What is happening?
Recent company data suggests that, in 2016, nearly two thirds (65%) of marketed drugs originated in small and mid-size biopharma and just over one third (35%) were developed in-house. Today that trend is gathering pace with 70% of current clinical pipelines in the hands of emerging firms.
Why is this happening?
Until recently, pharmaceutical companies made low offers for programs still in the pre-clinical testing phase in an effort to reduce the prospect of failure. Now, however, the value of these deals is rising. Then there’s the skyrocketing value of late stage products, thereby making early deals especially attractive. Consider this: in the fourth quarter of 2016, 67% of deals were for pre-clinical assets. Once clinical trials have met safety standards and efficacy in humans (phase II and beyond), licensing costs the pharma company significantly more, both in higher upfront fees and royalty payments for each compound. In fact, the rarity of products available at this stage means that rights to a single drug can exceed the cost of buying ten or more drugs in the early stages.
What we think
Although information on pre-clinical licensing deals can be limited in detail, there is sufficient evidence to demonstrate that early out-licensing can be extremely profitable, particularly if investment in products to reach this stage is modest.
Taking a closer look at New Chemical Entities (NCEs) and excluding the generally more highly valued, immuno-oncology deals over the past 18 months, NCEs out-licensed at the pre-clinical stage have a median ‘biodollar’ value of $346m.
A biodollar value includes the upfront access payment and sales milestones. It may also include a research contribution if the project continues in collaboration. But it does not include the potential value of future royalties.
Deals where the transaction is a pure license have a median of $309m (range $100 to $1,000m) with an upfront of $10m (range $1 to $200m). Where the deal is stated as a license and collaboration, the median is higher at $315m (range $140 to $2,250m). In addition, upfronts (where announced) are also slightly larger with a median of $35m (range $0.25 to $200m).
Bear in mind, however, that this is a relatively crude comparison as there is significant variation between deals and some may include several molecules or targets. But it does demonstrate that early stage licensing of novel compounds and novel targets can generate significant value.