to $275 million most recently. Median sales milestone payments involving pharma and big biotechs have gone from $55 million to $95 million in the same period.
Given this trend, and the time of year, it’s fair to ask “How do I use this data to close the gap in my deal valuation?” Here is where BiosciDB stands apart from all other biopharma alliance databases: The rectangles of Figures 1 and 2 are links to the specific contract language for each sales milestone provision that went into this analysis.
What does this tell us? Well, for starters, the Takeda/Orexigen alliance earns top honors in this analysis for largest potential sales milestone payments at $880 million. If you’d like to see the contractual language, it’s here.
More useful, however, is an appreciation of the specific sales milestone terms and trends exhibited by particular pharmaceutical companies across multiple alliances and over time. Alliances struck by Sanofi, including those by its Genzyme subsidiary, have the highest average sales milestone payments, at close to $300 million, while deals done by Novartis top the median sales milestone chart at $60 million. Of the 17 Roche deals in the analysis, five come from Genentech, but these were a decade ago and had sales milestones of $10 million or less. More recently, Roche has struck several alliances with sales milestones in the range of $100 million or more, but the bulk of these payments are only owed in the event annual product sales exceed $2 billion. This is in contrast to AstraZeneca, whose first $100 million sales milestone alliance with Cambridge Antibody, struck in 2004, committed $100 million in sales milestones to sales thresholds of $1 billion or less. More recently, two-thirds of the $515 million in sales milestones promised by AstraZeneca to MAP Pharmaceuticals come due at sales levels of $1.5 billion or lower. Similarly, GlaxoSmithKline (GSK) agreed to full payout of $80 million in sales milestones in the event its deal with Amicus reached $400 million in sales, while GSK’s Targacept alliance had aggregate sales milestones of $500 million distributed over seven compounds with a top threshold of $1.25 billion in annual sales.
Pfizer’s use of sales milestones vary greatly, which isn’t surprising given that many of the 17 deals analyzed were struck by Wyeth and Pharmacia rather than Pfizer itself. A similar result pertains to Bayer, whose alliances include those struck by Schering AG. By contrast, Merck, Eli Lilly and Johnson & Johnson are fairly consistent practitioners of sales milestone payments, with average and median payments in close proximity.
Armed with these insights, negotiators on both sides of the year-end push to close a deal can return from the Thanksgiving respite with a stronger tool to close the valuation gap. For the licensor there are comparables and trendlines; for the licensee, there is real evidence of what competitors have conceded and the sales levels to which these payments pertain. Best of luck to you both