Deals Of The Week: VCs Still Hoping To Cash Out But Growing Used To Earn-outs

In 2012, private biotechs and their investors waiting to cash out via acquisition likely will find themselves waiting a bit more, even after the deal is done. As we have noted for some time, biotech investors almost certainly have to exit their portfolio companies through acquisition, and since 2009 more than two thirds of those acquisitions have come with cash doled out after the deal closes – sometimes years after, and sometimes a huge chunk of it.

But venture capital firms are wising up, as we detail in our latest Start-Up magazine feature.

Knowing they’ll have to take some percentage of their returns on a contingent basis, they are negotiating to tie those post-acquisition payments to near-term clinical and regulatory milestones, not to sales figures. They’re also paying attention to the nuances of the clinical milestones and trying to avoid vague triggers that can be re-interpreted by the acquirers. One VC has drawn a line in the sand mandating that no significant milestones can occur more than two years past the closing of the deal.

Shareholders also are turning to escrow-like services that not only keep track of post-acquisition payments but help do a little watchdogging to help make sure acquirers are meeting the terms of the deal. One such service, Shareholder Representative Services LLC, has worked on more than 30 life-science acquisitions with earn-outs since 2008. Executive director Donald Morrissey said that on deals SRS has worked on that are more than six months old: 1) at least one milestone has been paid on about 20% of deals; 2) at least one milestone has been missed on about 50% of deals; and 3) milestone-bearing programs have been terminated on about 20% of deals.

Morrissey also noted that the area is ripe for dispute, especially as the deal flow climbs and the pool of post-deal payments still in limbo grows deeper. He says disputes have occurred in almost 30% of the firm's life-science deals (although not necessarily arbitration or formal litigation, which is the nuclear option), and 20% of deals have been renegotiated (take the Onyx Pharmaceuticals-Proteolix deal, for example).

Is VC adaptation in the age of the earn-outs having an effect? These are early days, seeing how the “age” didn’t really start until 2009. But DOTW did find that in 2011, the average amount of total deal value began to shift back in the sellers’ favor. For deals with a total potential value (upfront and possible earn-outs combined) of $50 million or more, 58% of the cash came upfront, which collectively gave sellers a 4x step-up on the money invested in the acquired companies. The total potential step-up – the fantasy number sellers would hit if every post-buyout milestone came to fruition – has declined, but investors gladly would trade unreachable ceilings for higher, yet-realistic floors.

In 2009 and 2010, the upfront totals were 45% and 35% respectively, and the upfront step-ups were 3x and about 2.5x. (The upfront amount was much higher before 2009, but that was before earn-outs became practically the only game in town for private biotechs looking for acquirers.)

Are milestones actually paying out? Again, these are early days. With so many deals consummated only in the past year or two, many milestones, even near-term ones, haven’t yet been triggered. One deal with milestones that keep rolling in, though, is Cubist Pharmaceuticals’ late 2009 purchase of Calixa Therapeutics. In addition to $93 million upfront, Cubist has paid three milestones totaling $90 million. That adds up to roughly a 6x return on the $30 million invested in Calixa, and another $40 million could come from Cubist later this year.

For a running total of earn-outs that have paid out – and a reminder how opaque some deal details are – visit Atlas Venture partner Bruce Booth’s blog, where he is trying to crowd-source deal information.--Alex Lash

Allena/Althea – Newton, Mass.-based Allena Pharmaceuticals has gained an exclusive worldwide license to Althea Technologies’ hyperoxaluria portfolio, including patents, regulatory information and development data. Althea is a contract manufacturing organization based in San Diego. The deal will help Allena’s research into ALLN-177, an orally delivered enzyme therapy for hyperoxaluria, a disease that can cause kidney stones and eventually lead to full renal failure. “Currently there are no effective pharmacological treatments for hyperoxaluria or the nearly 2.6 million Americans who suffer from kidney stones annually,” said Alexey Margolin, co-founder, president and CEO of Allena. Allena is a privately held company with a focus on protein therapeutics, with a special focus on kidney and urologic diseases. Investors, including Third Rock Ventures, Frazier Healthcare and Bessemer Venture Partners, put $15 million into a Series A to bankroll the company's launch in November. The management team and investors were all involved with Alnara Pharmaceuticals Inc., a company purchased by Eli Lilly & Co. in 2010 for $380 million. Like Alnara, Allena focuses on enzyme-based therapies that can be delivered orally rather than injected and are designed to remain stable in the stomach instead of going into circulation.--Lisa LaMotta

Almirall/Menarini Group – Mid-sized pharmaceutical companies in Europe are turning to each other to achieve the scale and marketing muscle previously only found in the shrinking number of big pharma companies. Such a move is exemplified by Spain's Almirall SA, which has just turned to Italy's Menarini Group to help market its new chronic obstructive pulmonary disease therapy, aclidinium bromide, in Europe. Menarini has more than 5,000 sales reps poised to market the therapy in the countries covered by the commercial alliance: the majority of EU member states, Russia, Turkey and CIS countries. Almirall retains sole marketing rights in the U.K., the Netherlands and Nordic countries. The Italian company is particularly strong in Germany, Italy and France, as well as Central and Eastern Europe. Aclidinium is a long-acting inhaled muscarinic antagonist that has been jointly developed by Almirall and Forest Laboratories and is awaiting regulatory approval in the EU. However, there's been a regulatory hiccup in the U.S., where the product will be marketed by Forest; the companies reported March 29 that the FDA will require an extra three months to complete its review, although no new data were requested.--John Davis

Valeant/Natur Produkt – Valeant Pharmaceuticals International has continued its acquisition spree with further expansion into the Russian market. The Canadian company pledged on March 26 that it will pay $180 million plus the potential for $5 million in milestones for over-the-counter drug maker Natur Produkt International, which had revenues of $65 million in 2011. The company, which makes cough and cold medications, will be the second Russian asset that Valeant has purchased in recent months. Valeant said that it expects the Russian market to grow by 15% annually. A few weeks ago, Valeant acquired branded generic assets from Austrian pharmaceutical company Gerot Lannach Pharma, which generated 90% of its $55 million in revenues from Russia. Terms of the deal were not disclosed. The assets from both purchases will be immediately accretive to the Canadian company and will provide approximately $175 million in pro forma revenues by the end of 2012. The slew of acquisitions that Valeant has made over the last year have helped the company to double its top line, going from $1.18 billion in revenues in 2010 to more than $2.26 billion in 2011. Last August, Valeant acquired Lithuania-based specialty pharma AB Sanitas, giving it access to markets in Poland, Lithuania and Russia.--LL

Bausch & Lomb/Ista – Two months after Valeant failed with its proposed takeover of Ista Pharmaceuticals, Ista has again been targeted for acquisition. This time, fellow ophthalmic company Bausch & Lomb has offered $9.10 per share in cash (up from the $7.50 Valeant offered, and an 8% premium to the current 10-day average trading price and a substantially larger premium over the pre-Valeant-offer price), for a total of $380 million. Twenty-year-old Ista reported sales of $160 million last year and had $72 million in cash on hand as of the end of December 2011. In addition to four marketed products – Bromday (postoperative inflammation and pain), Bepreve (ocular itching due to cataract extraction), Istalol (glaucoma), and Vitrase (spreading agent) – Ista has a full pipeline. It is working on Phase III Prolensa (ocular inflammation and pain), T-Pred (ocular inflammation and infection), and several OTC dry eye medications; Phase II Bepomax and Beposone (both for allergic rhinitis); and Phase I bromfenac adjunct for age-related macular degeneration. The deal is a good match as not only do the firms have an overlapping customer base, but Bausch & Lomb has been manufacturing almost all of Ista's U.S. products for years.--Maureen Riordan

Bristol-Myers Squibb/Amylin – In our “No Deal” of the week, with Bydureon’s (long-acting exenatide) initial launch appearing to go better than expected, Amylin Pharmaceuticals has become a takeout target, reportedly drawing a $22-per-share buyout offer from partner Bristol-Myers Squibb. Amylin rejected the offer, prompting its share price to rise $8.38, or 54.5%, to $23.77 in same-day trading on March 28. That values Amylin at a market capitalization of $3.5 billion, amid speculation that it could yet obtain a better offer. Analysts agree, however, that Amylin is ripe to be acquired, potentially at a value higher than the bid reportedly made by Bristol. Bristol’s offer represented a 43% premium over Amylin’s previous day’s closing price of $15.39, but several analysts have revised their forecasts upward on the basis of strong early Bydureon sales and argue the stock could be valued in the high 20s to low 30s. If a bidder believes Bydureon sales could reach $1.5 billion in the U.S. by the end of the decade, with additional sales in Europe boosting global revenues well above $2 billion, the offer should be in the low $30s, wrote Leerink Swann’s Joshua Schimmer in a same-day research note. Meanwhile, reports also surfaced March 29 that Roche has increased its bid for gene-mapping tool specialist Illumina. Roche reportedly increased its hostile bid by 15% on March 28, causing another uptick in Illumina’s share price. The Swedish Swiss pharma, which could use Illumina’s expertise to better target its oncology drugs, said it is giving investors until April 20 to decide whether to accept the tender.--Paul Bonanos and Joseph Haas

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