Novartis signs a $7.8 billion China mRNA deal, but only $575 million of it, about 7%, is paid up front

Novartis has agreed to license an experimental autoimmune treatment from China's Abogen Biosciences in a deal worth up to $7.8 billion, CNBC reported, citing a statement from Abogen on Friday. Reuters and The Wall Street Journal reported the same headline value, and Fierce Biotech described the drug as an in vivo T-cell engager, a therapy built from messenger RNA.

Novartis will pay $575 million up front for global rights to the drug, with up to $7.2 billion more tied to milestones, and gets an exclusive option to license other assets built on Abogen's RNA platform, according to CNBC. Novartis' U.S.-listed shares were $142.27 in premarket trading, up 0.9%, on Nasdaq.com data.

The number behind the $7.8 billion

The upfront payment is about 7.4% of the headline value. The other 92.6% is paid only if the drug clears development, regulatory and sales goals, and the drug is still early-stage, where development risk is highest. A licence can also be ended if the drug disappoints, a lawyer at Sidley told CNBC, which is part of why big drugmakers now prefer licences to buying Chinese biotechs outright. The useful reading of "up to $7.8 billion" is "$575 million now, and an option on much more."

That structure suits both sides. Novartis caps its cash at risk on an unproven drug. Abogen gets funding to keep developing it at home, where, CNBC reported, faster regulatory reviews have made early clinical trials quicker and cheaper.

Why Novartis is shopping

Top-selling drugs that together generate hundreds of billions of dollars in sales lose patent protection in the early 2030s, and companies need replacements. Novartis' shares fell last month by the most since 1987 after several trial setbacks, CNBC noted, which raised the question of where its next big drugs come from.

It is not alone. Earlier this week Novo Nordisk licensed an early-stage weekly obesity pill from Hengrui Pharma for up to $2.6 billion, and in mid-September GSK agreed to buy a blood cancer drug from Chimagen Biosciences for up to $750 million, CNBC reported. ING estimates that China will account for about a third of new molecules in drugmakers' pipelines worldwide this year, up from 4% in 2014.

For investors reading the next one of these headlines, the split matters more than the total. We made the same point about Novo Nordisk's Nanexa deal.

Sources: CNBC, Reuters, The Wall Street Journal, Fierce Biotech, Nasdaq.com. Upfront share is our arithmetic. Novartis and Abogen had not published full deal terms in a filing we could read. This is market information, not investment advice.