Trends in University Licenses
How Healthy is the Seed Corn?
With roughly 200 newly public biopharma companies since January of 2013, there has been a substantial influx of SEC-filed license agreements between biopharma companies and their university or institutional collaborators.
One of the benefits of a robust and extended “IPO window” for biopharma companies is the heightened level of disclosure associated with companies making their debut on public stock exchanges. With roughly 200 newly public biopharma companies since January of 2013, there has been a substantial influx of SEC-filed license agreements between biopharma companies and their university or institutional collaborators. Many industry participants have correctly observed that university-derived inventions are the “seed corn” upon which the biopharma industry relies. It is therefore both useful and timely to analyze recent university/biopharma alliances to observe the health of this foundational relationship.
As of the beginning of 2016, BioSci has assembled approximately 2,000 documents involving biopharma agreements with universities or other private or governmental research institutions. 1,200 of these documents are for relationships commenced since 2006, and for which we have 500 SEC-filed license and related contracts.
BioSci has undertaken an analysis of certain economic provisions in approximately 100 of these SEC-filed university/biopharma alliances. As with most BioSci analyses, the tags to each economic provision included in the analysis that follows are accessible directly via the links in the embedded spreadsheets. Subscribers to BiosciDB may also access the full university/biopharma alliance from which each provision was extracted.
BioSci’s analysts have tagged approximately 235 SEC-filed university/biopharma alliances commenced since January 2006. For this analysis, we limited our search to university/biopharma licenses for which there was a known non-zero upfront cash payment, yielding 108 licenses in aggregate. We then assembled the key economic and other deal elements, including tags where applicable to specific contract provisions, related to one or more of the following:
- Upfront Cash – license fee, retrospective patent cost reimbursement, plus up to five years of license maintenance payments (upfront equity was not included, as it is typically granted to universities, rather than purchased);
- Deal Size – a summation of all upfront, milestone and sponsored research payments:
- Development & Regulatory Milestones – event-based payments through the launch in multiple jurisdictions of the first intended product indication (view tags);
- Additional Milestones – event-based payments through the launch in multiple jurisdictions of any specifically identified additional products and/or indications (view tags);
- Sales Milestones – one-time payments tied to the achievement of specified annual or cumulative product sales thresholds (view tags);
- Maximum Royalty Rate – highest royalty rate specified as payable to the university licensor under certain circumstances (view tags);
- Effective Royalty Rate (EFR) – application of the specified royalty terms to annual sales assumed to be $200M (EFR$200M), $500M (EFR$500M), or $1Billion (EFR$1B) per year;
- Definition of Sublicense Revenue – included and excluded payments from third parties for sublicensed rights to university inventions (view tags); and
- Share of Sublicense Revenues – percentage (or range) of sharing of payments received by biopharma from sublicensee(s) (view tags).
Additionally, we grouped the agreements as standalone licenses versus licenses with research or development contracts, and by agreement date for trend analysis.
Typical Economic Structure of University/Biopharma Alliances.
The typical (median) university/biopharma license has Upfront Cash of $80K, total Deal Size of $800K, a Maximum Royalty Rate of 3.5% of sales, and a 20-25% Share of Sublicensee Revenue. However, due to a small number of much bigger deals, the average university/biopharma license has Upfront Cash of $1.1M, total Deal Size of $7.4M, a Maximum Royalty Rate of 4.2% of sales, plus a 17-27% Share of Sublicensee Revenue. 6% (6 of 108) of licenses have Upfront Cash in excess of $1M, and 8% (8 of 98) of licenses have a total Deal Size greater than $10M.
For the 52 licenses for which there is a breakdown of milestone payments, the typical (median) license has Development & Regulatory Milestones of $1.1M. Typical milestone events are patent issuance, IND filing, Phase II initiation, Phase III initiation, NDA filing and first approval. In addition, 36% (19 of 52) of licenses had Additional Milestones with typical (median) payments of $950K. Typical Additional Milestone events are for development of second indications. Finally, 15% (8 of 52) of licenses had Sales Milestones with typical (median) payments of $3.5M. Sales Milestone thresholds ranged from $50M to $1Billion in annual sales.
Royalty rates are quite consistent across the 59 licenses for which royalty rates are known, as only 3% (2 of 59) of licenses have a Maximum Royalty Rate of 10% or greater, and only 3% (2 of 59) of licenses have a 1% or greater difference between the Effective Royalty Rate on $200M and $1Billion in annual sales.
Sublicense Revenue Definition and Sharing.
75% (53 of 71) of licenses with sublicense revenue sharing provisions had a specific Definition of Sublicense Revenue. Typical definitions include all payments received from sublicensee(s), other than royalties on sales, less payments as loans or for equity purchased at fair market value, and less reimbursement of patent, R&D and supply expenses, but only to the extent incurred after the grant of the sublicense and only to the extent such amounts do not exceed the costs of the services provided.
Of the 49 licenses for which the breakdown of the Share of Sublicense Revenue is known, 43% (21 of 49) of licenses had a static share of sublicense revenue, while the other 57% (28 of 49) of licenses had a variable share that decreased as development advanced or over time. The typical (median) static Share of Sublicense Revenue was 20%, with a range from 10% to 45%. Most variable shares dropped by half, although the range was 5- and 10-fold in some instances.
We grouped the university/biopharma licenses by agreement date into three time intervals of 2011-15 (33 deals), 2008-10 (33 deals), and 2006-07 (42 deals). We found the typical (median) Upfront Cash has fallen from $100K in 2006-07 to $60K in 2011-15. However, total Deal Size has increased over this interval – with median potential payments of $650K in 2006-07 compared to $1.6M in 2011-15.
Finally, we grouped the agreements as standalone licenses versus licenses with research or development contracts. For the 43 standalone licenses, typical (median) Upfront Cash was $80K and total Deal Size was $300K. For the 65 licenses with research or development components, typical (median) Upfront Cash was also $80K, but total Deal Size increased to $1.2M. Again, due to a small number of much bigger deals, the average standalone license had Upfront Cash of $360K and total Deal Size of $2.6M, whereas the average license with R&D had Upfront Cash of $1.7M and total Deal Size of $10.3M.
As compared to when last we looked at the economics of university/biopharma alliances, typical license terms haven’t changed significantly. While the absence of major gains may be disappointing to university licensors, particularly in light of the substantial increase in economic terms obtained by biopharma in their alliances with commercialization partners, there has been a significant change in at least this aspect: the increased frequency of sublicense revenue sharing and sophisticated usage of associated definitions of sublicense revenue.
As payments from commercialization partners to biopharma have risen 10-fold, this would imply that a 20-25% share of sublicense revenue ought to eclipse all other university remittances prior to royalties on approved products. Moreover, given that the odds of a biopharma entering into one or more commercialization alliance based on a university’s license are at least 10-fold higher than an approved product emanating from the license, the total expected economic return from a university/biopharma license is likely to be principally derived from the sharing of sublicense revenue. To the extent that biopharma honors these obligations, therefore, it’s fair to conclude that the “seed corn” is likely to stay healthy for years to come.