Paying Attention to Biotech M&A Earnout Payments

Posted February 22nd, 2012 in Exits IPOs M&As, VC-backed Biotech Returns

In recent years, acquisitions of early stage private biotechs have frequently included an upfront value coupled with significant future milestone payments.

These earnouts resemble the “biobucks” common to product licensing deals: stretching out over 5-10 years, they get ravaged by R&D’s high attrition rates and are certainly not expected to be paid out in full.  But the presence of these milestones helps to bridge the gap between buyer and seller expectations of value, and to incentivize closing an early stage deal by preserving some of the upside for the seller in a success scenario.  The presence of these earnout payments in deals has been in part what has pushed great companies into the arms of buyers rather than the public markets.

But there’s little data out there on whether these structured earnout M&A transactions, which really became common after 2005, have paid out any of their milestones.  Data are very difficult to obtain, confounded by both undisclosed figures as well as typically scant mentions in most buyer’s SEC filings.

To try to shed some light on this, I’ve assembled a small dataset by piecing together insights from RecapIQ (Deloitte), SEC documents, and discussions with friends about rumors and facts.  This is by no means a comprehensive or correct dataset; it’s an attempt to put some data into the public domain. I’m hoping that by posting it here in the public eye that we’ll be able to crowdsource a more refined and appropriate curation and enumeration of this dataset.

So here’s the dataset.  These data are focused on “earnout” deals in therapeutics, and is arbitrarily defined as any M&A deal where at least 20% of the total value is represented by the future milestone payments.  These include different flavors: acquisitions followed by milestones (e.g., Gloucestor-Celgene, CovX-Pfizer), options-to-buy (e.g., Ception-Cephalon, AkaRx-Eisai), or staged acquisitions of equity (e.g., Actimis-BI).

Using these criteria, this dataset contains 35 therapeutic biotech M&A deals that closed in the five-year time period between Jan 2005 and Dec 2009.  These deals represent $11.3B in total M&A deal values; $4.3B in upfront payments, and $7.0B in potential milestones. 

Of these 35 deals, 25 have programs that remain in active development at their acquirer; 10 of these deals have seen their programs’ development terminated or severely curtailed (unlikely to pay any further milestones).  At least 16 of these deals have paid at least one milestone to date.

While the specific milestone data are not definitive for any/all these deals, the aggregate numbers are likely directionally-correct and of potential interest:

  • At least 24% of the milestones ($1.7B) have already been paid out to date from these deals.  This was surprising and it is higher than my expected ‘consensus’ estimate from discussions with others.
  • Approximately 40% of the total milestones ($2.8B) are linked to deals with active programs and could still pay out in the future (caveat: not clear what proportion of those milestones have already been missed).
  • Lastly, at least 37% of the total milestones ($2.6B) have been lost due to terminations of the underlying programs/deals.

It’s worth noting that the only three of the milestones were for product approvals (Salmedix, Ovation, and Gloucestor); a number of other large payments were for clinical development and platform milestones (CovX, Agensys, Ception, others).

While the analysis above represents “older” deals where payouts of milestones would be more anticipated, I also looked at a more recent, less mature deal vintage between 2010-2011: another 13 M&A deals have milestones representing greater than 20% of their deal value and all of these remain active to my knowledge (i.e., no program terminations). At least two of these have paid earnouts to date: Biomarin has paid LEAD an $11M milestone for their IND filing, and Pfizer has paid FoldRx shareholders several milestones to date.  Alnara is the only one with visible, public setbacks, though Lilly is apparently conducting another Phase 3 trial.

Another caveat to this dataset is that by filtering for deals with greater than 20% of their value in milestones, a number of large deals get cut from the analysis.  Two $400M+ Atlas exits with earnouts, Adnexus and Novexel, both had approximately 15% of their deal value in downstream payments, some of which have already been paid.  The aggregate impact of deals like these on the above metrics and payout percentages for milestones is unclear.

As mentioned above, curation by the broader community would make this data far more interesting, and help us all begin to appreciate the impact of these earnout structures on the value of future deals.  Please feel free to email me, or post (anonymously if you’d like) to share further information on these deals. In particular, if I’ve got the data incredibly wrong. I’ll update the spreadsheet and repost.

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  • Thanks for herding the data and starting a discussion Bruce. I hope that others contribute data to your collection. 
    This information is critical to understanding whether/how “biobucks” can be part of a viable biotech business model. 
    The impact of the deal features (e.g. how milestones are structured) on payout chances would also be good to know.

  • Igor R

    While I don’t have much to add to the data (sorry), I am curious about what are some common milestones that payouts happen at. 

  • David Thomas

    Great topic. Here are a few more earn-out deals for your analysis:

    2006: Forest/Cerexa for $493M + $100M earn-out

    2006: Endo/RxKinetix for $20M + $95M earn-out

    2006: SuperGen/Montigen for $18M +$22M earn-out

    2006: Biomira/ProlX for $17.9M + $15M earn-out

    2007:Amarin/Ester Neurosciences for $14.2M + $17M earn-out

    2007: SurModics/Brookwood Pharmaceuticals for $40M + $22M earn-out

    2007: TopoTarget/Apoxis SA for $19.78M + $13.6M earn-out

    2007: Pfizer/BioRexis Pharmaceutical for $200M + $ND

    2008: Clinical Data /Avalon for $10M + $2.5M earn-out

    2008: Ligand/ Pharmacopeia for $59M + $15M earn-out

    2008: ViroPharma/Lev Pharmaceuticals for $442.9M + $174.6M

    2008: The Medicines Co./Curacyte for $22.6M +
    $16.3M earn-out

    2008: Sepracor /Oryx Pharmaceuticals for $50M + $20M

    2008: Roche / Piramed for $160M + $15M in earn-out

    2008: Abraxis BioScience / Shimoda Biotech for $15M +$ND

    2009: AstraZeneca/Novexel  for $350M + $75M earn-out

    2009: Biovitrum/Swedish Orphan for $514M +$60M earn-out

    2009: Endo/Indevus for $352M + $234M earn-out
    (Source: BIO and Elsevier Business Intelligence)

  • Even diving in deeper, I wonder how success in hitting milestones might be affected by the staging of the deal ie. preclinical-PhI vs. PhII-PhIII. Maybe by keeping a program in-house longer, you’re more likely to hit those early milestones due to better control of the program (vs. a big pharma calling the shots and not necessarily having the best insight or incentives aligned). Obviously it’s always a give and take with timing the deal and tons of different factors to consider!

  • Bruce

    Thanks David – this is great stuff, and appreciate the input/contributions.

    I’ll review these and add the appropriate ones.

    Some of these deals were considered but excluded because they involved a public target (Endo/Indevus), or didn’t have at least 20% of the total value as earnouts (Piramed, Novexel, Cerexa), or didn’t disclose (or I couldn’t find out) what the earnout portion was so hard to include (BioRexis, Shimoda). Perhaps its wrong to exclude deals where the value of the earnout is large, like Cerexa, but still less than 20% of the overall value. From the standpoint of overall returns, the 20% cutoff is meant to exclude deals where the earnout is not material to the return on investment (i.e., if less than 20%, then the upfront itself drives the vast majority of the returns).

    And Endo/RxKinetics was in the dataset (and no earnouts were paid).

    But thanks for adding these – this is precisely the kind of engagement I hope more readers provide.

  • Katrine Bosley

    It would be interesting to add one additional factor to the analysis – ie, does the post-acquisition operating model affect the probability of hitting milestones?  My sense is that milestones have a higher probability of being achieved when the team of the acquired company is kept together and continues on as part of the acquiror.  Even when integrated (or partially integrated, or kept “independent”) – the history is there and those people care about moving things forward.
    -Katrine Bosley

  • James A

    Couple more to help fill out the data set:
    7/24/07          Systems Medicine/Cell Therapeutics $20 upfront, $15 contingent

    4/24/07           Alliant/Sciele Pharma $122 upfront, $55 contingent                       

    12/11/06          Valera/Indevus Pharmaceuticals $120 upfront, $54 contingent

  • Anonymous

    The most common milestones are clinical stage advancements – IND filings, dosing first patients in Phase 2a, success in Phase 2 study (hitting primary endpoints), Phase 3 trial start, NDA submission, NDA approval, EU approval, etc… Thanks for the question.

  • Mark S

    Would also be interesting to understand what the rise of structured acquisitions has done for the value proposition for founders/early employees. Do these smaller upfronts still allow the team to capture significant value at the time of the deal? I worry that having so much value at risk could impact attractiveness of therapeutics as a space for founders going forward…

  • My data suggests that overall values are increasing over what we saw from 2005-2008.  The increase is significant in both up front and milestones, and actually has average up-fronts approaching what was once all in values.  Even though deals are structured now I would propose that attractiveness of exits are not being sacrificed – quite the opposite – up- fronts are similar to all-ins of five years ago with another 50% upside in earn-outs.