Wednesday, December 09, 2009

2009 Exit/Financing DOTY Nominee: Lundbeck/Ovation and the March of the CVRs

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.
We think what we'll do for this one is give you about 60% of this nomination post now, and if all goes well with the rest of the nominations and we hit certain targets--X thousands of votes, clicks and whatnot, then you'll get another 20%. If the nomination of Lundbeck's acquisition of Ovation wins, then you'll see another 10%. Of course to get the full nomination, you'll need those guys to provide a killer acceptance speech.

We think you see where this is going. You want the full monty, you gotta EARN IT.

Ah, the earn-out. Not new, for sure (though it seems to have a new, flashy name: contingent value rights [CVR]), but earn-outs were so common earlier this year that it was fair to wonder if they were now a de facto part of every biotech acquisition.

Lundbeck's acquisition of Ovation--our first nominee in the 2009 Exit/Financing DOTY category--boasted a biobucks figure of $900 million. No doubt there was a large down-payment ($600mm) but a substantial sum rested on the regulatory progress of Ovation's epilepsy drug Sabril.

And that's one of the reasons we chose Lundbeck/Ovation over a raft of potential CVR-laden deals (see, among others, Sanofi/BiPar, Sanofi/Fovea, CombinatoRx/NeuroMed, The Medicines Co./Targanta, Onyx/Proteolix, Alcon/ESBATech). We've got no word on whether Ovation's shareholders have received all or only some of that $300 million (GTCR invested $150 million in the company in 2002), but it seems quite probable that they got a fair chunk.

Sabril was approved by FDA in August with a REMS to help mitigate the risk of peripheral blindness, a known side-effect of the drug. So: the CVR-boosted deal structure was established to allow Ovation and Lundbeck to share the risk associated with that approval. The REMS itself was well-anticipated given the rocky history of the drug (which Ovation licensed in from Aventis in 2004) and Sabril is now on the market--second line for epilepsy and first line for infantile spasms, a condition for which the drug has Orphan designation. Folks, we have a winner.

CVRs ought to flourish in tougher economic times, as pharma can place more pressure to share risk on investor syndicates eager for exits. But these aren't usually the typical biobucks figures we're used to seeing tacked onto alliances or in-licensing deals. As Ovation's deal demonstrates, CVRs can be used to bring parties together around binary risk events like drug approvals or clinical trial success. In other words, earn-outs help smooth out differing views of product development or regulatory risk, and help deals get signed that otherwise might languish.

Why vote for this deal? For starters, CVRs aren't going away, even should biotechs become increasingly buoyant if/when public investor dollars return to the IPO scene. And we do hear rumblings that pharma might rather NOT do earn-out heavy acquisitions thanks to some accounting factors that mean they'd have to report future payments as liabilities.

But acquisitions will remain the favored VC exit. And we'd bet our crafty pharma-friends will find a way around those accounting issues, if they exist. And so instead, we'd suggest, get to know CVRs. Embrace them, even. A vote for Lundbeck/Ovation is a vote for the dominant biotech-pharma acquisition structure of 2009, and very likely a vote for the future of biopharma acquisition structures, too.

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