Hitting The Milestones: Update On Earning “Biobucks”

Posted December 8th, 2016 in Business Development, Exits IPOs M&As | Leave a comment

Earnout payments have been nearly ubiquitous in biotech M&A transactions for the past decade. Given the risks, costs, and timelines in drug R&D, these contingent value rights, or “biobucks”, play an important role in bridging the gap in valuation expectations between seller and buyer.

Their importance, and data around their likelihood of being paid out, has been the subject of at least three past blogs (in 2012 here, here; and in 2015 here).  It’s fair to say that the earlier 2012 datasets were very scant – but thanks to Shareholder Representative Services (SRS Acquiom), we’ve gotten a few updates since then.

Don Morrissey and his colleagues at SRS Acquiom have just released their latest report: the 2016 SRS Acquiom Life Sciences M&A Earnout Achievement Update.

This update includes 104 life science deals representing over $62.5B in total value.  This includes $27.5B in earnouts across 700 milestone payments in the life sciences – just about evenly split between biopharma and medtech.

For those new to these data, SRS Acquiom is hired by sellers to keep tabs on the buyers’ progress, including things like escrows and milestones. Because of this, they have insight into which milestones are “supposed to have been met” over time and can classify them as hit, missed, delayed but likely, or delayed but unlikely.

This September 2016 update includes over 230 individual milestone events and $6.3B in earnout consideration from deals that have closed since 2008. This represents nearly a 2x increase in the number of milestone events in the dataset than the spring 2015 report, and 10x more than in the 2012 report. So its starting to feel like a robust dataset.

In line with the general conclusion from prior blogs, “roughly a third” of all M&A milestones that were expected to be met by now have been paid out. Here’s the graph for all sectors:


Here are a few specific take-aways:

  • Over time, we’ve seen some downward pressure on rate of milestone achievement. Numerically, SRS Acquiom has seen a downtick versus the 2015 dataset (38% vs 30% overall have been paid to date, in the 2015 and 2016 datasets respectively). As time progresses this should be expected, given the dependency of future milestones on the success of past ones.
  • BioPharma earnouts continue to deliver: these deals have hit or plan to hit a delayed event in 40% of the milestones that have come due in the current 2016 dataset, representing 43% of the value of the earnouts payments. Slight differences from MedTech exist in the dataset, but hard to know their significance.
  • Bigger deals are more likely to meet their milestones. Analyzing only the 58 milestones associated with BioPharma deals with greater than $50M in upfront payments, 54% of them have been paid or are likely but delayed. This reinforces the intuitive expectation: when Pharma is more serious about its conviction on deal (i.e., willing to pay more), it’s more likely to actively pursue it through development – triggering more milestones. For deals where the upfront is tiny, these milestones can just be “fliers” that Pharma gives away to get the deal done but gives up on progress quickly.
  • Early stage deals have seen high rates of milestone delivery. Nearly 60% of the IND and Phase 1 stage milestones that have come due have been paid or are delayed but still likely to be met. This bodes well for early stage deal-making. And is also intuitive: if Pharma is willing to buy a preclinical program rather than wait for data, it must be excited about progressing it into early development. With preclinical rates of success in drug R&D in the 60-80% range (depending on data source), one would expect these milestones to reflect underlying attrition rates – this appears to be trending toward the case (with relative few milestone events).

As in the past, the report covers various deal terms and contract issues as well.  One that leaped out at me: serious disputes about milestones have occurred in 36% of deals that have already met at least one milestone, and these disputes typically involve disagreements over progress and changing plans.  This is up from 30% in the 2015 report – hard to know whether that’s noise or if more disputes are indeed on the rise.

For further discussion about life science earnouts and this latest update, I encourage you to attend a live presentation of the study’s findings on December 14th at Goodwin’s Boston office. Michael Gilman, Atlas EIR and founder/CEO of both Padlock Therapeutics and Stromedix, Don Morrissey of SRS Acquiom, and Kingsley Taft of Goodwin will lead the discussion. For more information and to RSVP click here.


Celebrating BioPharma: Of Triple Crowns And Unicorns

Posted December 5th, 2016 in Exits IPOs M&As, VC-backed Biotech Returns | 4 Comments

Everyone wants to invest in a Unicorn, or so it seems. These are the investments that legendary track records are made of. But truth be told, Unicorns don’t always lead to the biggest pots of gold at the end of the investment rainbow. David Coats at Correlation Ventures recently posted a great piece that frames up the topic nicely: “Unicorns are Overrated. Triple Crowns are Better.” 

David came up with the latter term – Triple Crowns – to focus attention on deals that make great returns.  Triple Crowns have three characteristics: realized investment multiples of at least 10x, realized IRRs of at least 100%, where VC’s invested a meaningful amount of capital (>$1M).  Like Unicorns, these deals are rare, but Triple Crowns even more so – less than 1.4% of all investments that have been made and exited over the past decade.

While Unicorns get lots of media attention for their astronomical paper valuations, it’s the realizations of Triple Crowns that we really seek as investors. David states this very clearly in the post:

Ultimately the interim, or even ultimate, valuation of venture-funded companies is not what matters. It is the cash-on-cash multiples and IRRs that we realize on our investments.

David’s blog – and a great Venn Diagram – is based on 17,432 venture financings in the Correlation Ventures database that went into companies which have “exited” from 2006 through 1Q 2016. For purposes of this analysis, Correlation defined a Unicorn as a company that achieved at least a $1B valuation either privately or immediately after lock-up from an IPO (i.e., 6-9 months post IPO median valuation). There were 247 Triple Crowns and 459 Unicorns, with only 96 overlapping as both.  In fact, David highlighted the surprising lack of overlap: more than 70% of all Triple Crowns weren’t Unicorns (meaning those deals drove great returns at more modest valuations), and more than 80% of the Unicorns didn’t deliver Triple Crown-like returns despite their >$1B valuations.

But these data cover all of the sectors of venture capital, rather than just the 11% that went into BioPharma.  David was kind enough to share that data with me. Here’s the run down:

There were 1915 BioPharma financings into companies that have exited from 2006 through 1Q 2016.  Of these, there were 43 Triple Crowns and 54 Unicorns, with only 8 deals were overlapping the two groups.


To get a sense of the relative frequency of these events, the charts below capture both the share of each sector’s investments that end up as Unicorns and Triple Crowns (left), as well as the share of each exit type that came from BioPharma deals (right).


A couple observations:

  • BioPharma has delivered roughly the same rate of Unicorns as the rest of venture (2.8% vs 2.6%, respectively), but over 70% higher rates of Triple Crowns (2.2% vs 1.3%). This latter difference is a big delta.  This relative outperformance for exits that generate greater returns is in line with last month’s post on biotech venture and its myths.
  • The lack of overlap between Triple Crowns and Unicorns is even more pronounced in BioPharma than the rest of venture. Only 8% of the exits are both (vs 14% in the rest of venture).  Stated another way, more than 80% of the Triple Crowns weren’t Unicorns.  Early stage biotech’s often have great return curves without achieving Unicorn status.  This lack of congruence may also reflect the lack of growth capital in BioPharma in the private sector: most multi-billion-dollar Unicorns in the biotech world get public and grow into those valuations.

As David concluded in his original post – which I can’t state any better:

My hope is that a re-focus on realized returns by financing round will help us return to more capital- efficient investing and management. Shouldn’t we celebrate the entrepreneurs and VCs, for example, in an investment that generates a 15X return on a $200M exit more than we do an investment in a Unicorn that generates a 2X return?

Thanks to David and the team at Correlation Ventures for sharing these data.