Licensing deals have risen in prominence in a restrained market environment. Is it desperation, or an important part of the biotech ecosystem? Experts weigh in.
As the biopharma world delves deeper into complex biology and new high-tech modalities, drug development is riskier than ever. At the same time, the market is particularly risk averse following the post-pandemic slump. Pharmas are therefore piling the risk onto smaller companies with small upfront licensing deals but a massive potential payday—if all goes perfectly to plan.
“The science has gotten riskier. We’re going after targets that are often in diseases where there is no treatment or few treatments, and so it does make sense to kind of put your toe in the water, see how the data comes out over the course of the trial,” Kirsten Axelsen, a nonresident fellow at the American Enterprise Institute and senior policy advisor at DLA Piper, told BioSpace.
Some companies have been inclined to strike licensing deals over more transformative M&As in a restrained biotech market, according to Thijs Spoor, CEO of radiopharma biotech Perspective Therapeutics. He’s seen a level of desperation among some biotech leaders: “They’re willing to take deals that are just to get the deal done.”
“It’s been tough for some of those innovators to really get funded in a way that makes sense,” Spoor said.
When To License vs. Buy the Whole Pig
Pharmas typically pay an upfront fee at signing, then layer the deal on the back end with payments for development, regulatory and commercial milestones. While the milestones can reach into the billions, upfront fees typically fall below $100 million—and rarely is all the additional cash paid out.
The back-loaded nature of these deals “shift[s] all the risk back [to] the person innovating,” Spoor said, making these types of deals attractive for pharma companies looking to access early candidates that have yet to show commercial success. When a licensing deal is announced, Spoor said he eyes the upfront payment to see “how much is real, how much is future potential.”
According to GlobalData, upfront payments are slowly getting bigger, growing 137%, or $55 million on average from 2021 to 2024, or 22% ($17 million) per year.
One of 2024’s biggest deals involved Novavax, which received $500 million upfront from Sanofi to work together on its COVID-19 vaccine and a combo COVID-flu shot. The deal added another $700 million in milestones for a potential total of $1.2 billion overall. But this one was an outlier. In a typical example for smaller biotechs, Prime Medicine received just $55 million upfront from Bristol Myers Squibb, with $3.5 billion possible later on in milestones.
Axelsen said the larger upfront payments suggested by GlobalData’s analysis could reflect increased demand for licensing deals in general. “Companies are pretty competitive, but they do still have this appetite to de-risk, even if they have to pay more to de-risk,” she said.
Sometimes, however, pharmas want to take a big bite and acquire a company instead. Labya said this approach is more likely when a Big Pharma wants to prevent future competition from smaller companies with drugs in high-growth areas. She noted Pfizer’s huge $43 billion buyout of Seagen for its ADC technology in December 2023. The ADC space has since exploded with licensing deals from Big Pharmas, such as Roche’s newly struck deal with China’s Innovent. GSK also recently signed two ADC deals with China-based firms, first with Hansoh Pharma, then with DualityBio.
From the biotech’s perspective, both types of transactions can be advantageous, said Zevra Therapeutics CEO Neil McFarlane, who advised an all-of-the-above approach to dealmaking. “The M&A versus licensing world, I don’t think it really matters. I think the best thing is, how can you structure a deal that allows for you to find the leverage and allows for you to be able to get a win-win for your shareholders?”
Axelsen, meanwhile, said that she is happy to see so many biotechs accepting licensing deals and continuing as independent companies, as opposed to being acquired by a larger firm, which often leads to layoffs of executives and other employees. “It’s a good trend, because you keep the entrepreneurial spirit, the smallness of the company,” Axelsen said.
On the other hand, if biotechs are acquired and their executives are cut loose, they often return quickly with a new company, just as Seaport Therapeutics’ leaders did after their previous biotech Karuna Therapeutics was bought out by Bristol Myers Squibb for $14 billion in December 2023. This, Axelsen said, is an important part of the ecosystem as well: “Who doesn’t want a big payout and to walk away?”
