Please ensure Javascript is enabled for purposes of website accessibility

What Is a Biotech Milestone Payment?

By Motley Fool Staff – Jul 6, 2016 at 6:20AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Milestone payments are pre-determined fees deep-pocketed drugmakers pay their collaboration partners after their project passes specific goals -- and they can provide some important insights about the biotech receiving them.

Image source: Getty Images.

A milestone payment is a pre-determined fee smaller biotechnology companies receive from larger partners, after their collaboration project passes a specific goal. The goals, and milestone payments, typically begin small at the early clinical stages of a new drug candidate's development. Milestone payments tend to increase substantially if a candidate earns regulatory approval, and end with some percent of future sales to be paid in the form of royalties.

While that all seems fairly straightforward, milestone payments can provide several important insights for savvy biotech investors. 

Milestone payments vs. upfront cash

The probability of a new drug candidate earning an FDA approval is a dismal 9.6%, after success in a phase 1 clinical trial. This is why industry slang for potential milestone payments, "biobucks" is a fairly derisive term.

When a deep-pocketed drugmaker is willing to pay upfront for rights to co-develop early stage drugs, it speaks volumes about the larger company's confidence in its partner's candidate, management, or both. For example, Celgene's upfront payment of $150 million and an equity stake in Juno Therapeutics for an initial payment of roughly $1 billion screamed confidence in Juno's ability to succeed

Discover or develop?

Sometimes bigger drugmakers enter "discovery deals" that generally entail paying another company to discover potential candidates for clinical testing. It's easy for these types of deals to catch your eye with billions in biobucks, but the devil's in the details.

For example, last summer AstraZeneca gave Ionis Pharmaceuticals $65 million upfront to discover and develop an unspecified number of therapies for treating cardiovascular and metabolic diseases. Although there isn't a specific drug in clinical development, the number of potential candidates leaves Ionis eligible to receive milestone payments, and other fees, of more than $4 billion from AstraZeneca.

Before you lose your head, it's important to understand Astra must accept each candidate. It might select just one, or two, or possibly none. To collect all $4 billion would require Astra to select and develop multiple candidates and advance them all from phase 1 through commercial success.

Collecting all $4 billion in potential milestone payments from Astra under the terms of the deal isn't impossible for Ionis. Considering the overall failure rates associated with new drug development, it's pretty close.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at [email protected]. Thanks -- and Fool on!

The Motley Fool owns shares of and recommends Celgene and Ionis Pharmaceuticals. The Motley Fool has the following options: short October 2016 $95 puts on Celgene. The Motley Fool recommends Juno Therapeutics. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

HOW THE MOTLEY FOOL CAN HELP YOU

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
376%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.