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For Biotech VCs, Anticipation And Adjustments In The Age Of Earn-Outs

This article was originally published in Start Up

Executive Summary

For biotech companies and their backers, the structured acquisition -- with contingent payments that stretch well beyond the close of the sale -- is practically the only exit available and, everyone agrees, a permanent part of the landscape. While it's certainly a buyer's market, the sellers have begun to adopt strategies and rules to help boost returns. Are they working?

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Biotech Backers Are Learning to Live with Exit-by-Earn-out

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.

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