Up-front licensing costs hit a five-year high

But the pace of biopharma asset deals dips. Are the two trends related?

Licensing is the lifeblood of biopharma, or so the saying goes, and activity across the past five years shows a steady flow of these types of deals.

A closer look at the data, from Evaluate Pharma, shows that the median up-front fee hit a five-year high in the second half of 2021. But in the same period the number of transactions hit a five-year low.

One interpretation of these trends is that demanding prices have started to deter licensors. Similar theories have been put forward to explain a quiet year for biopharma M&A, and evidence of inflation can be seen in buyout prices (The year of the small buyout, January 28, 2022).

Valuations might be tumbling across the board for listed biotechs, but it is not inconceivable that any subsequent drop in asset prices takes time to feed through to the negotiating table.

What looks like a lull at the end of 2021 could also just be a blip, of course. It is notable, however, that the second half of every year since 2017 was larger than the first, in terms of up-front spend.

This analysis includes only deals where the initial signing fee is disclosed, and it should be remembered that approximately two thirds of licensing transactions do not reveal this figure. The actual number of asset deals struck each year will be higher than shown here, though these data are probably a good reflection of the most substantial transactions and of the initial sums that the sector deploys each year.

This analysis also does not consider future or contingent downstream payments, the so-called "bio-dollars" that might never be paid out. 

The chart below shows that, on mean and median measures, disclosed up-fronts have climbed in value over the past five years. This has been driven by rising prices for early-stage assets, last year's deeper dive into this licensing data found. Intense competition for cancer projects also contributed, and this therapy area continues to attract the most demanding valuations (Cancer continues to dominate deal making, August 18, 2021).

That certainly held true last year, with oncology counting for five of the 10 biggest up-fronts paid out. And if the opening the weeks of this year are anything to go by biopharma’s appetite is unstated, with news around cancer projects dominating the JP Morgan conference, alongside rare disease and gene therapy assets..

Blip or not, a healthy level of deal making should be expected this year, particularly if the ongoing stock market rout and deteriorating financing climate transfers power away from sellers, and towards the buyers, over the course of 2022. That shift is certainly expected in the M&A market, and there are few reasons to believe that the licensing deal space will be any different.

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