Lower up-front payments for startups
The boom in biotech has had multiple impacts on early development companies. The lack of funding has forced many to tighten their belts, and several actors have even had to throw in the towel. But how has the new environment affected the prospects for partner agreements?
According to a report from JP Morgan, licensing agreements signed between early-stage biotech companies and big pharma have changed character in recent years. Although the total value of the deals remains the same, the guaranteed upfront payment has become significantly smaller.
In 2019 and 2020, up-front payments to preclinical biotech companies accounted for an average of just over 12 per cent of the total contract value. This year, it looks completely different. During the first half of 2024, the upfront part of the deals accounted for approximately 6 per cent of the contract value. Since 2022, the median upfront payment to preclinical companies has fallen from USD 75 million to USD 47 million.
The harsh economic climate has made big pharma less risk-averse. They prefer to put most of the deal into later milestone payments, which they do not have to pay if the project should fail along the way. Often, most deals are linked to different sales targets once the drug reaches the market.
Mature projects are more popular
The current trend starkly contrasts with previous years, when the contract market was characterized by greater competition. In the past, it was more common for large pharmaceutical companies to sweeten the agreement with a more significant proportion of early money to attract the most exciting projects.
– The world is no longer receptive to these types of business structures, says Tom Duley, partner at the law firm Sidley Austin, in a comment to Biopharma Dive. The economics of the business are more closely tied to actual progress in the projects than it was ten years ago.
Big pharma’s risk minimization is also clearly visible in which projects they prefer. The deals primarily concern projects in the late development phase, which are thus closer to the market. In this contract segment, the picture is the exact opposite; here, upfront payments have instead increased.
According to JP Morgan, upfront payments to companies with late-stage projects rose from $75 million to $200 million between 2022 and the first half of 2024.
A Tug-of-war between the parties
Every partnership negotiation is characterized by a tug-of-war, where the paying party wants to take the least possible risk while the seller wants to get as much money upfront as possible. Right now, the paying side seems to have the negotiating advantage over companies in early development, while the roles seem to be reversed for the more mature biotech companies.
– This situation means that early-stage companies, already dependent on regular capital raises, end up in an even more difficult negotiating position. Investors currently prefer companies with drug prospects that have come further, while younger biotech companies are fighting for survival, says Jakob Dupont, partner at Sofinnova Investments, to Biopharma Dive.
High expectations after interest rate cuts
So when will the trend revert? The interest rate-sensitive biotech sector is expected to benefit significantly from central banks worldwide’s efforts to ease interest rate pressures. Right now, however, it looks like we have a wait-and-see situation, with experts pointing out that it will take a while before the interest rate cuts have full effect in the biotech industry.
Yaron Werber, an analyst at TD Cowen, does not believe that the market will be in a hurry to return to the highs of 2021 – 2022.
– I think we will continue to see a recovery, but I don’t expect a full-scale bull market, he told Endpoint News. I simply don’t believe we have the same fundamentals as in 2008, 2010, and during Covid.