Determining value is one of the key components of doing a deal and, once that deal is signed, the challenge for alliance-based agreements is the subsequent extraction or realisation of value.
In the case of licensing deals, we are all too familiar with the sometimes wonderful headline value reported, but we know that most of the value of these deals is at risk because potential payments by the licensee will be conditional upon the future success of the product or technology that is the focus of the agreement.
It is quite normal when negotiating a licensing agreement that you turn naturally to the financial terms to ascertain the value of the deal. As negotiations progress, you shape the deal terms, including the upfront, milestone and royalty payments.
Your arrival at your own assumptions for value may well have been determined by financial modelling, maybe discounted cash flow-based methodologies of the type we teach at our workshops. These financial models will incorporate decision-tree analysis that is based on assumptions concerning the risk of product failure at various points in its clinical development. Such methodologies are commonly used throughout the pharmaceutical industry; in fact, they are in more-or-less standard use.
"One element to value that should not be underestimated is the control that one party has over the other in decision making, and the potential impact of this on the value of the deal."
Of course, when the calculations are done from the perspectives of both licensor and licensee, the values reached are also used to determine the split in value of the deal between the two parties. It is to be hoped that both parties can then determine what should constitute a fair proportioning of the value between them.
One element to value that should not be underestimated is the control that one party has over the other in decision making, and the potential impact of this on the value of the deal.
As the alliance unfolds, key decisions will be made by both parties, with one of them, usually the licensee, having the final say. This, in effect, provides the licensee with ultimate control over the project, including the right to terminate the deal for non-technical or clinical reasons - which are, in fact, essentially commercially based. This control contributes additional risk and can actually alter the value of the deal negatively from the licensor's perspective, a factor that is often overlooked by biotech companies which are negotiating deals.
Finally, a key lesson is not to ignore the so-called non-financial clauses of your contract, because they can have a significant influence on value.
Fintan Walton
Chief Executive Officer
PharmaVentures Ltd