Evaluating licensing opportunities can fast become an overly detailed and sophisticated pursuit if the right parameters are not agreed beforehand. First of all, there are two levels of valuation. The first involves a selection of the most appropriate and valuable opportunities. For an in-licensor this is the most attractive product, compound or technology, while for an out-licensor this is the most attractive partner. Once the selection process is completed a second, more detailed evaluation supports negotiations and deal-making. This deal-making evaluation is not covered in this section of the report, but is presented in detail in the licensing valuations chapter.
Licensing evaluations for selecting appropriate opportunities to advance to a more detailed stage of negotiation and deal-making are similar to those found as part of an internal portfolio management process. Valuations need to be consistent and transparent in order to provide the relative ranking and prioritization required. Like portfolio management evaluations, the key trade-offs are to be found between sophisticated financial models and more simple rating models that include strategic elements such as portfolio fit and balance. Unlike portfolio management evaluations, potential licensing agreements involve an extra level of uncertainty, which is the contractual relationship with a third party. Understanding the relative value of an underlying licensed asset is not enough to make choices among different licensing opportunities. Some expectation as to the likely deal terms available for a licensing deal is required in order to compare opportunities. However, understanding a deal’s potential terms and financial metrics at an early stage of opportunity assessment can be difficult, particularly for complex licenses which might include multiple compounds.
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General portfolio management
Licensing evaluations need to provide relative values and rankings across all external opportunities, but need not necessarily provide consistent measures across both in-house and external opportunities. However, it is desirable in a robust portfolio management process to include both internal and external potential projects in order to arrive at optimal resource allocation decisions. Parameters set-up to aid decision-making for internal projects and resources can easily be adapted for use in evaluating external projects.
Portfolio evaluation approaches allow decision-makers to establish preferences across projects by measuring them against the explicit objectives identified by senior management. As a result, project evaluations must include measurable criteria to assess the extent to which key objectives are likely to be satisfied. Identifying these value criteria is a key part of the project evaluation framework. Once criteria have been established, project evaluations can begin.
Project scoring approaches accommodate the fact that multiple criteria are often required in order to select and prioritize pharmaceutical projects effectively. Different scoring systems use different criteria, and include financial measures, strategic fit, competitive advantage, market attractiveness, the degree to which projects leverage core competencies, technical feasibility and risk versus return.
After a project has been scored against relevant criteria, a weighted score is calculated.
This relative superiority or attractiveness score is used as a proxy for the value of the project. Once all projects have been evaluated, minimum threshold scores can be set in order to select and prioritize the most attractive projects and eliminate those of insufficient value.
Although project scoring is a key approach to project evaluation, and enables projects to be evaluated with respect to a number of different dimensions, the project rankings
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derived from scoring can be misleading, which as a result can lead to sub-optimal project prioritization and decision-making. Scoring systems provide a means of capturing and quantifying project information in a consistent manner for future decision-making, but as a basis for discussion rather than a decision in itself.
Pharmaceutical companies develop approaches to portfolio management in order to allocate resources optimally with respect to both the minimization of risk and the maximization of value across the portfolio. Different projects are associated with different values and risk profiles. Although additional parameters can be incorporated, the key role for project evaluations is to provide a critical assessment of value and risk across the portfolio.
A broad range of different financial tools and evaluation techniques are available for use in project valuation. Financial analysis is able to combine an evaluation of a project’s value, risks and associated costs. However, financial approaches do not represent a viable standalone approach to project evaluation. Portfolio decision-making is characterized by the range of trade-offs made across different criteria, including meeting unmet medical need while maximizing cash-flows, balancing short-term and long-term performance, and protecting existing franchises alongside investments in new technologies. It is clear that these trade-offs cannot be adequately captured by project evaluations based solely on financial analysis. Instead, financial analysis must be employed alongside a broader scoring methodology enabling non-financial dimensions to be assessed and included in decision-making.
Although it is beyond the scope of this report, a 2005 Business Insights report, Pharmaceutical Portfolio and Project Management, discusses a range of available financial analysis tools and techniques, their application in project evaluation and their relative strengths and weaknesses. Key financial approaches include:
Net present value (NPV);
Decision tree analysis and expected NPV (ENPV);
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Monte Carlo simulations;
Real options.
Applications for licensing evaluations
As mentioned previously, the key difference between an internal and external opportunity is that a licensed compound’s agreement terms will determine how risks, returns and responsibilities will be shared between parties. It is only by including an evaluation of this package of contractual terms that a potential licensing opportunity can be evaluated. Other complications for evaluating licensing opportunities include the partnering risks brought about by third-party decision-makers and the limited availability of data for generating evaluations for external opportunities.
As a check list, some of the key intellectual property (IP) licensing evaluation questions include:
Who owns the IP rights (sole versus joint ownership, originator versus sub-license, exclusive versus non-exclusive etc.)?
Is the patent in force and valid (have maintenance fees been paid, is claim enforceable, are there any blocking patents etc.)?
What is the scope and length of the patent (how useful in preventing competitors, how does regulatory progress affect legal and economic lifespan of patent etc.)?
In evaluating a licensing opportunity it is optimal to first value the asset and then apply expected deal terms to bring about a company-specific value. As is shown in the licensing valuations chapter, a number of different parameters affect compound valuations. The costs, risks and returns associated with a compound all differ depending on the stage of development and therapy area of the specific compound.
Further adjustments can be made if a specific peak sales figure can be forecast, while company specific characteristics such as size and experience can also impact on values.
Consistent discount factors, applied for internal products, will allow for relative
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rankings for licensing opportunities. Finally, expected deal terms, with respect to milestones, royalties, shared costs and responsibilities, can be applied in order to determine valuations for each licensing opportunity. These values, along with other more strategic considerations, provide the basis for selecting the opportunities of greatest potential value to the company.