Cost of drug licensing on the wane, says Lehman Bros

That is the conclusion of a Lehman Brothers report, which suggests that an increase in the magnitude of upfront fees, preferred by smaller companies as other sources of financing have started to get squeezed, means that they are more prepared to forego higher royalty-based revenues in the longer term.

Upfront fees of 25 per cent of total deal value are now commonplace, up from 10-15 per cent just a few years ago.

Overall 160 new licensing deals were forged in 2007, according to Lehman, with an average value of around $380m. In the first half of this year the number of deals increased by 50 per cent, but the average value dipped to $350m.

It is also notable that deals are being struck earlier and earlier in the drug development process. For instance, 40 per cent of all the licensing deals signed in 2007 were for compounds not yet in human testing.

Lehman also notes that big drugmakers are becoming more likely to acquire promising research-based companies outsight, rather than cherry pick particular development programmes. More publicly-listed biopharmaceutical companies have been acquired in 2008 than in any year since 2003, the report notes.

But regardless of the method employed to bring new pipeline candidates in-house, the driving force behind the process remains the pharmaceutical industry’s poor showing in terms of R&D productivity. The industry’s internal efforts, and most notably a steep decline in late-stage clinical projects, remain inadequate to drive long-term growth over the next few years, despite hefty increases in spending on R&D.

The proportion of a typical large-cap pharmaceutical company’s net present value that comes from partnered products currently stands at around a third, compared to just 20 per cent in the first half of the decade.

However, the report thinks a plateau may have been reached, in part as a result of more drugmakers opting for the acquisition path, but also because of an apparent increase in R&D productivity in earlier-stage (Phase I-II) pipelines.

"Growth in the terms of partnership deals cannot expand indefinitely, particularly deals with blockbuster milestones, as it becomes cheaper to acquire the licensor outright​, " the report points out.

Another interest finding in the report is that big pharma companies are not particularly enamoured of licensing later-stage projects – raising questions about the perceived wisdom of licensor firms keeping projects in-house for as long as possible to maximise value.