Biotechs' fees soar for drug development partnerships

The fees that biotech groups charge big pharma companies to go into drug development partnerships have hit a nine-year high, in a fresh sign of booming valuations for the hottest new medicines.

In an attempt to refill their pipelines, big pharma groups have increasingly turned to "in-licensing" deals, where they pay biotechs an upfront fee to help develop a drug, followed by milestone payments pegged to success. In return, they get a share of the returns once the medicine goes on sale.

Such arrangements have been seen as a cheaper and less risky way for big pharma groups to access the newest drugs, as opposed to investing in their own research labs or buying companies outright. However, biotechs are charging much higher upfront fees in exchange for access to their most promising molecules.

Last year, big pharma groups paid an average upfront fee of $100.1m to partner on drugs that were in late-stage clinical trials, more than double the average upfront payment of $46.2m in 2013, according to research compiled by Morrison & Foerster, a law firm.

The average upfront payment for drugs across all stages of clinical development was $58.7m last year, up 73 per cent compared to 2013, and the highest since Morrison & Foerster started collating the data in 2006.

The largest deal of 2014 saw US-based Celgene hand an upfront payment of $710m to Nogra Pharma, a privately-held Irish biotech, to partner on its drug for Crohn's disease, the bowel disorder. It also pledged a further $815m in milestone payments for the drug, which had just completed mid-stage clinical trials.

The trend has continued apace in the first quarter of 2015, with a string of large in-licensing deals. However, Stephen Tau, an attorney at Morrison & Foerster, said there were signs that big pharma groups were turning to less proven treatments that have not yet been tested on humans or are in early-stage trials.

Offering big upfront payments to partner on early-stage assets is riskier than in-licensing more proven treatments, but it can allow big pharma groups to get better value while "locking up access to new technology" to gain an edge on rivals, said Mr Tau.

In March, Merck Serono paid an upfront fee of $115m to partner with US-based Intrexon on a novel type of cancer treatment known as Car-T cell therapy, and pledged a further $826m in milestone payments, while Amgen paid Kite Pharma $60m upfront to access a similar drug. Neither treatment has been tested on humans.

Mr Tau said large pharma groups were opting to do in-licensing deals rather than acquiring biotech companies outright because they wanted to fill specific gaps in their pipelines. "They might not want everything the company has to offer - just a specific programme," he said.

In the past, smaller biotech groups had been keen to do in-licensing deals at lower multiples as they needed the cash to fund their research labs, while the big pharma companies also offered them superior distribution and marketing capabilities.

However, investor enthusiasm for biotech groups has led to a booming IPO market and easier access to capital, meaning smaller groups are less willing to accept modest upfront payments when they can secure funding without having to sacrifice a share of future sales and profits.

The New York Stock Exchange Arca biotech index has risen by more than 200 per cent over the past five years, although positive shareholder sentiment has recently been punctuated by nervousness at soaring valuations. A couple of sharp sell-offs last month erased all of the index's gains from April.

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