Wednesday, December 16, 2009

2009 Exits/Financings DOTY Nominee: Vertex's Milestone Sale

It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

In the future, when the industry's historians sit down in their maroon smoking jackets in comfy, plush leather chairs situated in dimly lit libraries smoking apple-scented tobacco from antique Exubera inhalers to write the history of the biopharma industry (while watching the earth rise out the window) we like to imagine they'll pause, and smile a little smile, when thinking about our friend, the once-elusive biobuck.

Oh, phantom biobuck! We've mocked you, for sure. But we also recognize that in your capacity to spread risk, you make the bio-universe go round. And in 2009 we got a fleeting glimpse of you without having to resort to hijacking the Large Hadron Collider to smash NCEs together under the Swiss countryside. And for that, we can thank Vertex Pharmaceuticals.

In July Vertex announced that it would sell its future milestone payments associated with the filing, approval and launch of the HCV protease inhibitor telaprevir in Europe. Those milestones are owed (potentially, of course) by J&J, which licensed European rights to the HCV protease inhibitor from Vertex in 2006, and could total $250 million: $100 million for filing and approval of the molecule, $150 million for launch.

The proposal was just the latest move by Vertex in a series of ambitious financings that have raised hundreds of millions of dollars over the past two years (one of which you'll remember was nominated for a DOTY last year).

But more importantly it gave us a data point in the ongoing debate about the value of biobucks. So what's $250mm in biobucks worth? In this case, $155 million. Only it's not so straightforward, and involves TWO transactions, so let's go back to what we wrote when the deal--with undisclosed investors--was announced September 30th.

In transaction A, Vertex gets $120 million cash in exchange for notes securitized with $155 million in J&J milestone payments. If the payments come through as expected, by 31 October 2012, the milestone buyers get the cash. If these payments don't come through, Vertex makes up the shortfall--in any case, the buyers get $155 million, but Vertex pays nothing before 31 October 2012. In transaction B, Vertex gets $35 million in cash in exchange for $95 million of J&J milestones related to launch in any two territories. If those milestones don't come through, Vertex doesn't have to pay a dime.

Why the split? CFO Ian Smith: "From an investor's perspective, they have effectively provided Vertex with $155 million which, to a certain point, is interest free. Upon the achievement of milestones, they then get their return on the $155 million." But "the allocation between $120 million and $35 million, it's important, but it's mainly important from the tax perspective of how the transaction came together."

From Vertex's perspective--and we'd define that as the 'going all-in on telaprevir' strategy--the biotech gets access to cash at a reasonable cost. Smith pins that down around 15% cost of capital, "depending on your probability of success with the milestones."

So what's a biobuck worth? In this case, that still depends, ironically, on whether telaprevir is approved and launched in Europe. For the investors who paid out $155 million, they'll get either $155 million or $250 million in return in three years (it's hard to see a middle ground). For Vertex, they get 62% of the value up-front, and if the drug fails, they pay it back.

Is this the Exit/Financing of the year? We say yes. It's novel, shrewd, and--we'd guess--soon to be imitated. What's next for our friend the biobuck? Only time will tell.

image by flickr user mackius used under a creative commons license.

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