Biopharma Deal Structures Shift: Upfront Payments Rise as Earnout Potentials Decline

In a notable trend reshaping the landscape of pharmaceutical industry deals, recent data from SRS Acquiom reveals a significant shift in how biopharma agreements are structured. The analysis, covering deals from mid-2023 to mid-2025, shows a decline in average earnout potentials while upfront payments continue to rise, signaling a change in risk allocation between buyers and sellers in the biotech sector.

Earnout Potentials on the Decline

The mean earnout potential for biopharma deals has seen a steady decrease over the past few years. According to SRS Acquiom's data on 64 deals:

• Mid-2023 to mid-2025: $437 million
• Mid-2021 to mid-2023: $494 million
• COVID-19 era: $683 million

This downward trend suggests a more cautious approach to long-term value projections in deal-making, possibly reflecting increased uncertainty in drug development outcomes.

Upfront Payments Show Opposite Trend

Contrasting with the decline in earnout potentials, upfront payments have been on an upward trajectory:

• Mid-2023 to mid-2025: $386 million
• Mid-2021 to mid-2023: $303 million
• Mid-2019 to mid-2021: $272 million

The increase in upfront values indicates a shift towards more immediate compensation for sellers, potentially reflecting a preference for guaranteed returns over speculative future earnings.

Milestone Achievement Rates and Earnout Realization

The data also sheds light on the actual performance of biopharma deals post-closure:

• 22% of biopharmas hit milestone events as of mid-2025, unchanged from 2023 but down from 34% in 2021
• For 128 deals with at least one milestone due by mid-2025:
  • 45% hadn't garnered any earnout money
  • Only 5% collected 75% to 100% of their potential earnout worth
• Out of 609 total milestone events:
  • 73% (443 events) were missed
  • 22% (136 events) were achieved, totaling $6.5 billion in earnouts
  • 5% (30 events) were pending

These figures highlight the challenging nature of achieving milestones in biopharma deals, with a substantial $27.4 billion left uncollected due to missed targets.

Timing of Milestone Achievements

The analysis also provides insights into when successful milestone payments typically occur:

• 56 out of 136 paid events happened within the first two years of deal closing
• Only 8 milestone collections occurred more than seven years after closing

This data suggests that early post-deal years are crucial for realizing earnout potential, with diminishing returns as time progresses.

The shifting dynamics in biopharma deal structures reflect an evolving industry landscape, where companies are adapting their strategies to balance immediate gains with long-term potential. As the sector continues to navigate challenges in drug development and market uncertainties, these trends may have lasting implications for how future deals are negotiated and valued.