Earn-outs, where are we today? A smart and shared attempt by Bruce Booth, Partner with Atlas Ventures

Just to comment on Bruce's Feb. 21 blog on acquisition earn-outs. I must admit that many times Bruce is "right on the money" and I recommend all biotech aficionados to read his blogs. I do!

(I recommend the one on the relative robustness of data from academic labs…. - it puts in perspective the academia - early-stage VC relationship and respective high expectations and should help tech transfer offices in their mission to commercialize. That was Bruce's substantiated and constructive message)

Acquisition earn-outs have become more and more common in recent acquisition terms between large biopharmas and biotechs. Investors dread these types of acquisition as they don't immediately provide full liquidity of their assets and there is a high level of uncertainty as to whether all payments will be made since they are driven by onwards milestones. I have personally been involved as an investor in two earn-out deals. For one, we capture the full value (thanks to the company team), for the other one, we only captured one third of the full deal value (team did well but the science did not…!). It happens and if an investor gets to upset on that and blame it on the company leadership (a trait in certain countries…), well, he might be better off investing in warehousing…!

Below is Bruce's analysis and full credit goes to him . Not too bad it seems…I don't want to speculate as this is not a linear situation here but how about 40 (full) / 60 (partial but how partial?)? Just a gut feeling…and I am a pessimistic/positive guy.

Bruce says (quoted): " 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."

Celgene to Acquire Avila Therapeutics

This acquisition is in our views a landmark deal and a strong validation of the emerging trend in covalent (irreversible) interaction between a small molecule and its putative pharmacological target. It is fair to say that in the past, a vast majority of pharmaceutical medicinal chemists have been reluctant to undertake the development of covalently-bound small chemical entities fearing lack of specificity and the associated long-term side effects (off-target effects). For years, compound libraries have been selected to remove covalent molecules and the covalent nature of the molecule/target interaction considered a red flag during the Hit to Lead phase.

Avila has mastered the structure activity relationship (SAR) work centered around covalent/reactive molecules and consequently allowed a new "class" of potent drug molecules to emerge. Applications of this new approach are broad across all major therapeutic areas.

We wish Celgene the best of success in exploring this approach in late-stage clinical trials as it may open new avenues across the medicinal chemistry world.

Bristol-Myers Squibb to Acquire Inhibitex

As we anticipated in our December review of the Gilead-Pharmasset deal (see Media Coverage at www.alliance4growth.com), the hunt for new anti-HCV drugs is on with this acquisition - In all fairness, we weren't the only ones to anticipate other bold, high premium deals in this area -

BMS pays a quarter of what Gilead had to "bid" to win the Pharmasset contest. This can be explained by the fact that the Pharmasset program has completed Phase II and initiated Phase III whereas the Inhibitex compound is at the late stage of a Phase 1b study and a more regulatory-friendly more potent isomer is yet to reach the clinic.

Two comments come to mind:

1- it's not over and we can speculate that the Achillion and Idenix business development groups and leaderships are fairly busy at this time. If I were to speculate further, I would not be surprised that a couple of Japanese companies are in the hunt.

2- once again, this hunt exemplifies the fact that the big pharmas are quicker at addressing threats than at seizing new opportunities - probably related to their internal decision process and who from marketing or R&D has a better shot at convincing leadership.

Biogen Idec and Isis Pharmaceuticals Announce Global Collaboration for Antisense Program Targeting Spinal Muscular Atrophy

Well, well, well…

Four in a row over the last month:

·         11/29/11: PTC-Roche licensing deal in Spinal Muscular Atrophy;

·         12/15/11: Shire-Atlas Venture alliance in rare diseases;

·         01/03/12: Enobia acquired by Alexion; and,

·         today:  Isis-Biogen Idec licensing deal in Spinal Muscular Atrophy 

Have orphan diseases ever attracted so much interest from Big Pharma and Venture Capital?

Alexion to Acquire Enobia Pharma Corp. and First Potential Treatment for Patients with Hypophosphatasia (HPP)

Well, a $1 billion acquisition, not so unusual in the life sciences industry arena...

…but, in fact, quite rare!

Let's consider this: a Phase II candidate… in an "ultra-rare" indication, Hypophosphatasia (< 1/100.000 prevalence according to Orphanet).. $1 billion... the largest, largest ever deal in orphan diseases.. for a single drug candidate.

Humm…this is all good BUT what if the actual driver in this acquisition is in fact a far larger, blockbuster-type underlying indication such as…osteoporosis? 

Well, just an idea! 

Websites:

Alexion Pharmaceuticals

Enobia Pharma