Up-Front Deal Value Doesn't Reflect Peak Commercial Potential

As average up-front payments increase in licensing deals, so do actual approval rates of the drugs generated by those deals. (See (Also see "Drug Approval Rates Grow With Deal Up-Fronts" - In Vivo, 13 Jul, 2015.).) Many of the approved products were in therapeutic areas such as neurology and cancer, despite the prediction for lower likelihood of approval in those classes vs. others (See (Also see "Up-Front Deal Economics May Not Match Drugs’ Likelihood Of Approval" - In Vivo, 18 Jun, 2014.).) Taking these points at face value, one could argue that the higher prices paid by the licensees in those alliances are justified because more approved drugs came about as a result.

But just getting a drug cleared is only part of determining whether or not the partner got its money's worth. To take it one step further, IN VIVO compared peak drug sales estimates against the up-front payments in the deals as a proxy for commercial success. This follow-up analysis used the same original dataset as our previous two studies. (See sidebar, Methodology.) The review of the data suggests that licensees, especially for mid-to-late-stage candidates, do a poor job of valuing assets from a commercial perspective: there's no correlation between peak sales estimates and up-front licensing payments in our dataset of 43 deals which resulted in at least one drug approval. (See Exhibit 1.)

Exhibit 1

No Correlation Between Peak Sales Estimates And Deal Up-Fronts

From A Sample Of 2003–2011 Alliances For Phase I–III Candidates

SOURCES: BioMedTracker; Datamonitor; ;Medtrack; Strategic Transactions; company reports

We further broke down the group by the phase in which that drug had been licensed (mostly Phase III, some Phase II), but similarly didn't see a correlation in those subsets either, although the Phase II group resulting in 17 approved products suggested that up-front payments at that stage are somewhat predictive of commercial success. The Phase II dataset included six medicines that garnered $50 million or higher up front, two of which have peak sales in the $5-6 billion range: Imbruvica (Ibrutinib) from Janssen Biotech Inc. (a division of Johnson & Johnson's Janssen Pharmaceutical Cos.) and Pharmacyclics Inc.[See Deal]; and Anoro Ellipta (umeclidinium bromide/vilanterol trifenatate)/Breo Ellipta (fluticasone furoate/vilanterol trifenatate), which both resulted from a collaboration between GlaxoSmithKline PLC and Innoviva Inc.[See Deal]

Alternatively, splitting up the products by their therapeutic areas – oncology, infectious, metabolic, neurology, and respiratory (there were only two cardiology drugs in the dataset) – also showed no correlation between initial fee in a deal and peak sales estimate. However, both the respiratory and metabolic disease subsets, which included products like Anoro/Breo and the forecasted billion-dollar diabetes treatment Onglyza (saxagliptin; via AstraZeneca PLC and Bristol-Myers Squibb Co.[See Deal]), respectively, came statistically close to showing a slight relationship.

Despite there being no statistical correlation between peak sales forecast and up-front, that doesn't mean the deals weren’t successful commercially. All but two of the 43 drugs have peak sales estimates that are at least more than 1x the up-front payment made in the original partnership; the two exceptions were epilepsy treatment Aptiom (eslicarbazepine) and cancer agent Dacogen (decitabine), whose peak sales at $31 million (US) and $25 million (worldwide), respectively, were slightly lower than the $75 million and $45 million paid in their alliances: for Aptiom, Sepracor (now called Sunovion Pharmaceuticals Inc., part of Sumitomo Chemical Co.'s Sumitomo Dainippon Pharma Co. Ltd.) and Bial-Portela & CA SA[See Deal]; and for Dacogen, MGI Pharma (Eisai Co. Ltd.) and SuperGen (Astex Pharmaceuticals Inc., a division of Otsuka Holdings Co. Ltd.'s Otsuka Pharmaceutical Co. Ltd.) [See Deal]. On the opposite end, five drugs have peak estimated sales over 100x their up-fronts, including anti-depressant Viibryd (vilazodone), which Merck KGAA licensed to Genaissance Pharmaceuticals (now, through various acquisitions, part of Allergan PLC) for a $1.2 million initial fee, which was paid in stock [See Deal]. In 2021, Viibryd sales are forecasted to be $446 million. The drug's patents expire in 2022.

There were 12 potential "blockbuster" drugs in the group, those that have peak forecasts over $1 billion, and the average up-front of those 12 deals was $97 million, so relatively high (half of the agreements featured an up-front of $100 million or greater). The drugs were fairly evenly split among the therapeutic areas. (See Exhibit 2.) Vyvanse (lisdexamfetamine), one of the two CNS drugs, is forecasted to reach peak sales of $2.9 billion in 2022. The ADHD treatment gained approval for a new indication, binge eating disorder, in February 2015, with the potential to boost sales by $300 million. (See (Also see "Vyvanse Eating Disorder Use Should Help Shire Reach $10 Billion Sales Goal" - Pink Sheet, 12 Feb, 2015.).) Shire PLC got the drug from New River Pharmaceuticals in 2005 for a comparatively smaller $50 million up front [See Deal]. But it's worth noting that the deal was structured so that New River would receive 25% of Vyvanse's profits for the first two years after launch, and 50% thereafter, one reason that could explain a relatively smaller up-front fee; Shire ended up buying New River outright for $2.6 billion in 2007 [See Deal], just before Vyvanse launched.

Three respiratory products made it in the top group including Anoro Ellipta and Breo Ellipta, which together have the highest peak sales potential among the blockbusters. Also represented was Esbriet (pirfenidone), which InterMune (now part of Roche) licensed from Marnac for $13.2 million [See Deal]; the drug, one of two approved for idiopathic pulmonary fibrosis last year, has forecasted sales of $2.3 billion. Of the four cancer drugs with peak sales over $1 billion, Imbruvica topped the list at $6 billion, 40x the $150 million that Janssen paid Pharmacyclics in their 2011 deal. Because of their tie-up for Imbruvica, Janssen was rumored to be a potential buyer for Pharmacyclics, but AbbVie Inc. ending up acquiring it for $20 billion in March 2015 [See Deal], the biggest biotech acquisition so far this year.

Exhibit 2

Esbriet Tops List of "Blockbuster" Drugs With $1B Or Higher In Peak Sales

*Anoro/Breo are combined since they originated from the same deal.

SOURCES: BioMedTracker; Datamonitor; Medtrack; Strategic Transactions; company reports

Editor’s note: The Vyvanse forecast was corrected post-publication.