Why It's So Dang Hard to Value Biotech Deals
There's more to the deals than the big headline numbers.
Brian Orelli
(TMFBiologyFool)
If you just read the headlines, you'd think big biotechs were handing out cash like candy on Halloween. Three billion here, two billion there -- cute costume, grab a handful:
"Sangamo in $3 billion gene-editing deal with Gilead" --Reuters
"Can Bristol-Myers Squibb Squeeze $3.6 Billion From Its Nektar Therapeutics Deal?" --The Motley Fool
"Takeda surfs a potential $2B Wave of acquisitions" --BioPharma Dive
In reality, the deals are more complex than the total values of the deals in the headlines suggest:
Licensor
Drug(s)
Up-Front Payments
Sangamo Therapeutics (NASDAQ:SGMO)
Gilead Sciences (NASDAQ:GILD)
10 or more next-generation ex vivo cell therapies in oncology
$3.01 billion in milestones across 10 or more products
Nektar Therapeutics (NASDAQ:NKTR)
Bristol-Myers Squibb (NYSE:BMY)
NKTR-214
$1 billion
$850 million equity investment, and $1.78 billion in milestones
Wave Life Sciences (NASDAQ:WVE)
Takeda Pharmaceuticals (NASDAQOTH:TKPYY)
WVE-120101, WVE-120102, WVE-3972-01, an unnamed drug, up to six preclinical programs
$60 million equity investment, $60 million in research support, more than $2 billion in milestones
Data source: Company press releases.
The breakdown of the up-front payments makes it clear that Nektar has the best deal of the three. Clearly Bristol-Myers Squibb is risking the most with the $1 billion up-front payment; even the $850 million equity investment won't be worth as much if NKTR-214 is a bust.
For payments beyond the up-front payments, we'd ideally like to value them based on the risk-adjusted net present value of the other payments.
For instance, if there's a $100 million payment for an approval by the Food and Drug Administration that we think has a 30% chance of occurring, the risk-adjusted value is $30 million. Then, if approval is three years away and we'd like a 10% return, the net present value of the $30 million would be about $22.5 million.
Unfortunately, most drugmakers don't list what the milestones are, and what they'll get for achieving each milestone. Clearly a milestone for advancing into phase 2 is easier to accomplish than getting an FDA approval, which, in turn, is easier than achieving $1 billion in sales.
For some deals, the companies are nice enough to give some context. Wave Life Sciences, for instance, notes that more than $1 billion of its $2 billion in milestones is for precommercial achievements, but even that's vague. This is especially true for unnamed preclinical programs where the milestones could be anything from designating a drug as one of six compounds (which could happen pretty soon) to an FDA approval (which might come many years later).
Let's look at the value of theoretical milestones and how they relate to the value of an underlying company. Astellas Pharma (NASDAQOTH:ALPMY) gave us an interesting example recently, in a deal with privately held Universal Cells.
In October, the two announced a deal giving Astellas rights to Universal Cells' Universal Donor Cell technology. Between an up-front payment and research milestones, Universal Cells will be eligible for up to $9 million; for research funding and clinical and regulatory milestone payments, it can get up to $115 million. Universal Cells was also eligible for undisclosed royalties on Astellas products using Universal Cells technology.
How much should that potential $124 million add to the value of Universal Cells? Last month, four months after the initial deal, Astellas announced that it was buying the entire company for $102.5 million. For $102.5 million up front, Astellas can now use the technology on as many products it wants. It also picks up potential payments from other licensing deals that Universal Cells had previously set up, and could theoretically do additional licensing deals for the technology if Astellas doesn't want to just keep it in-house.
An endorsement
While it's hard to determine exactly how much future milestone payments should increase the value of the underlying company, a deal with a large biotech says a lot about the assets being licensed. Potential partners usually get more access to underlying data than what's available to investors, so a company's willingness to sign on the dotted line should be seen as an endorsement in the totality of the data generated so far.
Ultimately investors should focus on the up-front payment; it's the only concrete number to go on. A larger up-front payment is also indicative of a larger endorsement, because up-front payments are money the company won't get back if the drug fails along the way.
NKTR
NASDAQ:NKTR
ALPMY
ASTELLAS PHARMA UNSP/ADR
NASDAQOTH:ALPMY
WAVE Life Sciences
NASDAQ:WVE
NASDAQ:GILD
Sangamo Therapeutics
NASDAQ:SGMO
TKPYY
TAKEDA PHARM CO LTD S/ADR
NASDAQOTH:TKPYY
BMY
NYSE:BMY
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