The importance of information transparency and parity between buyers and sellers cannot be overstated. Consider the ongoing debate in Congress over drug pricing – ignore for now the disregard Congress possesses for understanding the various and underlying causes for drug price inflation – and the political assertion that the biopharmaceutical industry is pillaging research funded by the tax-payer (at both the NIH and in academic labs).
Academic technology transfer offices, the NIH’s technology transfer office and many small biotechnology companies enter into negotiations with big BioPharmaceutical companies without the benefit of experienced business development and licensing professionals. Don’t get me wrong, there are offices with very sophisticated professionals who have spent time on both sides of the fence, but most do not. But, big drug companies business development and licensing organization comes to the negotiation having done their homework because they have to. Regulatory and payor requirements demand that drug companies understand the markets they enter, the competition they face, and the ethical and medical need to supply safe and effective drugs to patients. Internally, drug companies seek a financial return that offsets the cost of failure (for every other drug in their program that does not make it into the market). For example, Bayer Pharmaceuticals suffered a phase III trial failure for Asundexian, at the time indicated for treatment of Atrial Fibrillation).
- “…Its [Bayer’s] shares slid 16.4% at 0903 GMT on Monday to their lowest in 12 years…Bayer said in a statement late on Sunday that experimental anticoagulant asundexian was shown to be inferior to Bristol-Myers Squibb (BMY.N), opens new tab and Pfizer’s (PFE.N), opens new tab established Eliquis in preventing strokes in high-risk patients part-way into a Phase III trial.
- It had hoped the drug would generate annual sales of more than 5 billion euros ($5.5 billion) and replace revenue from one of its pharmaceutical best-sellers, blood thinner Xarelto, which is set to lose protection from key European patents in 2026.”
Additionally, big pharma also develops deal terms that reflect current budgets and cost of entry into the market. Thus, as big pharma readies for negotiations, it has information and data from finance, marketing, regulatory, commercial operations and R&D, among other organizational inputs. It develops deal terms pursuant to several valuation models such as, a discounted cash flow model (and NPV), comparable deals (historic and near contemporaneous), and real options to determine drug asset value. The deal reflects where the asset is in drug development, i.e. early or late pre-clinical development, in phase 1, phase 2, phase 3 or in-market.
In contrast, technology transfer offices for the government, university (or early-stage biotech company founder teams enter into negotiations ill-prepared around financial modeling. These organizations typically don’t possess the business experience, supporting data, or modeling experience to develop informed business terms. Notwithstanding the above, the technology transfer organizations do in fact negotiate license terms for remuneration of their technologies. Despite Congresses assertion that pharma is just taking, the government does receive upfront fees, technology access fees, milestone payments and royalties on the drug covered by their patents under license. If the drug asset from the government does make it to the market without trial failure (or any other failure), they will receive royalties reflecting their contribution to the final product, as negotiated between parties.
What would help both parties, would be transparency and parity in information. If both parties had equal access to market information, valuation methodologies, and relative contributions to the final product, there would be no argument over value. Both parties could even show Congress how the deal was arrived and the fairness of the deal. Luckily, SNAP Life Sciences is developing such tools to help buyers and seller reach a meeting of the minds.
