We all read the headlines about high deal values and find that these can be quite staggering, with values in excess of US$500 M or even more sometimes being reported.
The good news is that these reflect a healthy sign of activity and provide welcome values for smaller biotech partners. They also help to underpin the value that some biotech companies can attach to their intellectual property. The bad news is that, for various reasons, these high values can provide misleading perceptions of what is actually happening in deal making.
First, most of these headline-grabbing deals are rare - we report about two hundred deals a month, the majority of which have much lower headline values. The effect of this situation is that negotiators often find that their senior executives and boards are setting these exceptional deal values as legitimate benchmark values for their own deals. These unrealistic expectations do nothing at all to help the negotiator.
Second, when we look at what these high headline values actually comprise, we find that in the majority of cases they represent the precommercial upfront and milestone payments and not the royalties. The problem here is that these values are the arithmetic sum of all precommercial payments, most of which are still uncertain, and therefore at risk. Even under normal attrition rates for drug entities these payments may never be attained and then, under the additional uncertainty resulting from an alliance between two parties, additional risk factors enter the scenario.
"Negotiators often find that their senior executives and boards are setting exceptional deal values as legitimate benchmark values for their own deals."
I am not suggesting that companies who agree high headline values in general set out to mislead, but the practice does not reflect an accurate picture of value - and indeed some companies have tried to alter the perception of value. I have heard of a company that asked for additional milestone payments to be made during the commercial stage when royalties are collected, so that these too could be included in the headline values.
So what is the solution to all of this? It is difficult to impose a specific formula. The SEC and other similar regulators could insist that company press releases specifically state a warning that the deal values and payments are not certain. I would suggest that companies should refer to the potential deal value, rather than simply the deal value. In any case, we would suggest caution to all who read about headline deal values. In such cases, understanding the drug and the risks involved will also help in arriving at a more realistic deal value.
Fintan Walton
Chief Executive Officer
PharmaVentures Ltd