Intro
We are often asked by clients how they can use a risk-adjusted net present value (rNPV) for deal term negotiations for an asset. The rNPV methodology is discussed in depth in several of our other articles, including “Valuing Pharmaceutical Assets: When to Use NPV vs rNPV”, and the exercise of generating one has its own value by providing clarity and consensus within a management team. Once the process of modeling defensible assumptions is completed and the asset’s rNPV is generated, it can be a critical tool for negotiating deal terms for several key reasons.
Risk Assessment
Biotech drug development involves significant risks at various stages (e.g., discovery, preclinical, clinical trials, regulatory approval, etc.). An rNPV helps in assessing these risks by assigning probabilities of success to both the expected future cash flows from an asset and the probabilities of achieving those cash flows at each stage of development. This allows both parties to understand and agree on the risk profile of the project.
Deal Structuring
By understanding the rNPV, parties can better structure deals to align with the risk and reward profiles. For example, milestone payments, royalties, and upfront payments can be adjusted to reflect the risk at each stage of development. This helps in distributing the financial burden and potential rewards more equitably between the parties. Alacrita’s bespoke valuation model is capable of modeling a ‘share of value’ to licensor and licensee, which allows you to judge the fairness of any set of proposed deal terms. The more equitable the relationship is, the greater the likelihood that the partnership will progress the asset in its development since truly balanced relationships are enduring.
Negotiation Leverage
A detailed rNPV analysis provides a robust basis for negotiation, as it is grounded in quantitative assessment rather than subjective estimates. This can lead to more informed and objective discussions, enabling parties to negotiate terms that are fair and justifiable.
Investment Decisions
Partners use rNPV to make informed decisions about whether to partner with a biotech company. A clear rNPV calculation can demonstrate the potential value of a project, making it easier to attract strategic partnerships.
Scenario Analysis
rNPV allows for scenario analysis, where different assumptions about the probability of success, timelines, and costs can be tested. This helps in understanding the impact of various risks and uncertainties on the project’s value, facilitating better decision-making and negotiation.
Alignment of Interests
By using rNPV, both parties can align their interests more effectively. For instance, biotech companies might be more willing to accept lower upfront payments in exchange for higher milestone payments or royalties if the rNPV shows significant value at later stages. This alignment can make partnerships more collaborative and goal oriented.
Regulatory and Market Considerations
rNPV incorporates considerations related to regulatory approvals and market dynamics, such as the likelihood of FDA approval or market adoption rates. This comprehensive approach ensures that deal terms reflect the realistic commercial potential of the biotech product.
Alternative Deal Structure Comparisons
Modelling allows one to compare the relative values and/or merits of alternative deal structures. In situations where there are multiple offering parties with differing terms, running them through the model to obtain an rNPV for each one, can significantly aid in their evaluation. In the same token, it can be helpful in shaping counteroffers, to ensure the deal is not straying too far from your expectations.
Practical Example
In practice, if a biotech company is negotiating a partnership for a new drug in early-stage development, the rNPV might highlight that, while the immediate value is low due to high uncertainty, the potential value at later stages (e.g., post-Phase III trials) is substantial once the risks of further progression have been discharged. This could lead to a deal structure with smaller upfront payments but significant milestone payments upon reaching key development milestones and achieving regulatory approvals.
In Conclusion
An rNPV is an invaluable tool in biotech deal negotiations as it offers a realistic, risk-adjusted assessment of a project's value, facilitating more balanced and strategically sound deal terms.
About the author
Christopher leverages more than 20 years of experience in biopharma drug development, strategy, and business development across multiple modalities and indications. He brings extensive expertise in antivirals, CRISPR gene editing, gene therapies, and gene therapy vectors.
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Our Business Development Expertise
We have deep experience on both the buy and sell-side, and work with our clients to ensure that partnership, licensing and investment decisions are taken with confidence, along with clear alignment between transaction price and asset value.