Getting Taken to School: Key Considerations and Differentiators of why “Academic” Transactions Have Typically Lower Deal Values than Industry Transactions

With the new school year just around the corner here in Boston (and already underway in other parts of the country), transactions involving academic and research institutions are on our minds.  Specifically, while research doesn’t stop during the summer vacation, as students are returning to their campuses it is a good opportunity to explore the work of university Technology Transfer Offices and examine the transactions they complete in comparison to their industry peers.

To do this analysis, we looked at all small molecule, pre-clinical stage, single asset oncology global licensing transactions for the last 10 years.  We limited the analysis purely to small molecules (i.e. no immuno-oncology assets) and to drug programs with a clearly-identified lead asset/indication.  We defined an “Academic Transaction” as any transaction between one company and an academic or research institution (i.e. university, NIH, etc.) and defined an “Industry Transaction” as any transaction between two companies.

While we anticipated that the data would show that Academic Transactions, as a group, would have lower transaction values (upfront plus milestones) than Industry Transactions, the difference was significantly greater than expected.  In fact, our analysis showed that the average transaction value for an Industry Transaction was almost 35x greater than the average value for an Academic Transaction.

Average Deal Value

However, when looking at the breakdown between upfronts and milestones, the general structure of Academic Transactions and Industry Transactions were fairly similar.

Composition of Deals

What, then, could explain the large discrepancy in deal values if transactions appear to be structured the same but are different by orders of magnitude?  What lessons could Technology Transfer Offices learn and incorporate to increase their transaction values, if that is a goal?  The clear disconnect between Industry Transactions and Academic Transactions for similar stage assets can be explained by a number of factors, the most important including:

  1. “Preclinical” describes a wide spectrum of development

Although the analysis was limited to preclinical stage assets, preclinical development covers a wide spectrum from drug discovery through in vivo and ex vivo studies and GLP toxicology studies.  As with clinical drug candidates, the stage of development has a material impact on the transaction value for preclinical drugs.  In general, we discovered that preclinical industry programs are typically further along in development than preclinical academic programs at the time of the transaction (i.e the assets in an Industry Transaction are closer to IND than the assets in Academic Transactions).  As the product gets closer to an IND filing, its probability of clinical success increases and the transaction values similarly increase as risk is decreased.

What this means for an academic or research institution is that if they could somehow further the preclinical development of their assets, they would start to see an increase in the transaction values of their commercial partnerships.  Several institutions have already recognized this impact from furthering the preclinical development.  For instance, the Blavatnik Biomedical Accelerator at Harvard University was established, in part, to help advance the innovative, early-stage life science research coming out of Harvard’s labs to a point that the university could achieve higher-value commercial partnerships.  The Balavatnik Biomedical Accelerator leverages expertise across the university, including the business school, and is an interesting model from an academic and research institution geared toward increasing the value of its research and is one that should perhaps be mimicked elsewhere.

  1. The IP matters

The fundamental basis of any licensing transaction is the underlying IP for the product that is being licensed.  Transaction value is therefore directly correlated to the strength of the underlying IP, both in terms of the extent of the protection around the new product and the duration of that protection.  Any avenues through which a potential competitor could engineer around the IP would decrease the value of the transaction.  What is important, then, is not the composition of matter patents, but also patents relating to the manufacture, formulation and use of the product, including claims as broadly written as possible to ensure the largest “moat” possible for protection.  Companies spend a lot of time working on their patent estate strategies, including the timing of when to file, where to file, what to claim and even what to publish.  Researchers, on the other hand, are often more focused on getting the results of their research published, which can possibly have a detrimental effect on the scope of any claimed patents.  Similarly, they are less focused on IP protections, such as manufacturing process patents or trade secrets that would have a material impact on preventing a potential copycat by making it commercially infeasible.  Having as robust of an IP estate as possible is essential to maximizing the transaction value, especially for a pre-clinical asset.

  1. Investor requirements establish deal hurdles

Whether in academic/research institutions or companies, much preclinical work is funded through grants.  However, companies also have likely raised capital from investors, which means investor returns are a key consideration when deciding whether to proceed with a transaction.  This establishes certain minimum hurdles for deal value for companies that are not present with academic and research institutions and could cause a company to walk away from a proposed transaction if the economics are not attractive enough.  Similarly, a company with investors has the option of raising additional capital to advance the program on its own if it does not like the offers it receives from potential partners.  These two forces in combination help push up the transaction values that are observed in Industry Transactions.  Since universities and research institutions do not have a realistic capability to fund the further development themselves or true minimum hurdle requirements for a deal, the lack of a real BATNA depresses the transaction values the Technology Transfer Offices can generate.

  1. Equity is a real value driver that is not captured in transaction value

Another element we noted in our analysis was that the size of the counterparty in the transaction matters.  In the Industry Transactions, the counterparty was often a company with significant financial resources that could both afford to pay for deal economics and the future cost of development of the product.  The counterparties in the Academic Transactions, on the other hand, were typically start-ups or smaller companies without the financial capabilities to pay large upfronts or milestones and more focused on raising the necessary cash to run the further development of the asset.  In many cases, the counterparty in the Academic Transaction was even a company spun out of the research lab and headed by the main researcher.  Because counterparties in Academic Transactions do not have a large ability to pay, instead the institutions accept equity in the companies as further compensation.  The value of equity, however, is not captured in our analysis since the equity ownership is (1) not announced and (2) too difficult to value at any one point in time for a private company.  But, the equity ownership a university or research institution has in a company could be of significant value if the company is successful.  If for instance, a university only receives $5M in total transaction value from a license but also receives equity that ends up being worth $100M at the company’s exit, that ends up being a significant transaction to the university even though the deal value is only reported as $5M.

Universities, therefore, are building broad venture portfolios based on the research coming out of its own labs.  In acting as venture investors, though, it then becomes important for the universities to properly manage the portfolio and try to determine which of the companies in which they hold equity are more likely than not to generate a significant return.  For these companies, the universities should be more proactive in maintaining their pro rata ownership by participating in future financing rounds (leveraging, perhaps, a portion of their endowments).

  1. The need for future sublicenses

As stated previously, the counterparties in most Academic Transactions were start-ups and smaller companies that are unlikely to be able to advance the product to approval and commercialize it themselves.  Instead, it is likely that they will need to sublicense the drug at some point to a larger company.  In Industry Transactions, it is more likely that the licensee has the development and financial capabilities to bring the product to market themselves.  This has profound implications on the sort of economics the academic/research institution can get for the initial license.  To account for lower upfronts, the university may be inclined to push for larger development milestones and/or royalties on sales of the product.  However, each additional payment that must be made by the potential sublicensee makes it more difficult for the sublicense transaction to be completed.  With value tied to success, universities are then pressured not to demand terms that would squeeze the licensee and not provide the proper incentives for them to push forward with development.  Royalty stacks, for instance, can materially impact both the licensor’s and sublicensee’s willingness to do a deal and any need to go back to the original licensor (the university) to renegotiate the original license adds complexity and risk to a transaction.  We at Locust Walk are firm believers that any economics-based issues in a deal process can always be solved through creative structuring and similarly strongly believe that by being creative with deal structuring Technology Transfer Offices can still capture high value downstream.

  1. Deal certainty v. deal value maximization

The remit of the Technology Transfer Office is to figure out how to transition university-discovered science into companies for further development.  The focus therefore is much more on deal completion than deal maximization.  Since the university cannot further develop the product on its own, if there is no deal for the asset it sits dormant on the shelf making any deal better than no deal.  Companies, on the other hand, are much more willing to say “no” to transactions that do not provide them the value they need and can better afford to wait and see if something better comes along.  As a result, Academic Transactions are more likely to undervalue the assets being outlicensed since deal certainty is the priority.

  1. Industry expectations and stereotypes impact deal value

It is also important to note the industry expectations of academic Technology Transfer Offices.  For Technology Transfer Offices, it is an unfortunate reality that the industry has traditionally viewed academic and research institutions as unserious deal makers who have limited leverage in what they ask for in a license.  It is considered very aggressive for an academic institution to seek private company-like transactions.  As a result, academic institutions rarely run formal partnering processes for a particular asset, which would maximize the deal value by generating competing bids.  Instead, the industry functions more by the companies identifying the asset at the university and then approaching on its own.  There have already been some signs of this changing, including the 2016 transaction between Harvard and Merck (a direct result of the Blavatnik Accelerator) that culminated from a broad strategic partnering process.

  1. The purpose of the research

Ultimately, though, we believe the biggest reason for the discrepancy between Academic and Industry Transactions is cultural.  Companies that are in the business of drug discovery to license to other companies are exactly that, in the business.  Academic and research institutions, instead, are focused on more altruistic goals such as the furtherance of human knowledge and understanding.  In order to truly maximize Academic Transaction deal values, universities would have to reorient themselves to be more like a business, which is antithetical to their guiding principles.  If an academic researcher was most driven by commercialization and profit, he or she would most likely have gone to work for a drug company instead of being in academia.  Universities and research institutions should not try to be the R&D organizations of a pharma company because its not their role.  Technology Transfer Offices will have an uphill battle to improve on transaction values, but it is possible to do so without losing sight of the guiding principles of the institutions.

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 Written by Andy Meyerson