Beyond Borders: Global biotechnology report 2010

with Elan (the judge agreed) the parties
renegotiated the deal to remove the
side agreement and reduce the equity
investment by US$115 million. Biogen
Idec didn’t like the side agreement in part
because it could discourage other
potential acquirers.
Sharing the risk
With biotech companies and their investors
needing to secure financing or find exits in
a challenging environment, the bargaining
power in deals swung toward buyers in
2008 and remained there in 2009. With
this shift came an increase in various forms
of “risk sharing” arrangements that gave
biotech companies more risk than they
would have assumed in years past.
On the M&A front, risk-sharing manifested
itself in the increasing number of
transactions that included milestone
payments (sometimes referred to as
contingent value rights or CVRs). This
was most common in takeouts of private
companies, including sanofi-aventis’
acquisition of BiPar Sciences for up
to US$500 million (including US$125
million of milestones), Alcon’s acquisition
of ESBATech for up to US$589 million
(including US$439 million of milestones),
and Novartis’ acquisition of Cothera for a
potential value of US$620 million (including
US$500 million of milestones).
Biotech buyers also used the CVR structure
commonly during 2009, in part to bridge
differences in perceived value. The more
significant biotech-biotech deals with
CVRs included Onyx Pharmaceuticals’
takeout of Proteolix for a potential value
of US$851 million (including US$575
million of potential milestones), Celgene’s
acquisition of Gloucester Pharmaceuticals
for a potential value of US$640 million
(including US$300 million of milestones)
and Cubist Pharmaceuticals’ acquisition
of Calixa for US$403 million (including
US$310 million of milestones). The
CVR structure was not limited to private
companies either, as both The Medicine
Company’s acquisition of publicly
traded Targanta Therapeutics and Endo
Pharmaceuticals’ takeout of publicly
traded Indevus Pharmaceuticals included
such rights. CombinatoRx and NeuroMed
of Canada forged a particularly creative
contingent transaction. The two parties
struck a merger agreement which had
shareholders of each company initially
holding 50% of the combined entity.
However, much of the value of NeuroMed
was tied to receiving FDA approval to
market Exalgo, a drug for the treatment of
chronic pain. The two parties agreed that
if Exalgo was approved by a specified date,
the ownership percentage would adjust
in the favor of NeuroMed’s shareholders.
This scenario came to pass when the drug
was approved by the FDA in March 2010.
CombinatoRx issued additional shares
to the former NeuroMed shareholders
equaling an additional 10% of the combined
company. The approval also triggered a
US$40 million milestone payment from
Covidien, which will market the drug.
While contingent rights serve a valid
business purpose, they can create deal
and asset valuation issues for the acquirer,
both at closing and in subsequent reporting
periods. (For more information, see A closer
look on the previous page.)
Having options
The use of option structures in biotech deals
has been around for awhile. In early 2007,
for instance, Amgen paid Cytokinetics
US$75 million for an option to license
a cardiovascular drug candidate (the
company exercised the option in 2009 for
80 Beyond borders Global biotechnology report 2010
an additional US$50 million). In the current
environment, however, such structures are
becoming increasingly common.
In these arrangements, the buyer pays a
fee (and in some cases makes an equity
investment) in exchange for the right
to license a particular product at a later
date (e.g., upon successful completion
of a clinical trial). The biotech company
typically uses the proceeds from the
option transaction to further the product’s
development. Early in the year, Cephalon
and privately held Ception announced
an option-based acquisition structure
under which Cephalon paid US$100
million (a portion of which was returned
to Ception’s venture capital investors)
for an option to acquire the company for
an additional US$250 million following
the results of a key clinical trial. In early
2010, Cephalon exercised the option.
Cephalon also used this structure in a deal
with BioAssets, and Novartis employed
acquisition options in deals with Proteon
and Elixir Pharmacuticals, each of which
has a potential acquisition price in excess of
US$500 million.
Of course, option structures are not
limited to M&As; they can also be used in
licensing transactions involving individual
R&D programs. GlaxoSmithKline has
been the most prominent user of option
structures in such deals; in 2009 alone the
company entered transactions that included
option rights with Vernalis, Prosensa,
Chroma Therapeutics, Supergen, Concert
Pharmaceuticals and others. Buyers may
end up paying more for a product that
achieves the desired clinical outcome and
is later licensed through the exercise of the
option. However, over a portfolio of deals,
they manage the risk of failure by having
multiple “shots on goal” and only paying
to license products that have successfully
reached the desired outcome. When GSK