The March of the CVRs

Lo, and behold: it is biotech's winter and thus has the March of the CVRs begun. (CVR is a contingent value right, these days the acronym for earn-outs in structured deals.) So far in 2009 every biotech acquisition where terms have been disclosed--not just acquisitions of private companies--has included some form of earn-out.

• This week's acquisition of Ovation Pharmaceuticals by H. Lundbeck boasts a headline figure of $900 million. $300 million of that is contingent on the regulatory progress of Ovation's Sabril anti-epileptic. Our Pink Sheet DAILY story on the deal can be found here.
• Cephalon has paid $100 million for the option to buy Ception and its antibody for eosinophilic esophagitis. If Cephalon likes the results of the Phase II program it can pay $250 million more to seal the deal.
• The Medicines Co. paid $2/share, or $42 million, for Targanta Therapeutics in a deal that could see earn-out payments of an additional $4.55/share, depending on meeting regulatory and sales goals for Targanta's lead antibiotic.
• Endo has decided to move beyond pain and acquire Indevus Pharmaceuticals for $352 million in cash plus a potential $234 million in regulatory earn-outs related to Indevus' Nebido testosterone candidate and octreotide implant. Our coverage of that deal is here.

The biobucks figures associated with the majority of industry alliances are mostly jokes. Come on, you know the ones. The $1.7 billion headline figures that are reached only after 6 compounds make it to market in 137 countries and each become blockbusters in multiple indications.

But we think of the headline figures for acquisitions that include earn-out dollars a little differently. These risk sharing arrangements at least have a shot. In fact they are more like the little emperor penguin eggs on the feet of male emperor penguins during an Antarctic winter. Only after the female's long trek to the sea and back in absolutely miserable and ruthless conditions to secure enough regurgitated fish to save the family will we know if anybody involved in this bizarre ritual is going to make it. The only thing missing in the biotech version is a Morgan Freeman voiceover.

CVRs are by no means new. But the conventional wisdom is that they flourish in tough economic times, and so by that reckoning we should be seeing more deals sweetened with downstream earn-outs. (Or, looked at another way, more deals where pharma takes on less risk.) Because of the relative ease of administration CVRs have usually featured more in private company acquisitions than in public deals. Looking at private biotech deals over the past four full years though suggests a decline in this kind of structured acquisition, a phenomenon we explore in this Start-Up article from December. (See chart below.)

The latter two deals on our 2009 list are for publicly traded biotechs. Financial details for the rest of this year's biotech acquisitions so far--Helsinn's takeover of Sapphire and Symphogen's buyout of beleaguered Receptor Biologix's technology--remain undisclosed. We wouldn't be surprised if either of those deals were similarly structured. If these CVRs do anything, they bring companies together to share risk: might we suggest they'd be a way for CV and Astellas or even Roche and Genentech to come to terms?

Maybe even. So as we have been saying: expect earn-outs, structured deals, CVRs--whatever you want to call them--to feature heavily in the dealmaking landscape for the foreseeable future. And then go ahead and root for those frigid penguins.

image from flickr user sidereal used under a creative commons license