PharmaVentures: Valuation methods and trends in licensing deals




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Video title: PharmaVentures: Valuation methods and trends in licensing deals
Released on: October 14, 2008. © PharmaVentures Ltd
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In this informative panel discussion, Fintan Walton talks with 3 members of PharmaVentures’ deal advisory team about Royalty Rates, particularly the valuation of deals in the pharmaceutical and biotech industry, and the challenge to find information about Royalty Rates not generally available in the public domain.

Dr Tibor Papp, Head of Advisory, outlines how the consultancy team would advise clients to enable them to arrive at the best Royalty Rates for their deals in the intensive deal-making environment.

Nigel Borshell, Senior Consultant, and the editor of the soon-to-be-published PharmaDeals® Report, The Royalty Rate Report 2009: A Comprehensive Assessment of Valuation in the Pharmaceutical Sector, talks about the methods used for calculating Royalty Rates; use of NPV calculations, market benchmarks, the application of “Real Options” and the 25% rule of thumb.

Steven Renwick, Consultant, who was involved in the design and execution of the recent LES Royalty Rates Survey, talks about the research findings, such as the different valuation methods used by pharmaceutical companies, biotechs, universities and research institutes.

Watch this interview now to find out more about Royalty Rates and how they can be used to increase flexibility around the deal negotiation process.

For further information on The Comprehensive Guide to Royalty Rates in Pharmaceutical and Biotech Deals. 2009 Edition, please visit our website or contact The PharmaDeals Team on +44 (0) 1865 784 177.

View the table of contents

Order now: The report is currently available at a 10% pre-publication price.

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PharmaDeals® is the publishing imprint of PharmaVentures Ltd.
Trends in deal making
Fintan Walton:
Hello and welcome to PharmaVentures Business Review here live in London. On this show I have Tibor Papp, who heads up the Consultancy Team at PharmaVentures, Nigel Borshell, who is Senior Consultant at PharmaVentures Consulting and also Steven Renwick, who belongs to the same team and he is a Consultant. Welcome to the show gentlemen. We are gathered here today in London to discuss some of the issues relating to royalty rates in particular valuations in deals that are going on within the pharmaceutical industry. We at PharmaVentures obviously are being following valuations for many, many years. But Tibor Papp, for you what are the actual trends that we are seeing first of all in terms of deal making, what is the market like for licensors, licensee's pharmaceutical companies and biotech companies?
Tibor Papp:
Well first of all the key driver for deal making is the intense pressure that we see in the industry now around productivity crisis. We know that pharma companies are facing several big hurdles, increasing hurdles, technology competitive funding, regulatory reimbursement hurdles and these are all intensifying in creating complexities for them so that commercializing products becomes a lot more resource intensive a lot longer plus the generalization of their products coming of the market, large pharma companies are losing a lot of their value, this creates an immense need for sourcing products from outside. And especially acute this need is in the large pharma companies and this creates a very intensive deal making environment. We know recently we have seen recently that in Phase III late stage compound the deal making was very intensive, but essentially what it created is the lack of these mature compounds out there. This pushed the deal making of especially large pharma towards earlier stage compounds, this raised the valuation of earlier stage products and created sophistication in the deal making environment. All these complexities created a game which if played well and some companies have shown this could create a profitable R&D companies.
Fintan Walton:
Right. So you talked about productivity being depleted in pharmaceutical companies, but or biotech companies more productive or are they running into the same problems as biotech as large pharmaceutical companies?
Tibor Papp:
In fact this phenomenon is you can see it everywhere across the board. Early stage companies, R&D companies face the same issues they need more funds, they need more time, they face productivity issues as well.
Valuations of deals and the challenges to access information about royalty rates .
Fintan Walton:
Yeah, sure. Now Nigel Borshell, you've been involved in the last few months in putting together latest report from PharmaVentures and PharmaDeals on royalty rates. And now what are the key thing that comes up when anybody talks about royalty rates is, is where are they basically because getting that sort of information is difficult and we at PharmaVentures have been looking you know we compile PharmaDeals, we make sure that if there is a royalty rate out there and we'll pull it in and put it into PharmaDeals, so why is it that it is difficult to get royalty rates or get access to that information?
Nigel Borshell:
Yeah, I think the big challenge that people seeking to do deals and looking to bench mark that product is finding out information specifically around royalty rates. The components of the deal are mostly in the public domain except for the key royalty rate number and revelation rates are at about you know 3% across all deals right where we see specific numbers, now internally in our professional domain we see a lot more of the royalty rate numbers, but the numbers that are put into the public domain are few and far between. And one of the challenges people face and why they are interested in royalty rates specifically is because they don't know they don't know the number they should be using to bench mark their own deal.
Fintan Walton:
Right.
Nigel Borshell:
And so those approaches to valuation that people take would be to try and get an ideal value through a bench marking process.
Fintan Walton:
But just before to that, I mean why is it that, that information isn't in the public is it because of the biotech companies or is it because of the pharma companies who is stopping this going out?
Nigel Borshell:
I spoke to people from both sides of the table and it's typically today it's the big pharma side of the table that doesn't want to reveal the number. And their concerns are that once that numbers in the public domain it may be used against them in various ways either in the next negotiation it will set an expectation for the next person their negotiating with, it might affect their ability to sub license further down the road if somebody knows exactly how much their percentage is, so they see nothing to gain by revealing that number.
Fintan Walton:
So where does that leave us, that leaves us presumably with those people who are trying to do deals only getting some of the information from bench marks and they get the upfront payments to milestone payments but missing there is a royalty rate. So from your research and activities what should companies do?
Nigel Borshell:
Well most people are doing NPV Analysis to determine a valuation, I think that the bench marking and royalty aspects are more to try and portion the value within the deal to various components and that's the challenge they have. And hopefully the new report I think will help them do that.
Fintan Walton:
Right. But are we getting in royalty rates report that we are generating are we getting numbers that or guidelines that will help people to arrive at royalty rates?
Nigel Borshell:
Given guidelines to help them determine the value in the product and the royalty rate is a component of that value, so the answer is the answer is yes but it also places it within the context of the overall value and all the other components to add value.
Fintan Walton:
Which is important because in these days it is just not a royalty rate its upfront payments and milestone payments that play an important part of the deal?
Nigel Borshell:
Absolutely, yeah.
Royalty rate surveys,research findings and valuations.
Fintan Walton:
And this leads on to a question for you Steven Renwick, because clearly another way of trying to find out what's happening out there in terms of valuations and royalty rates is actually go out there and do surveys and you've been involved in a survey that PharmaVentures did several years ago but you've also been involved in a recent LES international survey on royalty rates. So first of all the first question for you is are royalty rates surveys a good way of getting information on actual royalty rates?
Steven Renwick:
Well it's perhaps one of the only ways of getting sorts of information that isn't in the public domain, because people are looking for these figures which were always (indiscernable) so they generate a great amount of interest. The problem is that your data is only as good as the people you manage to get responding to your surveys.
Fintan Walton:
Right.
Steven Renwick:
And in the most recent survey we worked on the Licensing Executive Society survey, we got a good response but in that survey we found that the majority of the data was biased towards preclinical and kind of academic deals with relatively few of the kind of biotech pharma deals, so in these sorts of surveys and not most recent one a lot of the data was biased towards earlier stage deals, lower value deals.
Fintan Walton:
Sure, sure. But then so when we get the output from those surveys and we start looking at the ranges of royalty rates and so forth, what are we finding or we finding a trend towards higher valuations, higher royalty rates in general as you go through different kinds of phases?
Steven Renwick:
In general you see higher royalty rates towards the later stages of development, but when it's dangerous to look at averages for these sorts of things, because within those the calculations for example just they got wide ranges of royalty rates even in you know in Phase III you might see royalty rates ranges between 5 and 30% but it doesn't you don't know enough from those figures about the products each product is individual it's it may be a brilliant product to the huge market, it might be a very small end product for a small market and also depends on the negotiating position of the relevant parties in the deal.
PharmaVentures consultancy enables clients to arrive at the best Royalty Rates for their deals in the intensive deal-making environment.
Fintan Walton:
Tibor Papp, as someone who heads up the Consultancy group at PharmaVentures obviously we are helping our clients to do valuations try and come to arrival of a royalty rate and we like to consider ourselves to be pretty whizzy at doing things like NPV calculations for potential modeling, but when it comes down to actually assisting the people in arriving at a royalty rate obviously we are looking at upfront payments, milestone payments and royalty rates themselves, what do we really need, can we actually deliver for our client a specific royalty rate and if we do how do we do that?
Tibor Papp:
Well we in PharmaVentures we are in deal making, we do deals and deals have when you are in deal making you have to deal with two components, one is an analytical the other is a negotiating bit. In the analytical bit in PharmaVentures we consider the multitude of drivers of the value and that includes a variety of contributions from the various parties along the process that includes manufacturing supply and co-promotion and various other components. And all these will drive value, all these will create a higher value in which the royalty sits. Now we are in the business of creating bench marks as it was said before just looking at market bench market is very dangerous, now our role is in this process to understand what the real royalty rate should be and validate it through market valuations or question the market valuations and use that in a negotiating process, so the next step is to take that multitude of drivers and the understanding of the various components take it into the negotiation process and use it. So we can deliver royalty rates, we can deliver the best royalty rates the client can imagine, but that will ultimately be defined in the negotiation process.
Fintan Walton:
Sure. So in other words we provide them with the kit which effectively helps them understand what value they are attaining and giving away, giving them confidence in understanding valuations?
Tibor Papp:
Absolutely, we give clarity, we give negotiating power, we give the understanding what the client would need to effectively come to a situation which is a good deal but also again in this situation because by using these components and this understanding they can transfer this knowledge to the other party, which the other party normally accept and that will create within the situation.
Fintan Walton:
Right. But of course then the output you have you come up with your model, you come with your valuations spread, you come with your upfront payments, milestone and then they go into negotiations so that all can change and that can change not because of your financial model but because of the negotiation?
Tibor Papp:
That absolutely and I just want to make it very clear that the various components they all provide an opportunity to create different deal structures, but possibly it is the royalty rate that is the most obvious opportunity that you can use in various shapes and sizes you know stud royalties and so on that can create flexibility around the negotiation process and you can use that and all of these will come up through sophistication of deal making with the deal result that you want.
Fintan Walton:
Right. So in the end I suppose big pharma companies are more interested in getting the best royalty rate while biotech companies who are cash-strapped are looking for the best upfront payment and milestone payment?
Tibor Papp:
Well that's normally true.
Fintan Walton:
Right.
Tibor Papp:
Although I have to say that recently what I can see is lot of biotech companies are becoming more mature and they are in less need for upfront money, so in fact if you look at the data you will see that the although the absolute numbers are rising the proportion of upfront payment in the total value has been dropping. In another words biotech companies want less value upfront and try to push down more value downstream in fact they can achieve higher value through that.
Use of NPV calculations, the application of "Real Options" and the 25% rule of thumb.
Fintan Walton:
Okay, right. So Nigel Borshell, coming on to you and your assessment you know you obviously looked at bench marking, you looked at the NPV calculation and I think the report helps reader a lot in understanding the use of those. I suppose one of the other things that people always ask is there another way of doing this, do I need to do an NPV calculation and the two that come to mind are obviously moving into things like real options and suitability of real options and also you know things like you know the 25% rule, so just first of all just on real options do we see people practicing that in any to any extent?
Nigel Borshell:
That it's very little used except in some peripheral areas in deal making. That the NPV seems to be the time definitive method of choice within the industry combined with bench marking. The 25% rule of thumb is used or was used in some industries where by 25% of the profit generated by the IP's use was attributed to the license sold.
Fintan Walton:
Right.
Nigel Borshell:
It suffers from problems firstly in what do you define as profit and there's been tones written about definitions whether it's operating profit, net profit, EBITDA. So 25% of what is the first question?
Fintan Walton:
Right.
Nigel Borshell:
And the second question is why 25%, where did the number come from?
Fintan Walton:
Right.
Nigel Borshell:
It's a historical average, it tells you nothing about where you and your product and your value sits, it just says that's what it used to be.
Fintan Walton:
So just clear that is not 25% it is not a 25% royalty rate, or 25% of the net sales, a 25% of a profit whether it's an operating profit or..
Nigel Borshell:
It's never 25% of sales.
Fintan Walton:
Right. And so you said it's rarely used in the pharmaceutical industry and you wouldn't recommend it as a rule?
Nigel Borshell:
No and we wouldn't recommend it at all it's not what you would determine as being a fair or useful way of determining value.
Practices of used bench marking versus NPV type calculations
Fintan Walton:
Just then if I can move to you Steven Renwick and ask you because part of the survey that you did with the LIS international was to look at the practices of used bench marking versus NPV type calculations. Again what where the results and were you surprised by those results?
Steven Renwick:
Well you know Fintan Walton one of the things that lot of people picked up one was that according to the survey most people didn't use NPV and that surprised a lot of people, but when you look at the respondents in the survey It was quite obvious why most of the respondents where preclinical academics. And it's very difficult or unwise to use NPV calculations for preclinical products there is too many unknowns to make it a safe calculation. And we ourselves, we know that almost everyone in pharma uses NPV calculations, we of course use NPV calculations when we are working for clients. And we know that a lot of people on biotech use NPV calculations but probably not as many as should do.
Current trends in valuations and deal making.
Fintan Walton:
Right, okay. And sort of final discussion between us all here is, is where do we see the general trend going or we Tibor Papp, do we except valuations to continue to rise or we going to hit a platter at one point?
Tibor Papp:
Well I personally believe that the values will continue to rise for a while, it may be that the numbers will come down in terms of number of deals especially in the current environment, but the need is still there, in fact the need is stronger than ever. There is still money in the bank to spend and there is good technologies out there and in fact some of these technologies are maturing in terms of more predictability for the future. I believe deal making is becoming more intense, requires more knowledge and the values will rise.
Fintan Walton:
But is also isn't it tipping companies to make acquisitions rather why pay high price on a license fee when you can probably same amount of money you can buy the company?
Tibor Papp:
Yeah. Well that's a very good comment, because we can see is that licensing values are so high as M&A values. So obviously large pharma companies, small or other companies small companies always consider whether I should buy this company or I should just license the program in. And what we can see is there those biotech companies which can provide more than just one product or one program in fact multiple opportunities options a platform bear better chances for M&A.
Fintan Walton:
Okay. And one of the things that you did Nigel Borshell when you were comparing this report as you said you talked to a lot of people in the industry, what was the mood that you picked up amongst the various people that you've talked about, were they bullish about deal making and valuations or?
Nigel Borshell:
I think that the mood from the big pharma side of the table was slightly depressed, they are under more pressure now than ever to source the products and they feel that the negotiating power is sitting on the opposite side of the table now. And so from that perspective I think it the converse therefore is that the biotech side the small or medium enterprise that has got the IP is feeling a little more bullish about how much they can get, how much of value they can realize from that deals.
Fintan Walton:
Right. One of the things Steven Renwick from your perspective and looking at the surveys that you've been involved in one area we haven't talked about too much is the universities, the research institutes and lot of the respondents were from that, is there any indication that, that valuations at that level at the earlier stages that the universities and the research institutes are they are their deal values going up or are they remaining relatively stable?
Steven Renwick:
They are increasing slightly. I think the one thing that you can see with the academics, with the preclinical products is that they need to keep their deal simple, you are better off saving all the kind of start royalties and then royalty (indiscernable) et cetera royalty (indiscernable) for more advanced clinical deals the academics are keeping things simple, but they are seeing that more value from the deals.
Fintan Walton:
Okay gentlemen, well thank you very much indeed for coming along and discussing everything about royalty rates. And we look forward to the guide the comprehensive guide to royalty rates coming out from you Nigel Borshell. Thank you all. Thank you very much indeed.
Nigel Borshell:
Thank you.
Tibor Papp:
Thank you.
Steven Renwick:
Thank you.
Steven Renwick Renwick
Consultant
Tibor Papp is a senior strategy advisor to leading companies, he has 16 years of experience in the healthcare/life sciences industry in corporate strategy, investment appraisal, portfolio development, business transformation, licensing/M&A deal making, marketing strategy, and risk management. He has advised health care and private equity companies about acquisition and transaction strategies in pharmaceuticals, biotechnology, medical devices, drug delivery systems and medical supplies globally. Currently, he is Head of Consultancy at PharmaVentures and focuses on commercialization strategies, product/technology licensing, mergers & acquisition, divestments and alliances. Dr Tibor Papp is also an experienced surgeon and has a PhD from the University of Aberdeen and an MBA from the University of Oxford. Nigel Borshell joined PharmaVentures' consultancy group in 2008 having worked on key projects with the team as an associate consultant since 2006. He is the author of several Pharmaceutical Industry reports including the latest publication on Royalty Rates, and has authored numerous healthcare industry articles on Therapies, deal activity, and research funding. Nigel Borshell began his commercial career in the 1970s after graduating with a degree in Applied Biology and spent some time conducting post graduate research at The National Hospital for Nervous Diseases, Queen Square, London, investigating the neurochemistry of Multiple Sclerosis. At Syva, a drug monitoring specialist company he held the position of General Manager role for the UK operation before being appointed UK Managing Director of the Hoechst division at Behring Diagnostics in 1994. Following the merger of US company Dade with Behring in 1998 his role was expanded to that of Commercial Director Northern Europe for the In-Vitro Diagnostics multinational Dade Behring. More recently Nigel Borshell has worked as Director of European Business Development for Cepheid Inc, California based Biotechnology company specializing in transportable molecular biology detection technology. Steven Renwick is a consultant at PharmaVentures. He joined the company in September 2005 and until recently he was the manager of the Strategic Intelligence department responsible for the development and production of PharmaDeals. In his work with the transactions group he has built up experience in company screening and relationship building for licensing and M&A transactions. Recently he has worked closely with the Licensing Executive Society on the execution of the LES BioPharmaceutical Royalty Rates and Deal Terms Survey. Steven Renwick holds a PhD in genetics from University College London and an honours degree in biochemistry from University of Dundee.
PharmaVentures
PharmaVentures The Royalty Rate Report 2009: A Comprehensive Assessment of Valuation in the Pharmaceutical Sector. The content of this Definitive Industry Reference has been formulated by leveraging over 16 years of PharmaVentures experience in assisting leading pharmaceutical and biotechnology companies worldwide in all aspects of deal making, and in response to valued feedback from our extensive market research. This report provides current thinking on Royalty Rates and follows on from the publication of previous top selling reports on the topic of Royalty Rates. Clear guidance on the best methodologies to use when calculating Royalty Rates to assist with vital decision making and to win the best deals. Opinions and advice from leading industry deal makers on how to calculate Royalty Rates and what drives them in different types of transactions. Analytical arguments supporting the setting of Royalty Rates " The report reviews the appropriate methodologies to use as part of the process to calculate Royalty Rates in-depth. It explores questions such as: "What do royalties mean in terms of value?" and "Where do royalties fit within the deal?" Recent case studies of notable deals " PharmaVentures highlights the issues and pitfalls so that you can avoid them and successes to consider before agreeing to Royalty Rates.