The recent downturn in the biotechnology sector has had significant impacts on startups, affecting everything from their financing opportunities to the research directions they pursue. A report from J.P. Morgan analysts, published late last month, highlights another important consequence: a noticeable shift in the terms young drugmakers are receiving in partnership deals.
The report reveals that the economics of drug licensing agreements between pharmaceutical and biotech companies have undergone substantial changes in recent years. Despite the total value of these deals remaining relatively stable, the proportion of guaranteed cash and equity—known as the upfront payment—that biotechs receive upon signing has dropped by half. This decrease is noteworthy, considering that upfront payments constituted approximately 13% of the overall value of drug alliances in 2019 and 12% in 2020. By the first half of 2024, this figure had fallen to just 6%, marking the lowest share since at least 2015.
The trend indicates that deals are increasingly backloaded, with a larger portion of the financial compensation for biotechs coming in the form of “bio-bucks”—potential future payments that are not guaranteed. These contingent payments are often tied to post-approval sales targets, and as such, they represent a larger share of deal totals, although they may never actually be realized.
Industry insiders interpret this shift as a reflection of a more cautious and risk-averse environment. In the past decade, before its acquisition by Bristol Myers Squibb, Celgene was known for its flexible dealmaking approach, which sometimes involved offering substantial upfront payments to unproven startups. This model was adopted by other major firms aiming to become partners of choice. However, today, pharmaceutical companies are more discerning, putting greater pressure on biotechs to demonstrate results before receiving substantial financial rewards. As a result, the terms of deals available to startups are evolving.
Tom Duley, a partner at the law firm Sidley Austin who specializes in collaborations and M&A deals in the life sciences sector, notes, “The world is not receptive to that kind of deal structure anymore.” He explains that the economics of these deals are now more closely aligned with actual progress in the real world compared to a decade ago.
For companies with proven drug assets, the landscape is more favorable. Between 2022 and the first half of 2024, median upfront cash and equity payments for companies with drugs in late-stage testing increased from $75 million to $200 million. Conversely, median upfront payments for preclinical biotechs fell from $75 million to $47 million during the same period, indicating that younger companies are bearing the brunt of the changing market conditions.
Stephen Abreu, another partner at Sidley Austin who negotiates life sciences transactions, adds that there is always a “tension point” in licensing deals, where one party seeks more upfront cash and the other aims to minimize financial risk. However, “right now, the people paying have a bit of an advantage,” he observes. “There’s been more stringency” in deal terms.
This shift places startups—already reliant on continual fundraising—at a challenging negotiating position. Investors are currently favoring companies with more advanced drug prospects, leaving newer biotechs “fighting for survival,” according to Jakob Dupont, an executive partner at Sofinnova Investments. These startups may need to narrow their research focus or seek alternative funding sources.
Meanwhile, prospective partners in the pharmaceutical industry are sitting on substantial cash reserves and can be selective about their investments. The increasing presence of China-based biotechs with advanced assets is adding to the competition for U.S.-based startups, driving down licensing prices, according to Duley.
Pharmaceutical companies are thus “in the catbird seat,” able to choose deals that offer the most value to them. As Dupont explains, biotechs are “unable to be as aggressive about their terms and upfront payments” due to the current dynamics.
In this challenging environment, Dupont suggests that “it really takes scrappy leadership teams and boards to find creative ways to keep these companies going.”
