I

t was a good day for UniQure, a Dutch biotech company at work on gene therapies for rare diseases. A big pharma company had just made a billion-dollar investment in its future. Or so the headlines blared.

Eighteen months and two CEOs later, UniQure is laying off about a quarter of its staff, abandoning some of its would-be drugs — and running out of cash.

So what happened to that billion dollars? It never really existed.

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Bristol-Myers Squibb paid UniQure just $50 million in cash up front. The rest of the deal came in what’s known in the industry as “biobucks” — akin to lottery tickets that pay out when an experimental drug hits various milestones along the path to commercialization. When a drug fizzles, the money doesn’t materialize.

STAT analyzed nearly 700 biotech licensing deals inked over the past four years and found that biobucks hugely outweigh actual cash on the barrelhead. On average, just 14 percent of the total announced value was paid out upon signing, according to data from EvaluatePharma.

And the up-front payments have dwindled as optimism about the industry has faded. In 2014, when biotech was the toast of Wall Street, about 18 percent of total deal value was paid out in cash on signing. That has dropped to 11 percent in the first nine months of this year, as biotech stocks have slumped.

‘Minimal level of truthfulness’

“You see a billion-dollar deal and think, ‘OK, let me open the press release and see how much it really is,’” said Maxim Jacobs, a biotech analyst at equity research firm Edison. “When you look at a deal [announcement], consider what’s the minimal level of truthfulness that has to be in here for the manager not to be in jail.”

Like any enterprise with something to sell, biotech companies are competing for attention. And a 12-digit deal announcement is more likely to raise eyebrows than an exercise in subtlety. Press release hyperbole can sometimes provide a quick jolt to a company’s stock price, too, by convincing novice investors to buy in.

“There’s something magical about being able to say that number,” said Dr. Frank David, founder of the biotech consultancy Pharmagellan. “Billions, with a B — billions and billions of biobucks.”

But there’s a long-term strategy, as well. By touting a towering sum for one agreement, however speculative, a biotech company might be able to exert some leverage the next time it seeks a partner from big pharma.

“I think people feel it helps increase the value for future deals,” said Alexis Borisy, a partner and Third Rock Ventures, which builds and funds biotech companies. “It’s some form of validation that there is value there, and it’s always easier to build value on top of value.”

Over the summer, for instance, pharma giant Novartis licensed a pair of blood cancer treatments from Xencor in what was widely reported as a $2.4 billion deal. Just 6 percent of that sum came in up-front cash. In April, Allergan struck a biobuck-laden $3.3 billion deal with Heptares Therapeutics in the field of neurological disease. How much cash actually changed hands on signing? Just $125 million.

(A smaller number of deals swing in the opposite direction. In 2013, AstraZeneca paid Moderna Therapeutics $240 million in cash for technology in the earliest stages of development, with another $180 million committed in future milestone payments. A year later, Celgene wrote a then-record $710 million check to Nogra Pharma for a Crohn’s disease drug in development.)

It’s often impossible to know how many biobucks ever actually pay out. Private biotech companies get to pick and choose what they disclose, and publicly traded pharma firms are only required to divulge what their lawyers deem material, which often excludes piddling milestone payments.

In UniQure’s case, the company announced another $15 million payment from Bristol-Myers in August 2015 but hasn’t received a dollar since, according to a spokesperson. The collaboration is still ongoing, however, and UniQure noted in its most recent earnings announcement that at least one project Bristol-Myers has invested in has entered animal studies.

Biobucks don’t exist solely to generate hype. The complex latticework of promises in each biotech deal is the product of a push and pull between the big company buying in and the smaller one selling out, with each trying to minimize its risk.

Rarely do both sides agree on the true value of the drug in question. A small biotech company would prefer a huge sum of cash up front, whereas its pharma collaborator would rather pay up only when it can be sure the project is a winner, said Richard Brudnick, an executive vice president at Biogen in charge of dealmaking. Somewhere in the middle do they meet, assigning values of $100 million here and $200 million there for each milestone the drug hits — a successful clinical trial, for instance, or an FDA approval.

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A hidden danger

Such incentives sound like a win-win for both sides. But they can sometimes backfire.

If a biotech company negotiates to receive, say, $250 million when its drug advances from one stage of development to the next, its pharma partner might think twice before moving the project forward based on promising but tentative data. In most deals, such decisions rest with the larger company, leaving biotechs at the whim of their partners.

“One has to think carefully about whether you’ll just end up causing the shelving of your own program,” said Samantha Truex, an advisor at Atlas Venture with experience doing deals at Biogen and Genzyme. “Those biobucks may have looked impressive for a couple months, but in certain circumstances, massive milestone [payments] could be a disincentive.”

And the more complicated the deal, the harder it is for analysts to make sense of what it’s really worth. Brian Skorney, a biotech analyst at the investment bank Baird, breaks down biobuck deals by multiplying each potential payout by its estimated likelihood of coming to fruition. But the farther away the milestone, the harder it is to parse its odds.

“A lot of us look at some of these preclinical billion-dollar deals and just roll our eyes and say, ‘Well, you’re probably not ever going to materialize any of that,’” Skorney said.

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  • Startups are going yo the bank laughing and the BIG pharma are looking like BIG fools who have negligible ROI. If a drug has value it is limited and for limited population. 100,000 would be a huge patient base.

    I just wonder have these pharma lost their compass. I just don’t see affordable drugs coming out of this song and dance being played infront of us.

  • I would say that this mechanism serves biotech startups quite well, as … ehm … well!
    Take, Ablynx. It has been able to stay afloat for years while fooling both gullible investors and the Belgian government, without any drug actually materializing, with this kind of deals. Just getting that enough cash to keep going.

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