The Complete Dealmaking Guide to Out-licensing and Partnering for Pharma and Biotech Companies

Dealmaking in the pharmaceutical and biotech industries plays a pivotal role in fostering growth and innovation. Partnering and out-licensing, also referred to as outlicensing, is an inorganic growth strategy, and often a key value-inflectional element for emerging pharma and biotech companies and their investors.

Technically, out-licensing is a subset of partnering deals and it involves licensing out intellectual properties, technologies, or drug compounds to other companies in return for fees, milestones, and royalties. It enables smaller biotechs with limited commercialization capabilities to bring their innovations to market by forming pharma partnering deals. For example, BioNTech out-licensed its mRNA platform to Pfizer for developing cancer vaccines. Effective partner search and selection, deal negotiation, agreement structuring, and alliance management are critical success factors for out-licensing arrangements in the biopharma industry. This comprehensive guide covers best practices and strategies across the entire partnering process for pharmaceutical and biotechnology companies.

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Differentiating Out-licensing and In-licensing in the Biopharma Sector

There are two types of pharma partnership deals, namely, out-licensing and in-licensing. Out-licensing involves licensing out an asset, technology, or intellectual property to another company in return for fees, milestones, and royalties. In-licensing (also referred to as inlicensing) works in the opposite direction – it involves licensing in an external asset or technology by paying the licensor for the rights to further develop and commercialize it. The following table describes the difference between out-licensing and in-licensing:

Pros and Cons of the Out-licensing and Partnering Process

For pharma and biotech companies, out-licensing helps manage risk, gain access to new markets, and generate additional revenue streams. Key benefits include obtaining revenue through upfront payments, clinical milestones, and sales royalties; risk sharing for costly clinical development; leveraging a partner’s regulatory expertise and commercial infrastructure; focusing internal efforts on core competencies; and reaching geographic markets that may be out of scope. However, out-licensing also requires giving up some control over the asset and its potential value.

Evaluating the Readiness of Pharma Assets for Partnering

Selecting the optimal timing to partner out a biopharmaceutical asset requires carefully evaluating multiple interdependent factors:

Development stage

Out-licensing late-stage assets after demonstrating clinical proof-of-concept can maximize deal value, as the asset risks and uncertainties are reduced. However, this requires absorbing heavy R&D costs during initial development. Out-licensing at earlier development stages increases risk but enables cost and effort sharing with a partner from the start.

Patent timeline

Outlicensing IP-protected assets earlier in their patent term provides the licensee more time to commercialize the technology before facing generics competition upon patent expiry. This extends the potential market exclusivity period for the partnered asset and the deal value.

Strategic fit and alignment

Assets that no longer align closely with the licensor’s core therapeutic focus areas or internal capabilities make strong partnering out candidates rather than competing for resources internally. Companies outlicense non-core assets to optimize the allocation of resources internally. Assets seeking to be externalized for this kind of reason are a favorite for private equity investors and venture capitalists.

Costs

If the projected costs for completing late stage clinical trials and commercialization are becoming prohibitive for the licensor, partnering allows the sharing of financial risk and recouping some investments made prior to the deal; however, the licensor must balance this with maximizing potential value.

Capabilities

Lacking specialized expertise, infrastructure, or resources internally to properly advance an asset through late-stage trials and regulatory approval processes may necessitate finding an external partner. Biotech companies outlicense to access required downstream capabilities.

Market access

Seeking to expand into geographic markets that are out of initial reach or focus for the licensor makes partnering a lucrative strategy for entering those new territories. There are examples of numerous partnership deals where Western companies out-license assets for emerging markets coverage with different regional companies.

Competition

The emergence of new competitors (either internally or externally) in a drug category or technology space may compel out-licensing an asset to another pharma player that is better positioned to compete in that market and maximize the asset’s potential.

Value

Carefully analyzing these complex interdependent factors provides clarity on the ideal timing, value propositions, and prospective partners to pursue embarking on a mutually beneficial partnering deal.

Finding Pharma Partnering and Out-licensing Companies

An effective out-licensing partner demonstrates having complementary capabilities, in-depth experience and expertise in the relevant therapy areas or technology domain, strong executive relationships, and strategic vision alignment regarding clinical development priorities and asset value creation plans. Establishing contacts and cultivating relationships with prospective partners facilitates deal discussions and ultimate execution.

Preparing Pharma Assets for Partnering

Before approaching prospective partners for out-licensing, biotech companies should ensure assets are thoroughly prepared and packaged to facilitate due diligence. Robust information packages demonstrate readiness and increase asset credibility. Key areas to focus preparation efforts on include:

Conduct Internal Due Diligence for Outlicensing

• Analyze and organize all preclinical and clinical data. Convert this into a strong business case that shows the value proposition of the asset considering the current and future competitive landscape. The downstream partnering deal process is fundamentally driven by a compelling R&D and commercial case.
• Undertake comprehensive financial, commercial, legal, IP, and technical due diligence on the asset to identify any major issues or risks impacting attractiveness or partnerability. Quantify remaining development costs.
• Thoroughly assess the strength of intellectual property protections surrounding the asset, including issued patents, pending applications, and supporting data exclusivity. Also, vet freedom-to-operate and confirm no major disputes or encumbrances exist.
• Critically evaluate the level of internal resources, expertise, and capabilities required for properly advancing the asset through remaining development milestones, regulatory approvals, and commercialization. Outline any gaps.

Develop Key Marketing Materials for Out-licensing

• Create a target product profile document highlighting the clinical differentiation, key benefits, safety profile, administration route, current development status, and other essential information. The aim is to concisely convey the value proposition.
• Prepare detailed financial models to analyze the risk-adjusted net present value (rNPV) using discounted cash flow analysis. Project potential revenue scenarios based on the addressable market that you are targeting covering indication prevalence, estimated adoption rates, and pricing power. Avoid inflated assumptions.
• Compile relevant data packages, preclinical results, completed clinical trial reports, regulatory submissions, safety information, and other technical documents into a well-organized virtual data room for partner review. Index and annotate the contents.
• Draft a high-level teaser summary and slide deck articulating the commercial opportunity, value proposition, and development roadmap. Convey the upside potential of your assets.

Benchmark Asset Value

• Research recent comparable out-licensing transactions for assets at similar development stages to establish reasonable valuation expectations, terms, and negotiating ranges. Assess where your asset fits.
• Engage valuation advisors to provide an objective view of inherent asset value based on concrete cash flow projections and comparisons. Avoid overvaluing or undervaluing.

Undertaking robust diligence, fundamental valuation, benchmarking, and collateral development demonstrates readiness to partners. It also assists with the assessment processes of potential partners and makes the process faster. The following section provides a more detailed explanation of the valuation.

Valuing Pharma Assets and Benchmarking Partnering Deals

Properly valuing a biopharmaceutical asset is a crucial component of establishing an equitable out-licensing deal structure that fairly balances risks and maximizes the potential value derived for both the licensor and licensee. The analogy that applies is – ‘You don’t put a house on the market before appraising its value. So do the same for your pharma or biotech asset’.

• Conduct discounted cash flow analysis projecting expected future revenues, costs, and margins for the asset to determine a risk-adjusted net present value. This requires developing revenue forecasts based on the target indication and market size, estimated margins, clinical development timelines, and probability of success. The projected cash flows are then discounted back at an appropriate rate reflective of developmental risks and the cost of capital.
• Benchmark potential upfront payment, clinical and regulatory milestone terms, and royalty rates against previous comparable out-licensing deals for assets at similar stages of development and of a comparable nature. Analyzing deal precedents provides a baseline for standard industry terms by development phase and asset type. Chances are that you won’t find perfect comparable but this exercise is worth conducting.
• You might want to develop real options-based valuation models, which calculate a risk-adjusted net present value for the asset while also accounting for the options and flexibility inherent in early-stage biopharma asset development. While real options valuations enable you to assess the value of options to potential licensees, however, most deals in the biopharma industry are done on the basis of rNPV valuation. So we generally don’t recommend this unless you know that the potential licensees in the past have paid for the options or have done some options-based deals.
• Create probability-weighted valuation scenarios for a drug asset based on the range of potential clinical trial outcomes, regulatory approval pathways, and commercial trajectories, each with estimated probabilities of occurrence assigned. The valuation is the probability-adjusted weighted average across the potential scenarios.
• Use risk-adjusted net present value models (rNPV) to factor in the development, regulatory, competitive, and overall commercial risks and uncertainties associated with early-stage biopharmaceutical assets. This risk-adjusting of cash flow projections provides a more accurate valuation. Be aware of key valuation drivers such as discount rate, probability of success and terminal value – they materially affect the value of a biotech asset.

Additional factors that impact asset valuation beyond the valuation drivers include the length of remaining patent protection, the competitive landscape within the target disease indication, relative strength and differentiation of existing supporting clinical data, size of the addressable patient population, and pricing power projections- they should be collectively reflected in the expected future revenue.

Engaging experienced internal valuation teams or external valuation advisors can help establish an objective and reasonable value estimate for an asset. This arms licensors with the knowledge needed to negotiate fair out-licensing terms, justify their asking prices, and close deals that maximize returns.

Engaging With Partnering Leads in Pharma and Biotech Companies

With a well-prepared asset package, the next phase involves methodically engaging with people in the prospective out-licensing companies that you identified earlier:

• Leverage connections and advisors to identify appropriate decision makers and influencers within licensing and business development groups (often executives in the business development and licensing, corporate development teams, etc.) at target prospective partner companies to contact. Get warm introductions whenever possible.
• Tap into personal networks and relationships between executives and scientists across biopharmas to obtain connections and introductions to key decision-makers and licensing stakeholders within prospective partner companies. Get buy-in from people on the inside.
• Craft tailored email outreach that piques interest by summarizing the clinical opportunity and asset’s value proposition, while demonstrating an understanding of the prospective partner’s therapeutic focus areas, strategic goals, and late-stage development needs.
• Follow-up outreach emails with a phone call to confirm receipt, discuss the suitability of the asset for a potential partnership, provide additional context, and gauge initial interest level.
• For interested companies, arrange an in-person presentation or video call with key scientific, clinical, and business stakeholders from the prospective partner company to walk carefully through the full asset package. Allow ample time for Q&A.
• Be highly responsive to due diligence requests and proactively coordinate access to the virtual data room and available personnel to address inquiries. Speed builds credibility.
• Add third-party validation – this essentially involves having several critical works ( e.g., market sizing, competitive landscapes, clinical trials analysis, etc.) done by consulting firms and advisors. This adds credibility while removing the bias that outlicensing seekers often have.
• Attend relevant industry conferences and events to network face-to-face with key representatives from prospective partner companies. Look for opportunities to build rapport.
• Follow a consistent yet customized outreach cadence tailored to each prospect based on their demonstrated level of interest and engagement. Balance persistence with patience.

The focus should remain on effectively communicating the asset’s potential to address unmet or under-met needs, differentiated value proposition vs. competitors both in-market and pipeline, highlighting strategic fit for the prospective partner’s portfolio and goals, and persuasively conveying the potential mutual benefits of a partnership. Disciplined preparation and tailored persistence are keys to driving promising dialogues forward.

Structuring Partnering Agreements and Deal Terms

The out-licensing partnering agreement governs the overall partnership between the biopharma licensor and licensee. Carefully structuring mutually beneficial deal terms upfront sets the foundation for shared success. Key components to address include:

Intellectual Property Protections

• Clearly define any background intellectual property being contributed by each partner and prospective rights for foreground IP and derivative works developed under the partnership.
• Specify which patents, patent applications, software, datasets, and know-how the licensor will provide license rights to. Detail their scope and jurisdictions.
• Establish the nature and extent of exclusivity being granted – whether the license will be exclusive or non-exclusive. Exclusivity terms impact asset valuation.
• Define any rights enabling the licensee to sublicense intellectual property to affiliates or partners for co-development, manufacturing, or commercialization.
• Set clear royalty rates and schedules payable to the licensor based on net or gross sales in licensed territories that account for development risks taken.
• Outline processes and accountability for prosecuting potential patent infringements and dealing with IP disputes. Enforcement capabilities affect valuations.

Financial Deal Structure

• The focus is to agree on financial deal structuring covering upfront payments, milestones, and royalties, and add-on instruments like options, and contingent value rights.
• Specify amounts and schedules for any upfront payments due to the licensor upon deal execution, as well as terms or conditions for subsequent milestone payments.
• Link clinical, regulatory, and commercial milestone payments to clear, quantified development objectives and sales thresholds achieved by the licensee.
• Construct royalty rates tied directly to net or gross sales in licensed territories, with scheduled rate adjustments over time or sales levels.
• Consider integrating revenue-sharing components that provide the licensor with a percentage of profits after certain product revenue thresholds are exceeded by the partner.

Operational Terms

• Clearly delineate clinical development, manufacturing, pharmacovigilance, regulatory, and commercialization roles, responsibilities, and requirements for each partner based on internal capabilities.
• Institute governance frameworks, joint committees, and processes to enable alignment on strategy, decision escalations, and information exchange.
• Establish reporting requirements and systems to enable monitoring of milestone progression, sales levels, and royalty payments owed under the agreement.
• Devise an alliance management team from Day 1 to keep the program on track and enable necessary adjustments from both partners.

Negotiating Out-licensing Partnerships and Agreements

Once a prospective out-licensing partner has been identified and initial interest confirmed, a crucial next phase is negotiating mutually favorable deal terms and partnership agreements. Savvy negotiation enables the creation of deals that maximize the potential value derived for both the licensor and licensee. Key aspects to address include:

• Establishing clarity on the fair valuation of the asset through detailed financial modeling including risk-adjusted net present value using discounted cash flow analysis, precedent transactions analysis, probability-weighted scenarios, and other valuation methodologies. This provides justification for proposed economic terms.
• Developing an explicit list of must-have non-negotiable deal terms related to aspects like IP rights, exclusivities, governance, milestones, and revenue sharing. Balance with areas of flexibility where compromises can be made.
• Detailing clinical study, regulatory filing, approval, and sales-linked milestone requirements incentivize faster development while enabling value inflection points and reducing risk for both licensee and licensor. Milestones align interests.
• Constructing royalty rates, guaranteed minimum payments, and longer-term revenue-sharing schemes that optimally balance risks and provide fair economic value distribution to both parties.
• Addressing operational considerations around asset transfer, ongoing collaboration, governance structures, progress reporting, quality and safety systems, pharmacovigilance obligations, compliance procedures, and other administrative needs. Strong operations enable success.
• Including protective provisions related to the use of intellectual property, regulatory approvals, data security, publication rights, termination clauses, change in control, dispute resolution, and other matters to reduce risks. Plan for uncertainties.
• Leveraging specialized legal, financial, and industry expertise to negotiate optimal terms while avoiding deal-breaking pitfalls.
• Maintaining frequent engagement and collaborative, win-win communication styles to drive negotiations forward in good faith – relationships enable deals.

Expert preparation, astute negotiation skills, and collaborative engagement enable creating out-licensing agreements and deal structures that maximize the potential for shared value creation and mutual success.

Finalizing and Executing the Out-licensing Partnership Deal

Once mutually agreeable deal terms have been aligned, the out-licensing process enters the final stretch of formalizing contracts, closing agreements, and onboarding licensees:

Finalize Contract and Close

• Work closely with legal counsel to incorporate the negotiated non-economic and economic terms into the final written contract. Resolve any lingering concerns.
• Present the final deal to internal stakeholders and governance committees to secure any required approvals and resources for successful execution. Address objections.
• Establish concrete timelines and finalize plans for smoothly transitioning the asset, transferring knowledge assets, and integrating the licensee into current processes. Ready resources.

Complete Due Diligence

• Provide the licensee full access to the data room and personnel to perform final due diligence, and validation, and address any outstanding questions. Be transparent.
• Develop remedies to reasonably resolve any material issues raised by the prospective partner during the confirmatory diligence process. Achieve mutual comfort.

Sign and Announce Agreement

• Following completion of the contract and resolution of due diligence items, officially execute the deal through formal sign-off between the licensee and licensor. Make it official.
• Collaboratively draft a joint press release announcing the partnership achievement, subject to mutual approvals. Spread the news.
• Develop tailored internal and external communications plans to explain the deal rationale and benefits within each company and to industry analysts. Get stakeholders on board.

Transition and Onboard

• Rapidly operationalize plans for transitioning the asset, sharing materials and knowledge, and onboarding the licensee pursuant to the agreement. Onboard quickly.
• Schedule frequent meetings and align key personnel to collaborate closely, build relationships, and support the partner in creating value from the asset. Develop shared goals.

Careful preparations, alignments, and teamwork in the final stages enable executing and implementing out-licensing deals smoothly to set partnerships up for shared success.

Frequently Asked Questions

How does out-licensing work in pharmaceuticals?

Out-licensing allows pharma companies to license their intellectual property (IP) like drug compounds to other firms to further develop, manufacture, market, and sell in certain territories. The licensor earns revenues like upfront payments, milestones, and royalties without taking on later stage costs.

Why do biotech companies out-license their drugs?

Biotechs outlicense to access expertise in late-stage clinical trials, regulatory submissions, manufacturing, and commercialization that they lack. Out-licensing also helps fund R&D and accelerates time-to-market while mitigating risks.

What are the pros and cons of partnering for pharma companies?

Pros include generating revenue earlier from R&D, reducing expenses, and leveraging partner strengths. Cons include loss of control, sharing profits, and risks if partners underperform. Strong contracts help minimize cons.

What types of deals are used in pharma and biotech out-licensing?

Typical deals include upfront payments, milestone payments, royalties, and profit splits. Hybrid structures are common, such as combining upfronts and milestones with royalties or profit shares.

How is asset value determined in pharma/biotech out-licensing?

Asset value depends on the development phase, market potential, competition, IP protection, projected revenue, costs incurred, likely expenses, and probability of success. Sector-specific financial modeling helps establish value.

What steps are involved in out-licensing a drug asset?

The main steps are identifying goals, evaluating assets, preparing marketing materials, reaching out to prospects, assessing interest, negotiating terms, performing due diligence, and finalizing the deal. Ongoing alliance management is key post-deal.

What makes a good out-licensing partner in pharma and biotech?

Strong R&D, regulatory, manufacturing, and marketing experience are vital. Shared vision, complementary capabilities, good communication, and a track record of successful deals are also important.

How do you find potential partners to license a drug candidate?

Attending industry conferences, networking, checking pharma licensing databases, promoting assets at partnering meetings, hiring expert consultants, and working with licensing brokers help identify prospects.

What are the main parts of a pharma/biotech out-licensing agreement?

Key sections cover licensed IP, exclusivity, upfronts and milestones, royalties, territories, responsibilities, IP ownership, warranties, indemnification, dispute resolution, and termination clauses.

What problems can arise in out-licensing deals and how can you avoid them?

Problems related to performance, priorities, and mistrust can be avoided by extensive due diligence, strong contracts, open communication, and careful alliance management.

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