Sharing the Wealth
Recent Trends in Biopharma Sublicensing
Even the casual observer of the biopharma industry must be impressed by the number of announced alliances and the massive amounts of committed capital in many of these deals. On close inspection, however, one might observe that a significant portion of these alliances are built on earlier licenses, asset purchases or collaborations. In such instances, it’s instructive to ascertain to what extent the value realization associated with the new alliance works its way back to the providers of the foundational elements of the current deal. In other words, do sublicensors of biopharma technology share the wealth with their upstream licensors?
For purposes of this analysis, we looked at approximately 150 commercialization alliances signed over the past decade wherein (1) at least one upstream deal was cited as germane to the commercialization license and (2) both the commercialization alliance and the upstream deal(s) were SEC-filed contracts. Most upstream deals were licenses, but there were also some asset purchases and former collaborations. These upstream deals came from research institutions as well as from commercial entities. Finally, to gain some insight into “sharing the wealth” when capital is committed via a merger or acquisition rather than an alliance, we also looked at approximately twenty change of control (CoC) provisions providing for payment to licensors upon M&A activity involving their licensees.
Specifically, for commercialization alliances, we assembled 157 alliances commenced between 2008 and 2017 for which the BioSci database has either redacted or unredacted contracts (typically FOIA-released) for both the commercialization deal and one or more upstream deal identified and tagged in the commercialization alliance. For each of the 207 upstream deals so identified, we analyzed the financial terms, including sublicense revenue sharing provisions if known and applicable. As with most BioSci analyses, the tags to both the identified upstream deals and the sublicense sharing provisions are accessible directly via the “Tag” links in the embedded spreadsheets. Subscribers to BiosciDB may also access the full biopharma alliance from which each tagged provision was extracted by following the “Deal” link. Also, for the alliances with payments on change of control, there are tags to the relevant CoC provisions.
Our definitions of the various financial and other key terms in this analysis are as follows:
- Deal Size – a summation of all upfront, R&D and milestone payments, including any equity or loan amounts, to be paid to the licensor;
- Upfront Cash – the license fee plus any annual payments within 5 years from signing that are not based on events (i.e. not milestones);
- Total Payments Thru Launch – the sum of Upfront, Equity, Dev Cost, loans, Dev/Reg, and Other milestones to be paid to the licensor through launch in all jurisdictions;
- Maximum Royalty (“Max Royalty”) –the highest royalty tier owed by licensee to licensor, not counting any profit split or supply payment;
- Sublicense Share % – the share of upfront, milestone and other non-royalty revenues paid by a sublicensee to licensee that are remitted to licensor;
- Estimated Share % – the share of upfront, milestone and other non-royalty revenues owed to the upstream licensor given the timing and/or stage of development of the commercialization alliance, per the terms of the Sublicense Share provision; and
- Change of Control (“CoC”) -- a right held by a party to modify the alliance terms in pre-determined respects in the event the other party experiences a majority change of ownership.
As shown in the spreadsheet tab “All Results”, the 157 commercialization alliances had a median Deal Size of $205M, of which the Upfront Cash component was $19M. The average Deal Size was $362M, and the average Upfront Cash was $50M. (For those instances of commercialization alliances having more than one upstream deal, we included the commercialization financial components only once.) By contrast, for the 207 upstream deals associated with these commercialization alliances, the median Deal Size was $5.5M, of which the Upfront Cash component was $0.5M. The average Deal Size was $35M, and the average Upfront Cash was $4.2M. (Here also, for those instances of commercialization alliances having more than one upstream deal, we included the upstream financial components only once.)
Of the 207 upstream deals, 113 (55%) involved research institutions as the upstream licensor. For 48 of these upstream deals, we know (or could estimate based on the timing and/or stage of the associated commercialization deal) the Sublicense Share %. These upstream deals involving research institutions had a median Estimated Share of 15%, and an average share of 16.1%.
By contrast, 94 upstream deals (45%) involved commercial entities as the upstream licensor. For 29 of these upstream deals, we know (or could estimate based on the timing and/or stage of the associated commercialization deal) the Sublicense Share %. These upstream deals involving commercial entities had a median Estimated Share of 20%, and an average share of 21.9%.
Payment on Change of Control
Finally, the Payment on CoC tab shows 21 instances wherein the licensor receives some form of incremental (or accelerated) payment in the event the licensee is merged or acquired. That BioSci’s analysts have only come across such a provision less than two dozen times in the past decade shows that it is rare, but selling a company outright is one way to defeat a substantial sublicense share provision in the absence of a payment on change of control.
This analysis has shown that research institutions participate to some extent in the value realization associated with their licensees’ commercialization alliances. The level of such participation is, however, much less than when commercial entities find themselves in the equivalent position of upstream licensor. Finally, as both the total committed capital and sublicense share percentages climb higher, it will be increasingly important for upstream licensors to protect themselves via payment on change of control provisions.