[M&A Essentials] Buying the Company to Save on Drug Royalties?

Big Pharma Compete to Secure Next-Generation Drugs Ahead of Patent Expirations
Acquisition Math Factors in Royalties, Business Rights, and Research Capabilities

"It is 90% cheaper than the original brand." That was the slogan Indian pharmaceutical company Natco Pharma used to promote the launch of its generic semaglutide this year. Semaglutide is the active ingredient in Wegovy, an obesity treatment, and Ozempic, a diabetes treatment. After the substance patent expired in India, the company announced it would supply an injectable diabetes treatment with the same ingredient at a low price.

Preparing for the expiration of patents on blockbuster drugs is an ongoing challenge for global pharmaceutical companies. To secure the next generation of drugs, they not only develop products in-house but also license technology from other companies or acquire the developers. Technology exports by Korean biotech companies are also tied to this demand. In this edition of M&A Essentials, we look at why pharmaceutical companies that license drug technology go on to acquire the original developers, and at the value of business rights and royalties reflected in acquisition prices.

Gilead and BioNTech Acquire Drug Development Partners

According to a recent report by Yuanta Securities, global M&A deals in the sector totaled $138.8 billion (about KRW 186 trillion) through the third quarter of this year, surpassing the full-year total of $122.1 billion last year. Acquirers are increasingly focused on companies with drugs that have been commercialized or have reached late-stage clinical trials.

In April, U.S. company Gilead Sciences acquired Arcellx. Gilead subsidiary Kite had been co-developing anito-cel, a multiple myeloma drug candidate, with Arcellx. Gilead said that by making Arcellx a wholly owned subsidiary, it secured control over the drug's development and commercialization and eliminated its obligations under the existing agreement to share profits and pay performance-based milestone payments and royalties. This is a case of a pharmaceutical company that had licensed technology and co-developed a drug acquiring its partner after confirming the development's progress.

However, evaluating the costs and benefits of an acquisition requires considering not only royalty obligations but also the additional rights and assets gained, as well as operating costs after the acquisition. When German biotech company BioNTech acquired Chinese biotech company Biotheus last year, it accounted for 565.1 million euros (about KRW 850.5 billion) of the purchase price as settlement of its obligations under existing agreements to pay milestone payments and royalties. In effect, BioNTech also paid for Biotheus's rights to receive royalties. BioNTech also secured the Greater China rights to the drug, other drug candidates, and manufacturing facilities.

For Korean Biotech Companies, Rights Retained After Technology Exports Are Key

There have also been cases in which overseas partners that licensed technology from Korean biotech companies were acquired. D&D Pharmatech licensed six obesity drug candidates to U.S. company Metsera in 2023 and 2024, and Pfizer acquired Metsera last November. The acquisition target was not the Korean company that originally developed the drugs, but the U.S. partner that had licensed the technology. Could demand for the next generation of drugs lead to acquisitions of Korean developers as well?

Securing rights to needed technology through a contract and acquiring an entire developer can involve different considerations. Early-stage drugs take time to generate revenue, and if the developer has already transferred key business rights, the rights gained through an acquisition may also be limited.

For example, even if Company B acquires a Korean company that has transferred its U.S. rights to Company A, Company B would not also secure those U.S. rights if the existing agreement remains in force. The rights retained by the company, as well as future milestone payments and royalties, must be considered. "Most Korean biotech companies are either in the early stages of clinical trials or have transferred their technology early, leaving them with few rights to their lead drug candidates," said Ha Hyun-soo, a researcher at Yuanta Securities. "We believe it will be difficult for these companies to become M&A targets."

The calculation changes, however, if the acquiring company is Company A, the existing technology licensee. As in Gilead's case, it could settle its obligations to pay royalties to the Korean developer and secure the remaining drug candidates and research capabilities. That is why it is important to consider both which rights have been transferred and who is seeking to acquire the company.

Using Contingent Payments: Additional Payments Tied to Drug Performance

Even after determining the scope of the rights to be secured, price negotiations remain. Developers place a high value on a drug's growth potential, while acquirers must also account for clinical failures and weak sales. One way to bridge this gap is to make additional payments based on performance.

When Gilead acquired Arcellx, it paid shareholders $115 per share and also granted them contingent value rights (CVRs), which entitle them to an additional $5 per share if certain conditions are met after the acquisition. The condition is that cumulative global net sales reach at least $6 billion by the end of 2029 following the launch of anito-cel. In other words, Gilead acquired Arcellx upfront, while setting roughly 4% of the acquisition price to depend on sales performance.

Technology licensing, a major transaction model for Korean biotech companies, also often involves payments made in installments based on performance. "Compared with M&A, technology licensing allows companies to secure rights to a platform or pipeline with a smaller upfront investment," said Ha. "Additional milestone payments are then made based on development and commercial performance."

Ultimately, understanding a pharmaceutical company's acquisition price requires considering together the royalty obligations being settled, the business rights and drug candidates being secured, and any additional payments tied to performance. As Korean biotech companies continue to build a track record in drug development, attention is turning to whether more of them will be acquired by global pharmaceutical companies, beyond simply exporting their technology.

This content was produced with the assistance of AI translation services.