October 18, 2024
The Influence of Taxes on Deals in the Biotech and Pharma Industry: A Strategic Perspective for Optimizing Value
Licensing agreements are a fundamental component of the biotechnology and pharmaceutical industries, where biotech innovators often collaborate with large pharma companies to bring new therapies to market. These deals are critical for the development and commercialization of cutting-edge therapies, but one often-overlooked factor that can significantly influence the structure and value of these transactions is the tax regime of both the licensor (often a biotech company) and the licensee (the pharma company).
At Avance, a Swiss valuation and licensing expert firm, we have witnessed firsthand the complex interplay between taxes and deal structures. Taxes can impact the net value derived from licensing agreements, influencing how much value is retained by both parties. By carefully considering the tax environments in which both the licensor and licensee operate, dealmakers can optimize licensing terms for greater mutual benefit. Below, we explore how taxes can influence licensing deals and why running simulations to account for tax implications can yield better results for both parties involved.
How Tax Regimes Affect Licensing Deals
1. The Licensee’s Perspective: A Lower Tax Regime Increases Value
When a pharmaceutical company (the licensee) operates in a low-tax environment, it can derive significant value from a licensing deal. This is because the lower tax burden increases the net income available to the company after tax, making the deal more attractive and potentially enabling the licensee to offer better terms to secure the rights to the technology.
If a company in a low-tax jurisdiction can retain a greater percentage of its earnings from a licensed product, the overall financial benefit of the deal increases. This additional value can be strategically split between the licensor and licensee during negotiations. In a competitive deal environment, a licensee may leverage its favorable tax position to offer a more lucrative upfront payment or royalty rate while still achieving its financial objectives.
Conversely, when the licensee operates in a relatively high-tax regime (see overview), it retains less of its earnings after tax, which can limit the scope for negotiation and reduce the perceived value of the licensing deal.
2. The Licensor’s Perspective: A Lower Tax Rate Boosts Shareholder Returns
For biotech licensors, the tax regime in which they operate directly impacts the net returns to their shareholders. When a licensor operates in a low-tax jurisdiction, the net benefit of any licensing deal is higher, even under the same licensing terms. In other words, for two identical deals in different tax regimes, the biotech firm in the lower-tax environment will generate greater net income after tax. This factor makes it crucial for biotech companies to understand not only the gross licensing terms but also how taxes will impact their net income. The tax regime can affect the overall return on investment, influencing how the deal is perceived by shareholders and stakeholders.
Deal Structuring
To optimize the deal, and create additional value to the licensee, the licensor may consider spinning-out the asset in a separate low-taxed vehicle and selling the shares, effectively giving the licensee access to the lower tax regime. By doing so the licensor provides for more value that can be spilt amongst parties. These types of structuring can be considered to optimize the deal for both sides. However, it goes beyond the scope of this article to address all tax structuring intricacies.
EXAMPLE
As a simplified example we modelled a Phase II asset in development by a biotech company with patent life until 2037 in the RIVAL software where we kept all inputs equal except for the tax rate. As reference we estimated Peak Sales of $1.2B to be reached in 6 years.
Asset Value
The effect of the tax rate on that future income (without it being licensed and available to be split under the contract) is as follows:
| Corporate Income Tax Rate | rNPV ($M) |
| 30% | 137 |
| 10% | 182 |
Licensing
Now let’s see what the outcome would be if we model licensing this asset post Phase II read-out (50/50 value split) that we included in the valuation:
The value of the licensing upfront and milestones are with equal 15% royalty rate:
| Corporate Income Tax Rate | rNPV ($M) Milestones & Royalties |
| 30% | 120 |
| 10% | 165 |
As can be derived from the above, the difference in deal value based on tax regimes in this example can amount to >30%
Optimizing Licensing Deals with Tax Simulations
To achieve the best possible outcomes in licensing deals, both licensors and licensees should run simulations that account (for most input parameters but also ) for the tax regimes of both parties. By understanding the after-tax implications, they can structure deals that maximize value, taking into account the respective tax treatments.
For example, consider a scenario where a biotech licensor is located in a low-tax jurisdiction and negotiating with a licensee in a high-tax environment. In this case, the licensor may be able to settle for lower milestone payments or royalties since its after-tax benefits are greater. Conversely, if the licensee has a tax advantage, they may be able to offer more attractive terms while still meeting their financial goals.
Deal simulations allow dealmakers to model various tax scenarios and adjust the deal terms accordingly. This approach can reveal opportunities to create value that may otherwise go unnoticed. Additionally, it provides a clearer picture of the net value each party will receive, enabling both parties to approach negotiations with a more informed perspective.
Big Pharma using this benefit
We have seen in recent years that high-taxed (US) Big Pharma is actively utilizing deal optimization and tax structing techniques by licensing in through low taxed subsidiaries to optimize their licensing deals as described above.
| Year | Pharma Company | Subsidiary Location | Licensing Partner |
| 2023 | Novartis (Swi) | Switzerland | Legend Biotech |
| 2023 | Teva Pharmaceuticals (ISR) | Ireland | mAbxience |
| 2024 | GSK (UK) | Ireland | CureVac |
| 2020 | Biogen (US) | Switzerland | Denali Therapeutics |
| 2020 | Amgen (US) | Ireland | Beigene |
| 2017 | Gilead (US) | Ireland | Galapagos |
Conclusion
Tax regimes can significantly influence the value of licensing deals in the biotech and pharmaceutical industries. For both licensors and licensees, understanding the tax landscape and running simulations to assess the after-tax implications of a deal can reveal opportunities for value creation and optimization. By leveraging tax advantages and structuring deals that take these factors into account, both parties can achieve better outcomes and maximize the value of their partnerships.
In an increasingly competitive environment for licensing deals, being tax-savvy is no longer optional—it is a necessity.
Overview of Corporate Income Tax Rates for Licensing Income
