Royalty Rates in Biotech Deals, Part I
Executive Summary
Royalty rates in biotech deals are determined by a variety of factors; most important is the level of risk the product represents at the stage it is licensed.
Royalty rates in biotech deals are determined by a variety of factors. Most important, suggests the chart below, is the level of risk the product represents at the stage it is licensed; royalty rates are higher for products in later clinical phases of development. Drugs with higher sales potential also can net their licensors higher royalties. In addition, some biotechs prefer to front-load the deal's value (trading higher royalty rates for bigger upfront and research payments), or back-load it, shifting most of the value to royalties, and perhaps even keeping co-promotion or manufacturing rights, to better participate in the product's sales.
However, the amount of financial leverage the biotech has at the time of the deal also seems to play a major role, and two NDA-stage deals offer an interesting case study. Both deals were for a niche cancer product being licensed to Rhone-Poulenc Rorer Inc., by Enzon Inc. in Dec. 1993, and Guilford Pharmaceuticals Inc. in June 1996 [See Deal]. Enzon's deal, signed at a low point of the biotech public market, fetched $1 million upfront, a $5 million milestone payment upon product approval (achieved in March 1994), and a royalty rate of 10% the first year after launch, escalating to 33% in subsequent years. The company filed a $7 million PIPE offering the month after the deal's signing and noted, in the announcement of the offering, that the money raised, plus that of the RPR deal, would fund its operations for two years.
When Guilford signed its deal with RPR, it had just raised $37 million in a follow-on offering at $20 per share, enjoying an upswing in the biotech market. Not only did it land a royalty rate estimated at 35-40%, the cash value of the deal totaled nearly $100 million, including $15 million upfront (part of which was an equity investment at a 17% premium), and $60 million in milestones.--KR