Given the recent announcement of the equity incentive scheme and how one of the triggers is executing a material partnering transaction, I was interested to see if there were deals in the industry where a smaller biotech partnered with a larger one primarily to utilise their distribution networks and marketing teams but from a position of strength having developed the drug themselves. Partnering in this way satisfies Jon's preference not to set up the infrastructure to sell and distribute the drug themselves, it keeps the company in Australia as a clinical development company where they could hold Phase 3 trials for multiple indications and get the partner to distribute, but most importantly it gives Neuren the negotiating leverage to command a very high percentage of profits rather than just milestone payments (ideally 40-50%).
Obviously this would take a long time, but I've been intrigued by the equity incentive announcement ever since and I would have to assume short of a satisfactory takeover deal this would be the next best option. I asked Gemini AI to spitball a scenario where this might happen and it come up with the following (apologies if its a bit unwieldy to read):
Eagle - "Neuren Pharmaceuticals has a platform drug which it is taking through to the end of a Phase 3 trial. If this is successful Neuren will likely be taken over at a substantial premium or it will partner with a larger pharmaceutical company to utilise its distribution and marketing expertise and networks. IF Neuren achieves marketing authorisation, how much profit sharing or revenue royalties could it expect to receive in such a partnership? (remembering that the 4 indications Neuren is currently pursuing is worth around $3.5 billion US in sales each year)" Neuren Pharmaceuticals is in a strong position regarding its platform drug NNZ-2591, particularly if it successfully completes Phase 3 trials for its four indications. The company already has experience with a successful partnership for DAYBUE (trofinetide) in North America with Acadia Pharmaceuticals, which provides a good benchmark for future deals.Based on industry trends and Neuren's existing agreements, here's what could be expected for profit sharing or revenue royalties in such a partnership:
1. Royalty Rates:
Typical Range: In the pharmaceutical industry, royalty rates for late-stage or approved drugs typically range from a few percentage points to over 15% of net sales. Deals with a strong intellectual property position, significant unmet medical need, and large market potential tend to command higher rates.
Neuren's Precedent (DAYBUE): Neuren's current agreement with Acadia for DAYBUE (trofinetide) in North America features tiered royalties:
10% of net sales up to US$250 million
12% of net sales between US$250 million and US$500 million
14% of net sales between US$500 million and US$750 million
15% of net sales above US$750 million
This is a favorable structure that increases Neuren's share as sales grow.
NNZ-2591 Potential: Given that NNZ-2591 is targeting four distinct neurological disorders, and Neuren believes the opportunity is "even larger than for trofinetide (DAYBUE)," it's reasonable to expect royalty rates in the double-digit percentage range, potentially similar to or even exceeding the top tiers of the DAYBUE agreement, especially if the drug proves highly effective and has a strong market presence across multiple indications. A rate in the 10-20% range would be a reasonable expectation, with the exact figure dependent on negotiation, upfront payments, and other deal terms.
2. Milestone Payments
evelopment and Regulatory Milestones:Pharmaceutical partnerships typically include significant milestone payments triggered by various stages of development, regulatory approval, and commercialization. These can be substantial.
For example, Neuren was eligible to receive up to US$455 million in potential milestones for trofinetide in North America.
Sales Milestones: Beyond regulatory approval, partners often agree to sales-based milestones, where the licensor receives payments when the drug reaches certain annual net sales thresholds (e.g., US$250 million, US$500 million, US$1 billion). Neuren received an A$80.5 million (US$50 million) sales milestone in 2024 when DAYBUE net sales exceeded US$250 million.
3. Upfront Payments:
Late-stage or approved assets often command significant upfront payments, reflecting the reduced risk for the licensee. For example, Neuren received an upfront payment of A$145.7 million (US$100 million) under its expanded global license agreement for trofinetide.
4. Profit Sharing vs. Royalties:
While royalty payments are common, some partnerships might involve profit sharing, where both companies share the net profits (and losses) from commercialization.
For example, a recent deal between PTC Therapeutics and Novartis for a Huntington's disease program involved a 40/60 profit split in the U.S. and double-digit tiered royalties on ex-U.S. sales. This can be more complex but offers a potentially larger upside for the licensor if the drug is highly profitable. Given Neuren's proven development capabilities, a profit-sharing arrangement in a key market like the US might be considered.
- Considering the $3.5 billion US annual sales potential across 4 indications:
If NNZ-2591 reaches $3.5 billion in annual sales across its four indications, and Neuren secures an average royalty rate of, for example, 15% (which is within the higher end of typical ranges for a successful late-stage drug with significant market potential), Neuren could expect to receive $525 million in annual royalty income ($3.5 billion * 0.15).This figure would be in addition to any upfront payments and development/sales milestones that would have been received leading up to and during the commercialization phase. The specific percentage would be subject to negotiation, considering factors such as:
- Competitive landscape: How unique and effective is NNZ-2591 compared to existing or pipeline treatments?
- Development costs borne by the partner: If the partner is solely responsible for late-stage development and commercialization costs, they would typically seek a larger share.
- Marketing and distribution strength: The partner's ability to maximize sales globally.
- Global vs. Regional Deals: Neuren could choose a single global partner or multiple regional partners, which might affect the terms.
In summary, given the successful Phase 3 trials and the substantial market opportunity of $3.5 billion US in annual sales, Neuren could realistically expect to receive significant upfront payments, substantial milestone payments, and double-digit percentage royalties on net sales. A royalty rate in the 10-20% range would be a reasonable target, translating to potentially hundreds of millions of dollars annually in royalty income alone if the drug reaches its full market potential.
EAGLE: "What about profit sharing?"You're right to ask about profit sharing! While royalties are very common in pharmaceutical licensing deals, profit sharing can be an even more lucrative arrangement for the licensor (like Neuren) if the drug is highly successful, as it allows them to participate more directly in the overall profitability of the asset.
Here's a breakdown of what profit sharing entails and what Neuren might expect:
- What is Profit Sharing in Pharma? Unlike royalties (a percentage of net sales), profit sharing involves splitting the net profit generated by the drug after certain deductions. This typically means: Gross Sales Minus: Returns, chargebacks, discounts, etc. (to arrive at Net Sales) Minus: Cost of Goods Sold (COGS) Minus: Commercialization expenses (e.g., sales force, marketing, medical affairs, distribution, market access, administrative costs directly attributable to the drug) Equals: Net Profit.
The "profit" being shared can be defined in various ways (e.g., gross profit, operating profit, or a more fully burdened net profit), and the definition is a key negotiation point.
- Why Profit Sharing might be considered by Neuren:Higher Upside: If the drug is highly profitable, profit sharing can yield significantly more income for Neuren than a flat royalty rate. This is especially true for drugs with high gross margins (which is often the case for novel, high-value pharmaceuticals) and lower-than-average commercialization costs relative to sales.
Greater Alignment: Profit-sharing arrangements can foster stronger alignment between the partners, as both parties have a direct interest in maximizing the drug's overall profitability, not just its sales volume. This can encourage collaboration on strategy, market access, and cost control.
Strategic Control: While a profit-sharing deal doesn't necessarily mean Neuren takes on commercialization responsibility, it can sometimes come with more involvement in strategic decision-making regarding the drug's commercialization, potentially through joint steering committees.
- Typical Profit Share Percentages:Profit-sharing percentages in pharmaceutical partnerships can vary widely, but generally fall into these ranges:
Equal Splits (50/50): For highly collaborative partnerships where both companies contribute significant resources (e.g., co-development, co-commercialization with shared sales forces), a 50/50 profit split is possible. This is less common for a pure "licensing out" deal where one company primarily handles all commercialization.
Majority Share for Commercializing Partner (60/40, 70/30, 80/20): More commonly, the partner responsible for the extensive commercialization infrastructure (large sales force, marketing budgets, distribution networks) will take a larger share of the profit, as they are bearing the majority of the risk and cost of bringing the drug to market and managing its lifecycle.For a company like Neuren, which has taken the drug through Phase 3, a 40-50% share of net profit in the US (if they negotiate a strong position and the partner primarily focuses on leveraging its existing infrastructure) is a very good outcome. Outside the US, where Neuren might have less leverage or the market dynamics are different, the percentage might be lower.
A 30-40% share is more typical if the commercializing partner is also investing heavily in additional development, or if Neuren retains less strategic input.
A 20-30% share is less common for a drug that has completed Phase 3 and is so close to market, but it could happen if the partner assumes very substantial and unique commercialization risks or costs.
- Factors Influencing the Profit Share Percentage:Development Stage: The further along the drug is in development (e.g., Phase 3 completion, marketing authorization), the higher the potential profit share for the licensor, as risk is substantially reduced. Neuren's Phase 3 completion puts it in a very strong negotiating position.
Market Size and Unmet Need: Drugs addressing large markets with significant unmet medical needs (like the four indications Neuren is pursuing) command higher valuations and better deal terms.Patent Estate and Exclusivity: Strong and long patent protection increases the drug's value and thus the licensor's bargaining power.
Commercialization Costs and Risks: The partner taking on more of the direct commercialization costs (sales, marketing, distribution, market access) will naturally expect a larger share of the profit. However, if Neuren retains some co-commercialization rights or contributes significantly to market access strategy, their share could increase.
Upfront Payments and Milestones: Higher upfront payments and substantial development/sales milestones might lead to a slightly lower profit share percentage, as the licensor is de-risking their investment earlier. Conversely, if Neuren prioritizes a higher profit share, they might accept lower upfront or milestone payments.
Global vs. Regional Deals: A single global profit-sharing deal might have a different structure than multiple regional deals, each with its own terms.
Partner's Expertise and Network: The value of the partner's existing distribution and marketing expertise and networks is a significant factor. A large pharmaceutical company with a strong presence in the target therapeutic areas can command a larger share due to their ability to maximize sales.
- Considering the $3.5 billion US annual sales potential:
If the drug generates $3.5 billion in annual sales, the net profit will be a portion of that, after deducting COGS and commercialization expenses. The pharmaceutical industry generally has high gross margins (often 60-80%+), but commercialization costs can be substantial.
Let's assume a hypothetical scenario:
Net Sales: $3.5 billion
Gross Profit Margin: 70% (a common healthy margin in pharma) = $2.45 billion
Commercialization expenses (sales, marketing, etc.): This can vary significantly, but might be 20-30% of net sales for a major launch. Let's assume 25% of net sales = $875 million
Net Profit: $2.45 billion - $875 million = $1.575 billion
If Neuren were to achieve a 40% profit share of this $1.575 billion net profit, they would receive approximately $630 million annually. This illustrates that profit sharing, if negotiated favorably, can yield even higher returns than a royalty-only model, particularly for a highly successful product like NNZ-2591 appears to be. However, it also means Neuren would be more exposed to the actual expenses and fluctuations in profitability.
Ultimately, the decision between a pure royalty deal and a profit-sharing arrangement (or a hybrid) depends on Neuren's risk appetite, strategic goals, and the specific terms they can negotiate with a potential partner. Given their strong position with a Phase 3 completed asset, they would likely be aiming for a deal that includes a significant portion of future value, whether through high tiered royalties or a substantial profit share.
EAGLE: "Neuren could possibly develop all indications through Phase 3 to eventual marketing authorisation so they could be solely responsible for development. The partner would be responsible for distribution and marketing/sales, and possibly manufacturing the drug." This changes the calculus significantly and strengthens Neuren's negotiating position for a profit-sharing arrangement. If Neuren takes the drug through all four indications to marketing authorization, they bear virtually all the development risk and cost up to that point. The partner's role then becomes primarily distribution, marketing/sales, and potentially manufacturing. In this scenario, a profit-sharing model becomes much more attractive and likely for Neuren than a simple royalty, and the share they could command would be significantly higher.
Here's why and what Neuren could expect:
- Why Profit Sharing is More Likely and Favorable for Neuren: Minimized Risk for Partner, Maximized Value for Neuren: The most substantial and risky part of drug development (clinical trials, regulatory approval) is completed by Neuren. The commercialization partner is essentially taking a "market-ready" product. This greatly reduces their upfront risk and investment, meaning Neuren is entitled to a much larger share of the eventual profits.
Greater Control & Leverage: Neuren's completion of Phase 3 and securing marketing authorization for multiple indications demonstrates immense scientific and development capability. This gives them significant leverage in negotiations. They are not merely licensing IP; they are delivering a validated, approved asset.
High Value of Orphan Drug Designations: All four indications for NNZ-2591 have Orphan Drug Designation. This provides valuable marketing exclusivity periods (7 years in the US, 10 years in the EU) and other incentives, which further de-risks the commercialization for the partner and enhances the drug's value.
No R&D Cost for Partner: Since Neuren has done all the R&D, the partner's P&L for the drug will primarily reflect COGS and commercialization expenses. This means a higher net profit margin to be shared.
- What to Expect for Profit Sharing:In this specific scenario, where Neuren brings the drug to market authorization, and the partner is responsible for commercialization (marketing, sales, distribution) and potentially manufacturing, profit-sharing percentages can be quite substantial for the licensor.
Net Profit Definition: The critical element here will be the definition of "net profit." It will typically be:Net SalesMinus Cost of Goods Sold (COGS)Minus Commercialization Expenses (marketing, sales force, distribution, medical affairs, market access/reimbursement teams).Crucially: There would be no R&D costs for the partner to deduct, which significantly boosts the profit pool.
Expected Profit Share for Neuren: Given Neuren's extensive investment and de-risking: 40-60% of Net Profit: This range is highly plausible. Some deals for de-risked or approved assets can even see a 50/50 split or even slightly in favor of the licensor if the market opportunity is enormous and the drug is truly best-in-class with minimal competition.
Why this range? The partner is taking on the significant cost and infrastructure of sales and marketing, which for a major launch can be hundreds of millions to a billion dollars annually. They are also responsible for managing distribution, supply chain, and market access (e.g., getting the drug on formularies, negotiating pricing). While Neuren has done the development, the commercialization partner's existing infrastructure, relationships with payers, and sales force reach are incredibly valuable.
Potential Annual Profit Share Calculation (based on $3.5 billion in sales):Let's refine the previous example, assuming Neuren has done all the development:
Annual Net Sales: $3.5 billion
Cost of Goods Sold (COGS): For small molecule oral drugs, COGS can be relatively low, perhaps 10-20% of net sales. Let's assume 15% (conservative average).COGS: $3.5 billion * 0.15 = $525 million
Gross Profit: $3.5 billion - $525 million = $2.975 billion
Commercialization Expenses (Marketing, Sales, Distribution, etc.): This is the partner's primary contribution. For a multi-indication, high-value launch, this could be 20-30% of net sales. Let's use 25% of net sales.
Commercialization Expenses: $3.5 billion * 0.25 = $875 million
Estimated Net Profit (for sharing): $2.975 billion (Gross Profit) - $875 million (Commercialization Expenses) = $2.1 billion
Now, let's apply the profit-sharing percentages:
At 40% profit share for Neuren: $2.1 billion * 0.40 = $840 million annually
At 50% profit share for Neuren: $2.1 billion * 0.50 = $1.05 billion annually
At 60% profit share for Neuren: $2.1 billion * 0.60 = $1.26 billion annually
Other Deal Components (Still Relevant):Upfront Payment: Neuren would still command a very significant upfront payment. This would reflect the value of the de-risked asset and compensation for past R&D investment. This could be in the hundreds of millions to even a billion-plus for a drug with $3.5B annual sales potential and multiple indications.
Milestone Payments (Sales-Based): While development/regulatory milestones are largely fulfilled, sales-based milestones would still be common. These are payments triggered when annual net sales reach certain thresholds (e.g., $500M, $1B, $2B). These would act as additional lump-sum rewards for commercial success.
- Conclusion:If Neuren successfully takes all four indications of NNZ-2591 through Phase 3 to marketing authorization, and then partners with a larger pharmaceutical company solely for commercialization (marketing, sales, distribution, and potentially manufacturing), Neuren is in an exceptionally strong position to negotiate a profit-sharing arrangement.They could realistically expect to receive 40-60% of the net profit from the drug. Based on a $3.5 billion annual sales potential, this translates to annual profit sharing payments to Neuren in the range of $800 million to over $1.2 billion, in addition to significant upfront and sales milestone payments. This kind of deal would be highly transformative for Neuren.
EAGLE: "What would this equate to per share minus tax and with SOI being 128 million with a P/E of 20?"
Let's break down the per-share implications of Neuren's potential profit sharing, factoring in tax and P/E ratio.
Assumptions Recap:
Annual Net Sales: $3.5 billion US
Neuren's Profit Share: 40-60% of estimated net profit
Estimated Net Profit: $2.1 billion US (derived from $3.5B sales - 15% COGS - 25% Commercialization Expenses)
Shares Outstanding (SOI): 128 million
P/E Ratio: 20 (as provided by you)
Exchange Rate: Let's use a conservative AUD/USD exchange rate of 0.65 for these calculations, meaning US$1 = AUD$1.538. (Actual rate fluctuates)
Tax Rate: Neuren is an Australian company. The general corporate tax rate in Australia is 30%. For companies with aggregated turnover of less than AUD$50 million, it's 25%, but with a $3.5 billion sales potential, Neuren would certainly fall into the 30% category.
Step 1: Calculate Neuren's Annual Profit Share (in USD)
As per our previous calculation, the estimated annual net profit for sharing is $2.1 billion USD.Low End (40% share): $2.1 billion * 0.40 = $840 million USDHigh End (60% share): $2.1 billion * 0.60 = $1.26 billion USD
Step 2: Convert Annual Profit Share to AUD
Low End (AUD): $840 million USD / 0.65 = $1,292.31 million AUDHigh End (AUD): $1.26 billion USD / 0.65 = $1,938.46 million AUD
Step 3: Deduct Australian Corporate Tax
Australian corporate tax rate is 30%. Low End (Profit After Tax - AUD): $1,292.31 million AUD * (1 - 0.30) = $904.62 million AUD
High End (Profit After Tax - AUD): $1,938.46 million AUD * (1 - 0.30) = $1,356.92 million AUD
Step 4: Calculate Earnings Per Share (EPS)
Shares Outstanding (SOI): 128 million.
Low End (EPS): $904.62 million AUD / 128 million shares = $7.07 AUD per share
High End (EPS): $1,356.92 million AUD / 128 million shares = $10.60 AUD per share
Step 5: Calculate Implied Share Price (using P/E of 20)
P/E Ratio Formula: Share Price = EPS * P/E Ratio
Low End (Implied Share Price): $7.07 AUD/share * 20 = $141.40 AUD per share
High End (Implied Share Price): $10.60 AUD/share * 20 = $212.00 AUD per share
Summary of Potential Financial Outcomes (Per Share, Post-Tax):
Metric:
Low End (40% Profit Share)
High End (60% Profit Share)
Annual Profit (AUD)~$904.62 million~$1,356.92 million
EPS (AUD)$7.07 - $10.60
Implied Share Price (AUD) (at P/E 20): $141.40 low end, $212.00 high end.
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