Tuesday, September 29, 2009

Valeant/Dow: More Fun With Milestone Buyouts

Not content with essentially owning all of Dow Pharmaceutical Sciences, Valeant Pharmaceuticals announced today it is buying out all of Dow stockholders' downstream claims to various royalties and milestones included in the original deal to acquire the topical formulations specialist.

This latest data point in the what's-a-biodollar-worth conundrum is less than straightforward to unpack, and might not have much relevance to, say, what Vertex might rake in by selling its European telaprevir milestones (recall that's $100 million for EMEA approval and $150 million more related to "launch" of the drug in Europe--whatever that means. Maybe it means reimbursement?).

But unpack it we will anyway. So Valeant is paying Dow's backers $115 million cash-money. (Those backers--which include VCs Essex Woodlands, Skyline Ventures, and Galen Partners have already done quite well; the initial deal last December netted them $277 million.) In exchange Valeant gets income rights to "all out-licensed and pipeline products" and is off the hook for a potential slew of milestone payments totaling $235 million.

First the royalty rights. Valeant's release today states that the initial deal excluded income rights related to the generic 1% clindamycin and 5% benzoyl peroxide gel (aka Sanofi-Aventis' BenzaClin) that was under FDA review at the time of the acquisition. That ANDA was approved in August 2009 and Dow partner Mylan Labs began marketing the drug, the first BenzaClin generic, later that month.

We're unsure what Dow's royalty was here, though Leerink Swann analyst Gary Nachman suggested in a note today that the profit sharing arrangement between Dow and Mylan may even exceed 50%. We don't have an exact estimate of what the generic will pull down revenue-wise, but Sanofi's branded product sold $221 million in the 12 months through June 2009 and Mylan has since captured a third of new prescriptions--so, depending of course on the generic price, it's not peanuts. To put the payments from that one drug into context, in 2008 Dow's revenue was $45 million, of which only $20 million came from royalties on a variety of others' products. This could be Dow's biggest earner, but still, it seems unlikely that the revenue from the Mylan royalty payments made up the bulk of $115 million price tag.

So if most of that $115 million is for the $235 million in milestone payments, and those milestone payments are, as the release announcing the December 2008 acquisition states, "based predominantly on the achievement of approval and commercial targets for certain pipeline products still in development," that leads us to believe two things.

First, Dow's backers got a pretty good deal. Dow's latest-stage proprietary dermatology projects were only in Phase II at the time of the deal and aren't expect to launch until 2012; plus milestones based on sales targets aren't easy to cash in. And second, because this is a pretty good deal for Dow, Valeant has some pretty high hopes for those projects.

Nachman also liked the deal from Valeant's perspective, and posited a third possibility. He said today that Valeant may be positioning the dermatology assets for a partnership--removing the $235 million in future milestones may make it easier to strike an alliance.

unadulterated version of image by flickr user mackius used under a creative commons license

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