Bloomberg Law
Feb. 10, 2021, 10:35 AM

Risk-Averse Pharma Companies Get Creative to Invest in New Drugs

Ian Lopez
Ian Lopez
Senior Reporter

The pharmaceutical industry is poised to see a record number of deals in 2021 thanks in part to innovative agreements that aim to facilitate the development of new products, industry watchers say.

Companies like AstraZeneca plc and Bayer AG are engaging in transactions in which they make up-front payments to smaller players, followed by milestone payments upon the smaller company reaching certain goals. Milestone deals are among the ways investors are looking to enter the biopharma space in 2021, with products like Covid-19 treatments and vaccines underway.

These deals can be particularly fruitful for the industry because the amount of money and regulatory hurdles involved with creating a product makes such endeavors fraught with financial risk. Milestone agreements can be used to minimize risk from investments in case the product in development doesn’t pan out.

“Bioproducts are an all or nothing proposition,” said Doug Robinson, a Harness Dickey IP litigator specializing in biopharma technology. Products that work and manage to get FDA approval have the “potential for a lot of money,” while failure is worth nothing and leads to “sunk costs,” he said.

Biopharma players emerged from the flailing economy with the “most active deal market in history,” according to advisory firm KPMG. The industry in 2020 had executed 1,138 total deals—including licensing and product acquisition—up from 634 in 2019, according to Jeff Stoll, KPMG’s national strategy lead for life sciences. He also said there were 367 “creative” R&D deals in 2020.

Industry watchers say the trend is expected to continue into 2021 as the pandemic—and the demand for vaccines and treatments—persists.

In biopharma, there’s a significant number of small companies and startups behind innovation and a large market to potentially serve, Robinson said. “Covid presented a problem that this industry exists to solve,” he said.

‘Banner Year’

For the pharma industry, “2020 was a banner year. There were more deals than any other year. By A lot,” Stoll said.

While the coronavirus pandemic devastated various sectors of the economy, the pharma industry saw a spike in innovation, spurring competition for high value assets. That spike has led companies to make deals “earlier in the pipeline,” a traditionally risky point where it’s unclear whether a product could be brought to market.

2020 saw a number of “creative” deal structures “designed to de-risk the total investment,” KPMG said in a report released in January.

For example, AstraZeneca—the drugmaker behind one of the leading Covid-19 vaccines—agreed to pay $1 billion upfront in staged payments to Daiichi Sankyo for an antibody drug conjugate that targets types of tumors, according to the report. An additional $1 billion would be paid once the product cleared regulatory hurdles, as well as “$4 billion for sales-related milestones” the report said.

Bayer also used milestone payments for AskBio’s continued development of a cell and gene therapy platform, according to the report. Bayer later agreed to acquire AskBio.

In a creative deal, a larger company provides investments to a smaller entity creating an innovation in exchange for certain commercial and R&D rights. The larger company can provide more funds to the smaller outfit when certain “milestones” are met. The larger company then can acquire the smaller outfit if it chooses.

“Here’s where we are. I’ll pay you X amount now, but if things go well, I promise to pay you an additional amount,” Robinson said of the deals, noting that the benchmarks leave all parties with certainty—small innovator entities get a cash fusion, while larger companies get access but doesn’t lose a substantial amount of money.

Over the past 18 months, there has been a “notable increase” of big pharmaceutical companies agreeing to these milestone deals, said Andrew Harrow, a Goodwin Procter LLP life sciences partner.

“It can be a helpful tool” for helping smaller pharmaceutical companies compete with the larger ones, he said.

Kristin Pothier, global and national health-care and life sciences strategy leader at KPMG, said these milestone deals are also “a great way” for big pharma companies to “buffer their portfolios.”

Big pharma can “lock in a platform and use it in a number of areas,” she said. “It’s something that keeps renewing.”

Pandemic Impact

Attorneys in the biopharma space note that creative deals aren’t an entirely new phenomenon. But the pandemic has opened the door for more, they say.

The pandemic “has set the stage to where if somebody out there that wants to get into a particular product line for a particular disease state, this makes a lot of sense. You get in early and you keep the product out of the hands of competitors,” Patrick Souter, of counsel at Gray Reed, said.

“I definitely think you’re going to see these types of deals continue, and there probably will be more activity across the board in this area,” he said.

The race for Covid-19 treatments and vaccines in particular may play a role in boosting the volume of deals.

“Biopharma is the focus of the pandemic,” particularly treatment and testing, said Kevin Noonan, chair of McDonnell Boehnen Hulbert & Berghoff LLP’s biotechnology and pharmaceuticals practice. And people investing are “following the trend.”

“If the vaccine works, I think there’s no reason to believe there’s not going to be an incredible boom in the economy,” Noonan said, meaning more biopharma investments.

Harrow said the pandemic “has changed the economics of companies.” In biopharma, this means delayed clinical trials and a longer development timeline.

Nevertheless, 2020 witnessed a number of pharma companies thinking 10-20 years down the road and leaning on creative deals to “fill their R&D pipeline,” Harrow said. And coming into 2021, such deals are “ramping up.”

“We’re seeing a lot of deals flow,” Harrow said, noting his firm has spoken to a large number of life sciences clients looking to access the U.S. capital market. “There’s going to be the same if not more in terms of activity,” he said, citing both oncology and mRNA—the backbone to some Covid-19 vaccines—as two focuses.

“It really feels like it’s going to continue apace,” he said.

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To contact the editors responsible for this story: Fawn Johnson at; Alexis Kramer at