A formula for drug licensing deals
Could a mathematical model predict the total value of licensing deals?
Elias Neuendorf, Kara E. O’Connell, Patrik Frei and Kumlesh K. Dev

Licensing deal transactions are confidential, and there can be longwaits before royalties from market sales are realized, so it can bedifficult to make generalizations about their total value and distribution structure. Conversely, details of upfront payments are a little
more readily available and display sensitivity to the development
phase of the drug1,2.
So, could a mathematical model using upfront payments be developed to predict the total value of licensing deals?
To address this question, we collected data from in-licensing
deals where the upfront payments, milestones—investigational
new drug (IND), phase 1, phase 2, phase 3, approval, registration and sales—and royalties from market sales were recorded in
US dollars. The data were collected from the global Biotechgate
database (www.biotechgate.com), which at the time of analysis
had information on 94,885 assets (including 54,946 therapeutics
and 8,411 technologies), 63,460 companies, 30,826 out-licensing

opportunities, 23,902 financing rounds, and 22,684 licensing
agreements.
Overall, 2,942 licensing deals totaling $905.3 billion were analyzed—all of which were agreed in 2010 or thereafter. Of thosedeals, 86.6% included upfront payments, 85.8% included milestone
payments, and 65.5% included royalties from sales (Fig. 1a). The
specific amounts were disclosed for 80.0% of upfront payments,
75.1% of milestone payments, and 9.7% of royalties from sales.
Interestingly, 59.1% were listed as having exclusive agreements.
From the 2,942 deals analyzed, three sets of formulae were generated and then united to create a ‘licensing deal formula’.
Initially, we calculated the average values for the upfront payments(y, $58.6 million, n= 2,353) and the milestone payments comprising
IND, (a1, $4.6 million, n = 45), phase 1 (a2, $5.6 million, n = 40),phase 2 (a3, $5.0 million, n = 66), phase 3 (a4, $20.3 million, n = 89),
approval (a5, $41.4 million, n = 127), registration (a6, $120.4 million,b 100

a Exclusivity
41%(1,202)59%(1,740)9080

13% (395)

Milestone86%(2,524)14% (418)

Royalties

Percentage of licensing deal

Upfront
87%(2,547)c Phase 1 (total deal $450.3 million)

46.6%

70
60

40

20.9%

30

100YesNo(n value)$32.5m$26.7m$17.2m
$7.1m

7.2%
5.9%
3.8%
1.6%
14.0%

20.1%

7.0%
5.7%
3.6%
19.0%

18.9%

$94.0m$209.9m$62.8mPhase 2 (total deal $323.0 million)$22.4m50

2034%(1,014)

66%(1,928)

44.7%

42.9%

Sales
Registration
Approval
Phase 3Phase 2Phase 1
Upfront$64.8m$144.5m$18.3m
$11.7m$61.4m

6.5%
5.9%

25.9%

Phase 3 (total deal $311.7 million)$20.1m$58.9m$133.7m$18.3m$80.6mLicence at Licence at Licence atphase 1phase 2phase 3Fig. 1 | Demographics, structures, and sizes of deals analyzed. a, Deals with ‘Yes’ or without ‘No’ exclusive agreements, upfront payments,
milestone payments, and royalties on sales are shown both as percentages (%) and as exact numbers (indicated in parentheses). The total numberof deals analyzed was 2,942. b, Based on the average upfront payments for phases 1 ($62.8 million), 2 ($61.4 million), and 3 ($80.6 million), therespective deal structure values for licensing were calculated using the licensing deal formula. c, Using the average upfront payments for phases
1, 2, and 3, the individual payments and total deal sizes were calculated as $450.3 million, $323.0 million, and $311.7 million, respectively.
B28 | June 2023 | www.nature.com/biopharmdeal

Credit: YAY Media AS /Alamy Stock PhotoFEATURE

FEATUREn = 482), and sales (a7, $275.2 million, n = 301), which summed(Σ) to give a total of $531.1 million. The relationship between theaverage upfront payments and the average milestone payments wasthen formulated (see the a values in Fig. 2).
Next, linear regressions between upfront payments and development milestone payments or sales milestone payments were calculated. The correlation coefficients for the slopes (b1–7) with theirintercepts (c1–7) were recorded for each linear regression. Here, oneregression for each milestone stage, i, was calculated. These coefficients were then formulated (see the b and c values in Fig. 2). Our
analysis revealed a moderate correlation (R2) between upfront payments and milestone payments for the earlier development phases(i.e., IND and phases 1–3). As expected, the correlation between
upfront payments and later stages of development (i.e., approval,registration, and sales payments) was weaker (Fig. 2a). In all cases,
the probability values for these correlations were <0.01 or better.
The total milestone size per deal stage (wj) was forecast by anadditional regression between upfront payments and total milestone payments. Here, one regression across all deal stages, j, wascalculated. This analysis used the upfront coefficient, d, and thedeal-stage coefficients, e1–5, for stages 1–5 (i.e., IND, phase 1, phase2, phase 3, and sales) (Fig. 2b). In this case, the probability values
for these correlations were <0.001 or better.
Lastly, using the calculated average payments (a1–7) and the coefficient values (b1–7, c1–7, d, e1–5) (Fig. 2), we devised a licensing deal
formula that, using upfront payments, predicted the percentage (%)
split of payments for milestones and upfront, as well as the total deal
size. The licensing deal formula calculated the size of payments for
all development milestones and sales milestones across all stages(see the full equation in Fig. 2c).
To test the model, we took the calculated averages of upfront
payments for drugs licensed at phase 1, phase 2, and phase 3.
In our previous studies, these payments had the following
ranges1,2: early research/preclinical ($9.3–15.6 million) < phase 1($20.1–30.3 million) < phase 2 ($18.6–$33.7 million) < phase 3($23.6–$39.1 million) > drug filed ($13.5–24.9 million). The average values were as follows: phase 1 = $24.4 million; phase 2 =$25.8 million; and phase 3 = $32.7 million.
Analysis of the recent data used here gave higher average values
for phase 1 ($62.8 million), phase 2 ($61.4 million), and phase 3($80.6 million), with a similar trend observed between the phases.
Using these average upfront payments within the licensing
deal formula, the percentages of all upfront and milestone payments across all the milestone stages were calculated for deals
in phases 1–3, representing typical deal structures for these deal
stages (Fig. 1b). In addition to the individual payments, total deal
sizes were also calculated as follows: phase 1 = $450.3 million;
phase 2 = 323.0 million; and phase 3 = $311.7 million (Fig. 1c).

Summary of results

Taken together, our data showed that more than half of licensing
deals could expect to arbitrate exclusive arrangements with a mix
of upfront payments, milestone payments, and/or royalty payments
on sales. There was a clear preponderance of back-loaded deals,
with more than 60% of milestone payments scheduled to take place
after approval.
Our findings showed that the developed formula was a reasonable
tool to calculate the total size of licensing deals and the distributionof payments from upfront and deal stages. In simple terms, themodel predicted the total size of a licensing deal to be about 7× thatof the upfront size for a phase 1 deal, 5× for a phase 2 deal, and 4×for a phase 3 deal, which appeared realistic.

Resolving dependencies in deal making

This licensing deal formula highlights the triangle of dependencies that decision makers need to solve during deal negotiations.
Every deal is defined by its value in a risk-adjusted net present value(rNPV) sense, its size (in bio-dollars), and its distribution (frontversus backloaded). In order to derive deal terms in a rigorous way,

baAverage (n)Slope (n)Intercept R 2

abc

4.6 (45)
5.6 (40)

0.33 (28)

2.9

0.57

Phase 1

120.17 (27)

3.5

0.31

Phase 23

5.0 (66)

0.68 (42)

3.1

0.58

IND

1

Phase 34

20.3 (89)0.76 (58)

8.2

0.41

Phase 1

2 342.3

5Approval
Registration 6

41.4 (127)0.09 (94)

41.2

0.13

Phase 23 217.5

120.4 (482)0.49 (372)

103.5

0.15

Phase 34 173.2

Sales

275.2 (301)

1.67 (247)186.20.22

Sales

5 90.2yR20.4258.6 (2,353)(n)(2,880)IND

Upfront

7Coefficients
dUpfront

0.72
e272.8[ai]71vi = upfront × [bi]71 + [ci]71
payment at each stage = (wj = upfront × d + [ej]51) × (zi = (( 7 ) + ()) ÷ 2)
∑ i=1 ai∑7i=1 vi

cFig. 2 | The licensing deal formula. a, Correlations between upfront payments and individual
milestone payments. The symbols denote the following: a = average value of deals analyzed ateach milestone stage ($ million); b = slope coefficients; c = intercept coefficients ($ million);y = average value of upfront deals analyzed ($ million). b, Linear regression between upfront
payments and total milestone payments. w = total milestone size at each deal stage ($ million),
forecast by an additional regression analysis using the upfront coefficient d and the deal-stage
coefficient e for stages 1–5 (i.e., IND, phase 1, phase 2, phase 3, and sales). In this case, theintercept was set to 0 and there was a stage unknown category that is not displayed. n = numberof deals averaged or used for linear regressions; R2 = fit of linear regression; Ave, average. c, Final
formula. The licensing deal formula created from correlations between upfronts, individual
milestone payments and total milestone payments is shown. The a and v values for the stages
reached were set to 0, such that for a compound in phase 2, the investigational new drug (IND)(a1 and v1) and the phase 1 (a2 and v2) values were set to 0. The percentages for upfront andmilestone payments and the total deal size were calculated by the formula shown.

the rNPV value, together with risk and development structures of
the asset in question, usually have to be determined. This is commonly combined with—or in cases where rNPV information is notavailable, replaced by—personal experience and benchmarking
against comparable deals.

A formula to supplement current approaches

The licensing deal formula derived here can serve as an additional
heuristic to find deal terms that are in line with industry standards. For this, an agreed upfront payment can be plugged into
the licensing deal formula to determine milestone payments ateach stage. Alternatively, the licensing deal formula can be combined with deal sizing via rNPV calculation or benchmarking.
The total deal value (from the rNPV) or the total deal size (frombenchmarking) can be distributed across the upfront payment
and various milestones according to the typical distribution
implied by the licensing deal formula at that stage. Under bothmethods of using the licensing deal formula, business partners
can then negotiate to shift the distribution of payments towards amore front-loaded or back-loaded design than typical. Thus, thelicensing deal formula may act as a tool to assist in deal making
and create an industry-standard starting point for negotiations
between partners. Considering the relatively low disclosure rateof royalties, we have not included them in this analysis, and theyneed to be addressed separately.
Elias Neuendorf 1*, Kara E. O’Connell 2, Patrik Frei 1 andKumlesh K. Dev 2*
1
Venture Valuation AG, Zurich, Switzerland. 2Drug Development,
School of Medicine, Trinity College Dublin, Ireland.
*e-mail: e.neuendorf@venturevaluation.com; devk@tcd.ie
1. Frei, P. & Dev, K.K. Drug Discov. Today 18, 1027–1029 (2013).
2. O’Connell, K.E, Frei, P. & Dev, K.K. Nat. Biotechnol. 32, 617–619 (2014).

www.nature.com/biopharmdeal | June 2023 | B29