For Biotech VCs, Anticipation And Adjustments In The Age Of Earn-Outs
The structured acquisition -- with contingent payments that stretch well beyond the close of the sale – is a permanent part of the biotech investor landscape. While it's certainly a buyer's market, the sellers have been adapting to help boost returns. Are their strategies working?
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The IPO drumbeat for drug companies is slow but steady, with valuations looking a bit stronger than 2011. But insider participation, haircuts and dilution are still the order of the day.
Japanese pharma Dainippon will gain two clinical-stage novel drugs targeting cancer stem cells and a drug-discovery platform with the acquisition of Boston Biomedical for $200 million upfront and substantial milestones.
Despite a few bright spots, the fundraising environment remains difficult for many venture investors. Biotechs that went public during the 2005-2007 window have largely underperformed, despite hitting the stock exchanges with what plenty of CEOs and VCs felt were artificially low prices negotiated by an oligarchy of biotech IPO buyers. Moreover, pharmaceutical companies have been buying fewer, not more, biotechs - even as more companies are seemingly created with acquisition, not IPO, in mind. Meanwhile, the M&A deals that do occur are increasingly risk-sharing affairs that resemble alliances, replete with earn-out payments triggered by development, regulatory, or commercial milestones. In short: good venture exits have been extremely hard to come by. And data from Elsevier's Strategic Transactions analyzed by START-UP suggest that although these risk-sharing deal structures may be a by-product of a miserable economy, they are likely to stick around regardless of any economic turnaround.