Valuing biotech licensing deals

June 22, 2023

rNPV = risk-adjusted net present value; this sums all the future cash flows of a project, adjusted for development risk and discounted to account for the time value of money

This tool calculates the value of biotech licensing transactions -- where a licensor / innovator company licenses commercial rights to an asset to a larger licensee / partner company.

Valuation analysis of a potential licensing transaction can help answer questions like:

Will we capture more value by partnering an asset, or developing it ourselves?
What deal structure will help us capture the most value, while still being attractive for our partner?
Is it worthwhile to outlicense a product to generate near-term cash flow, even if the asset would be more valuable if we held on to it?
How would a deal change the risk-reward profile of our company?

How to use this tool +

You can see how different deal structures impact the valuation to the licensee and licensor by changing the assumptions (scroll down to do this).

For example, using the default assumptions, the above chart shows that the licensor would do just as well without a deal than with one. The value of the transaction to the innovator (shown in the blue bar in the chart) is similar to the value of the asset if the innovator develops it themselves (the green bar).

Does that mean you shouldn't do a deal? Not necessarily. The company may not have enough cash or internal capacity to develop the product themselves, so a deal may make sense. And even if they can develop the product on their own, a deal may make sense with revised terms.

In this case, you can tweak the deal terms to get something that works for all parties.

Try changing the upfront payment, R&D reimbursement, sales milestones or royalties, then click "update valuation". Try to find a deal structure that is attractive to both parties.

So there's theoretically room for a deal here. Whether a deal will work in reality, of course, depends on many other factors beyond financial analysis. Even if we only consider financial analysis, a deal being NPV positive for both parties often isn't enough to get it done -- licensee's may have certain expectations about how much of the deal value they get vs. the licensor. And any analysis is only as good as the underlying assumptions, so you must critically analyze your assumptions (see the bottom of this page for more on our assumptions for this model). And even if you have rock-solid assumptions, your models will still be inaccurate due to the inherent uncertainty of the drug development process.

Scenario inputs

Product info

We automatically populate the model with benchmarks based on the stage, modality and indication of your product

Indication
Indication 1 stage
Therapeutic modality
Product loss-of-exclusivity year
COGS % sales
SG&A % sales

Transaction info

General info +

Deal year
Licensor / innovator discount rate %
Licensee / partner discount rate %
Upfront payment ($M)
R&D reimbursement (licensee reimburses licensor) %

R&D costs and milestone payments +

Milestones are paid at beginning of stage, $M

Stage	Milestone payment ($M)	Cost of stage	Duration of stage	Probability of succeeding in stage
Target-to-hit	n/a
Hit-to-lead
Lead optimization
Preclinical development
Phase 1
Phase 2
Phase 3
FDA submission
Approval		n/a	n/a	n/a

Revenue and revenue milestones +

Paid in first year that annual net sales exceed threshold, $M

Peak sales assumptions
Peak sales ($M)
Years to peak sales

Sales threshold ($M)	Milestone payment ($M)
In first year that net sales are greater than ($M)...	...milestone payment is ($M):
In first year that net sales are greater than ($M)...	...milestone payment is ($M):
In first year that net sales are greater than ($M)...	...milestone payment is ($M):
In first year that net sales are greater than ($M)...	...milestone payment is ($M):
In first year that net sales are greater than ($M)...	...milestone payment is ($M):

Royalties +

Royalty rates in the right-hand column are used if net sales are LESS THAN the sales threshold in the left-hand column

Sales threshold ($M)	Royalty rate
When net sales are less than ($M)...	...royalty rate is (%):
When net sales are greater than above but less than ($M)...	...royalty rate is (%):
When net sales are greater than above but less than ($M)...	...royalty rate is (%):
When net sales are greater than above but less than ($M)...	...royalty rate is (%):
When net sales are less than ($M)...	...royalty rate is (%):
When net sales are GREATER than ($M)...	...royalty rate is (%):

Data sources and assumptions

This model assumes that the licensee takes responsibility for all commercial activities once the deal is executed. The licensor is responsible for R&D (though the licensor can be reimbursed for some or all of the R&D expenses incurred). This model only models pre-approval partnerships. This tool only models one product in one geography.

The assumptions for the licensing deals are just placeholders. You will need to select these yourself based on comparable transactions for your programs. You can often find terms and redacted licensing agreements as exhibits to SEC filings -- this is a good free way to find these agreements.

If you need help finding comparable deals, contact us and we can potentially point you in the right direction.

All of the other assumptions (clinical trial cost, probability of success, peak sales, COGS and SG&A, etc.) come from our benchmarking database. The model selects these parameters based on the development stage, therapeutic area, and modality of the product in question.

This simplified model does not include any cash flow items, such as capital expenditures, working capital changes, or depreciation.

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Build robust biotech valuation models in the browser. Then download a fully built excel model, customized with your inputs.