May 3, 2012

Question: What a potential dermatology deal might look like?

A question from Mammon's list.

The current expectation is a headline deal size of $500 million for dermatology (to include all indications, clinically, pre-clinically or bench tested, such as atopic dermatitis, psoriasis, acne, etc.). The structure of the deal likely would be very traditional:
  • An upfront payment,
  • One or more clinical milestone payments (e.g., completed pivotal phase 3 trials),
  • One or more regulatory milestone payments (e.g., FDA approval for indications), and
  • Royalty payments (e.g., a percentage of sales).
$500 million represents a present value assessment of the deal itself, including upfront payments and future milestone and royalty payments, and is based on several assumptions that of course could change and raise or lower this headline expectation:
  • An upfront payment, however structured (e.g., cash and/or stock), might range from $10-$50 million. The range is influenced by direct and indirect factors. A higher upfront payment might accrue because of the increasing value of and potential in PH-10 and/or management's desire to take more money upfront rather than in contingent payments. I do not know management's expectations in this regard, but I would hazard a guess that above a certain cash level, like $10-20 million, they would rather get more cash in the future because of their belief in the efficacy and safety of PH-10 (i.e., more royalties from more sales);
  • Clinical and regulatory milestone payments measured in tens of millions of dollars. I cannot really hazard a guess as to a range here, but these payments likely would not be insignificant; and,
  • A mid- to high-single digit royalty percent over a 10- to 15-year term. This is facet of the deal is where the clinical and business value proposition of PH-10 is put to the test with the hope of the product earning initial market share and then grabbing more -- much more -- based on robust efficacy, dramatic safety and flexible (and perhaps) predatory [to competitors] pricing. Depending on how high interest is, royalty payments might be low double digits and the term might extend out to 20 years.
This material previously was posted here.

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