The capital markets have been volatile and unpredictable for some time now, and this situation is not expected to improve in 2023. In the current down economy, life sciences companies — particularly smaller to midsize precommercial technology companies — are less likely to find that venture capital financings and the capital markets are a viable option. As a result, many companies are taking a closer look at their pipelines and making tough decisions about what assets to prioritize or deprioritize, given anticipated cash runway. Companies that otherwise might have retained a second- or third-priority asset until a later value inflection point are divesting their rights to those assets now. Potential acquirors and licensors are finding that there are assets with early but promising data that are becoming available as a result of these portfolio reviews.
All of this has led to an increased focus on licensing and collaboration activity as a way to raise nondilutive development funding for prioritized assets. Co-development and co-commercialization deals are an attractive option for companies that desire to retain some rights to an asset but do not have the funds to develop and commercialize that asset on their own. Access to clinical data is a key negotiating point in these deals, with licensors looking to incentivize co-funding of clinical trials upfront by charging a multiple of trial costs for a licensee that decides it wants to use clinical data for a trial that it did not co-fund at the outset.
For collaborations and out-licensing deals, many licensors are placing a premium on larger upfront payments and near-term development milestones and are willing to accept lower economics on the back end. In 2023, for the most attractive assets that are made available through an auction-style process, bidders who follow this formula are more likely to be successful.
During 2023, we expect to see continued interest in territory specific out-licenses. Out-licenses to greater China rights have been and will continue to be popular as these deals can carry a significant upfront payment and do not usually jeopardize a company’s ability to sell itself at a later date.
In 2023, we are likely to see life sciences companies considering M&A transactions earlier than they might usually. The larger companies in the space are actively looking at acquisition targets and considering what deals they might propose.
There are, of course, liquidity-increasing alternatives to both M&A and licensing deals, notably royalty financing. In the past year there has been a significant increase in activity in this area. Investors are actively looking to buy the rights to milestones and royalties payable under existing collaboration and license agreements. Synthetic royalty deals, or royalty monetizations, are a very popular and effective financing tool for companies with later-stage assets that are looking to fund completion of a pivotal trial and commercial launch activities.