Alliance Trends

Recent Trends in Effective Royalty Rates of Biopharma Alliances

Mark Edwards Mark Edwards
Over the past two years 300+ recent biopharma alliances have revealed their royalty and other financial terms via FOIA and other SEC filings. We've taken this opportunity to update our Effective Royalty Rate (EFR) analysis to reflect the most recent trends.
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Ⅰ. Introduction

In March 2017 BiosciBD published an article entitled Effective Royalty Rates in Biopharma Alliances: What They Are and Why Use Them in Negotiations. This article was based on an analysis of approximately 1,350 unredacted biopharma licenses and related agreements commenced between 1997 and 2016.

The 2017 analysis utilized effective royalty rates (EFRs) as the basis for evaluating post-commercialization terms of biopharma alliances. Briefly, the concept of EFR entails the application of an agreement’s specific royalty rate provision to three assumed annual sales levels, namely $200M, $500M and $1 billion.

Approximately 60% (820) of the unredacted biopharma alliances in the 2017 analysis consisted of deals signed between 1997 and 2006, with the balance of the dataset fairly evenly divided between the 1987-96 (263) and 2007-16 (276) time periods. These agreements were obtained from the BioSci deal database (BiosciDB.com) as material contracts filed with the SEC. To obtain unredacted versions, most of these agreements were retrieved by BioSci via Freedom of Information Act (FOIA) requests.

Among other findings, the 2017 analysis observed that for biopharma alliances signed since 2007, average EFRs declined by 2-3% of annual product sales as compared to 1997-06 deals for all but discovery stage and regional licenses. Given the time lag associated with obtaining unredacted contracts via FOIA requests, however, the 276 deals in the 2007-16 cohort of biopharma alliances were too few to permit a more nuanced analysis of recent trends in EFRs.

We revisited this analysis recently and found that the 2007+ cohort of biopharma alliances with known EFRs in the BioSci deal database has grown substantially – to 595 deals having one or more royalty rates expressed as a percentage of product sales. This larger cohort was sufficient to permit an analysis of recent trends in EFRs of biopharma alliances.

As compared to our 2017 analysis, corporate and university EFRs have continued to slide even as Deal Sizes have increased. In the most recent 2013-18 deal cohort, average EFRs were 2-3% lower than in the decade ending in 2006, while average Deal Sizes doubled or more for all but lead stage deals. Secondly, as compared to worldwide alliances, Phase I/II and Phase III regional deals retained their higher EFRs in recent years, while preclinical stage regional deals fell by 2% and preclinical stage worldwide alliances experienced a 3% drop. Thirdly, while the 18 Top Pharma outspent other licensee categories (i.e. Mid Tier Pharma & 14 Major Biotechs, Japanese Pharma, Other Licensees) substantially in average Deal Size, these other licensee categories paid higher EFRs for both preclinical and late stage deals relative to Top Pharma.

The remainder of this paper is divided into the following sections: Section II describes the methodology used in the selection, coding and analysis of biopharma alliances in the current analysis; Section III discusses findings for the 595 biopharma deals signed since January 2007 taken as a group; Section IV shows changes in EFRs over the 2007 and 2008-09 time intervals; Section V shows changes in EFRs over the 2010-12 and 2013-18 time intervals; and Section VI presents conclusions and suggestions for additional research.

Ⅱ. Methodology

As with the 2017 analysis, all of the biopharma agreements used in the current study were obtained from the BioSci deal database (BiosciDB.com). BiosciDB tracks biopharma alliances and acquisitions from the early 1980s to the present. The deal database currently consists of approximately 24,600 SEC-filed biopharma contracts and amendments, of which 9,300 are redacted and 15,300 are available on an unredacted basis.

For the current study, I searched for deals signed since January 2007 which are coded by BioSci’s analysts as having an EFR @ $200M sales of at least 0.5%. This selection criterion eliminated most acquisition, asset purchase, co-promotion, distribution, joint venture and supply agreements, since such deals generally don’t utilize royalty-based sales compensation.

Of the 595 biopharma alliances, 72% (431) were FOIA versions of SEC-filed contracts, 19% (114) were SEC-filed contracts that weren’t redacted when filed, 8% (47) were redacted SEC-filed contracts wherein the EFRs weren’t redacted, and 1% (3) came from financial notes or deal press release disclosures. For trend analysis, the dataset was split into four approximately equal cohorts, as follows: 26% (152) of the deals were signed in 2007; 24% (143) of the deals were signed in 2008-09; 27% (164) of the deals were signed in 2010-12; and 23% (136) of the deals were signed in 2013-18.

BioSci’s definitions of the various financial terms included in this analysis are as follows:

  1. EFR $200M – the Effective Royalty Rate (EFR) owed by licensee to licensor in the event that annual net sales reach $200M;
  2. EFR $500M – the Effective Royalty Rate (EFR) owed by licensee to licensor in the event that annual net sales reach $500M;
  3. EFR $1B – the Effective Royalty Rate (EFR) owed by licensee to licensor in the event that annual net sales reach $1 Billion;
  4. Deal Size – a summation of all upfront, R&D and milestone payments, including any equity or loan amounts, to be paid to the licensor; and
  5. Maximum Share (“Max Share”) – the highest royalty tier, profit split and/or transfer price owed to the licensor.

Ⅲ. EFR Analysis of 2007-18 Deals

Chart 1 shows the average EFRs for 595 biopharma alliances signed between January 2007 and December 2018. 26% (157) of the deals in the dataset involve universities or other research institutions (including the NIH) as licensor. Average EFRs for these university deals are 3.0 to 3.3%, and increase only slightly based on exclusivity or higher assumed sales levels. By contrast, 74% (438) of the deals in the dataset involve corporate licensors. Approximately 9% (38) of the corporate deals are nonexclusive, and these have EFRs of 5%, increasing slightly with higher assumed sales levels. 91% (400) of the corporate deals are exclusive, with EFRs approximately double the nonexclusive rates.

For the subset of 2007-18 exclusive corporate deals involving compounds in preclinical or more advanced stages of development at signing, Chart 1 shows that EFRs increase by 3-4% from preclinical to Phase I/II stage deals, and again by about 5% from Phase I/II to Phase III stage. In each instance, “Max Share” refers to the impact of profit split or supply-based sales compensation on average EFRs due to certain deals having these elements.

Table 1 displays average and median EFRs, Max Share and Deal Size for 2007-18 worldwide and regional corporate deals by development stage at signing. As might be expected, EFRs increase, on both an average and median basis, by stage at time of signing for worldwide and regional deals, as does Deal Size. Regional deals have lower non-royalty financial consideration than worldwide deals, which is unsurprising, but higher EFRs for preclinical and Phase I/II stages, which is somewhat unexpected. Also surprising is that discovery stage deals outperform lead and preclinical stage alliances, both in terms of deal size and EFRs, on an average and median basis.

Chart 2 graphs average EFRs at assumed annual sales of $500M for 2007-18 corporate worldwide and regional deals, as well as for university exclusive deals, by development stage at signing. Worldwide corporate deals show gains to EFR with each advance in stage at signing, with the biggest gain associated with deals commenced at Phase III. Regional corporate deals have higher EFRs than worldwide deals at preclinical, Phase I/II and Phase III stages (there are insufficient regional corporate deals at the discovery or lead stages to analyze). University deals, by contrast, show little gains to EFRs associated with deal commencement at more advanced stages of development.

Finally with respect to the 2007-18 dataset, Chart 3 shows that the average and median Deal Size for compound-based alliances involving 18 Top Pharma licensees is 2-7 fold higher than for other categories of commercialization partners, but these other licensees agreed to higher EFRs than did Top Pharma for preclinical and late stage deals.

Ⅳ. EFR Analysis of 2007 Versus 2008-09 Deals

Chart 4 shows the average EFRs for 152 biopharma alliances signed during 2007, while Chart 5 has an equivalent analysis for 143 deals signed between January 2008 and December 2009. 72% (109) of the deals in the 2007 cohort involve corporate licensors, of which 59% (64) involve worldwide rights and 32% (34) are for one or two major geographic regions. The 2008-09 cohort has 73% (104) of alliances involving corporate licensors, of which 52% (54) are for worldwide rights and 39% (41) are for one or two major regions.

Average EFRs for 2008-09 worldwide corporate deals are 1.5% higher than for 2007, but regional corporate deals have lower EGFs in 2008-09 by 1-2%. For the subset of 2008-09 exclusive corporate deals involving compounds in preclinical or more advanced stages of development at signing, Charts 4 & 5 show that EFRs increased 1.5% for Phase I/II deals, increased slightly for Phase III deals, and decreased by 1-2% for Preclinical stage deals.

With respect to alliances involving universities or other research institutions as licensors, Charts 4 & 5 show that EFRs increased by 0.5% for exclusive licenses at Preclinical stage, but decreased by a similar percentage for exclusive licenses signed at lead stage of development.

Ⅴ. EFR Analysis of 2010-12 Versus 2013-18 Deals

Chart 6 shows the average EFRs for 164 biopharma alliances signed between January 2010 and December 2012, while Chart 7 has an equivalent analysis for 136 deals signed between January 2013 and December 2018. 69% (113) of the deals in the 2010-12 cohort involve corporate licensors, of which 63% (71) involve worldwide rights and 29% (33) are for one or two major geographic regions. The 2013-18 cohort has 82% (112) of alliances involving corporate licensors, of which 65% (73) are for worldwide rights and 27% (30) are for one or two major regions.

Average EFRs for 2013-18 worldwide corporate deals are 1% higher than for 2010-12 (but 3.5% lower than for the 2008-09 cohort, as noted above), while regional corporate deals also have 1% higher EGFs for the most recent period, and have returned to the EFR rates seen in 2007. For the subset of 2013-18 exclusive corporate deals involving compounds in preclinical or more advanced stages of development at signing, Charts 6 & 7 show that EFRs increased 1.5% for preclinical and Phase I/II deals but decreased by 1.5% for Phase III stage deals.

With respect to alliances involving universities or other research institutions as licensors, Charts 6 & 7 show that EFRs decreased slightly for exclusive licenses at both the lead and preclinical stages.

Ⅵ. Conclusion & Additional Research

As noted in our 2017 analysis, effective royalty rates (EFRs) provide an easily understood tool for rendering tiered royalty rates comparable across various deal structures without losing the specific financial implications of each deal’s royalty provision. When combined with other components of total deal consideration, such as upfronts and milestones, obtained from unredacted agreements, EFRs become a cornerstone of reliable benchmarking for negotiation, transfer pricing and reasonable royalty determination purposes. We intend to undertake additional analyses of recent trends in EFRs as more biopharma contracts become available through SEC filings and FOIA releases.