Valuation modelling of front-loaded vs. risk sharing deal for drug discovery collaboration

Challenge

A drug discovery company was in discussions with a big pharma about collaborating on a number of strategies that would deliver at least one quality clinical candidate. The pharma company had offered two types of deal: a front-loaded arrangement with R&D costs and milestones up to candidate delivery, and a risk-sharing deal where some of the compensation was to be back-loaded with milestones payable up to market, and possible royalties on net sales. The client asked us to assess its deal-making strategy, develop valuation models and advise on the negotiation strategy with its prospective partner.

Solution

Robert Johnson, the lead business development consultant, worked with our client to develop realistic inputs for its proprietary financial model (e.g. future costs and revenues, probability of success and development timelines) to explore the two deal structures on offer. We helped our client understand how the deals would affect the value accumulating to them at that point in time. As a result, our client was in a better position to negotiate a more beneficial deal structure. Our consultants provided ongoing support, including preparing a high-level financial terms sheet, supporting term-sheet negotiations, closing the deal, and supporting our client’s strategic decision-making on which therapeutic areas to pursue with the prospective partner and which to pursue in-house.

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