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."
