A brief explanation of Biotechnology Royalties

To understand Biotech product royalties one must first understand the typical life-cycle of a Pharmaceutical product. Typically, a pharmaceutical candidate (drug) is discovered in academia or research institute. Generally this candidate is spun-out into, or picked up by a Biotech Company. The Biotech Company will raise funds and prove the concept first in an animal model(s) and then in human clinical trials. Human clinical trials happen in four Phases/Stages:

  • Phase I: Purely focused on demonstrating safety in a small number of patients
  • Phase II: Further assessment of safety and how effective the drug is in a larger number of patients (does it work?)
  • Phase III: On a large scale, is it still safe and does it work in the wider population or sub-populations?
  • FDA Approval (for the USA) and ongoing monitoring post commercialisation (Phase IV)

The progression through these phases sees the cost/resources and time required to complete each phase increase several fold. For this reason, the typical Biotech will do a deal/collaborate with a Pharmaceutical company as clinical phases progress. A typical deal will see a stepwise handover from the Biotech (existing to prove pharmaceutical products work) to the Pharmaceutical company (existing to market and distribute Pharmaceutical product).

The process end to end looks like the following:

Typical Royalty Lifecycle

Typical Royalty Lifecycle

Deals between Biotech companies and Pharmaceutical companies tend to include the following:

  1. An upfront payment from the Pharmaceutical company to the Biotech
  2. Milestone payments from the Pharmaceutical company to the Biotech, as the product moves through clinical phases
  3. A handover point where the deal is executed and the pharmaceutical product is acquired by the Pharmaceutical company to the Biotech
  4. Ongoing royalties payable to the Biotech from Pharmaceutical company once the product reaches the market

Generally, the deal payments prior to royalties serve to fund the Biotech as it completes its share of the work up until the handover point. Whilst this does have a component of 'upside' for the Biotech, the real value is realised through royalty revenue. These royalties typically represent a percentage of the products revenue on the market. It is therefore very important for biotech companies to not only move the development of their biotech assets forward quickly, but also for the biotech company to have the capacity to complete later stage development so that the highest royalty rates can be negotiated with the Pharmaceutical companies.

This is obviously just a brief explanation of Biotechnology Royalties, fell free to contact the team at Xeophin for further information at www.xeophinbio.com

Troy Neilson