As pharma companies become even more risk-averse, biotechs that have been getting acquired are increasingly finding that for shareholders to get the full deal value, their assets must reach their promised potential.
Two major deals this month — Pfizer’s up to $7.3 billion Metsera buy and Roche’s purchase for 89bio worth up to $3.5 billion — spotlight an increasingly common tool in pharma M&A: contingent value rights (CVRs).
CVRs or similarly structured milestone payments are now a mainstay among both private and public takeovers. Of the 39 biopharma acquisitions so far this year tallied by
Endpoints News
, 19 have included a CVR or milestone-related payments.
Large drugmakers are demanding deals with less risk, and biotechs have to comply. Smaller biopharma companies have struggled to stay afloat in a difficult funding landscape and volatile equity markets. In recent years, valuations have dropped, and they’ve had to lay off staff, prune their pipelines and shut their doors.
Broadly speaking, “valuations [a few years ago] were more fulsome or higher,” said Jay Hagan, a biotech veteran who led Regulus Therapeutics to a CVR-heavy exit to Novartis in April. The gap in valuation expectations between buyers and sellers was lower a few years ago versus “markets that are more challenging, like we’ve experienced over the last 18 months or so.”
“Even mid-stage assets come with a lot of risks and some recently acquired assets or platforms didn’t hold their promise in big pharma’s hands,” Daniel Parisotto, a healthcare investment banker at Oppenheimer, said in an email. “Big pharma is getting a bit more cautious. In addition, we have seen very milestone-heavy deals for Chinese assets and those dynamics surely influenced some of the recent US deals.”
Many of the acquisitions this year have been for clinical-stage assets, meaning they still carry the risks associated with drug development and commercialization, according to Kevin Eisele, a healthcare banker at William Blair.
It’s also more common now for publicly traded companies to use CVRs, which were “rarely, if ever, used during 2020-2022,” Eisele said. There were just two big public company buyouts with CVRs in those years — Eli Lilly’s deals for
Akouos
and
Prevail Therapeutics
, according to Raymond James banker Brian Gleason.
When drugmakers buy companies that already have a drug on the market, those deals typically don’t have CVRs, as evidenced by the buyouts of Intra-Cellular Therapies by Johnson & Johnson, Verona Pharma by Merck, and SpringWorks Therapeutics by Merck KGaA. Sanofi’s $9.5 billion acquisition of Blueprint Medicines earlier this year had a $400 million CVR tied to a pre-commercial program, not Ayvakit, the company’s medicine for systemic mastocytosis.
Even if CVRs don’t make it into the final deal, they’re likely mentioned at some point in discussions.
Jacqueline Mercier, a lawyer at Goodwin Procter, estimated that more than 80% of all biopharma M&A transactions involve conversations around CVRs at some point. Mercier advised Vigil Neuroscience on its $470 million upfront exit to Sanofi. The deal included another $130 million in potential future payments.
In an email, former Vigil CEO Ivana Magovčević-Liebisch said CVRs can be a “helpful tool to bridge the gap in valuation.” But these deals also come with cons. “The drawback is that once the acquisition is complete, the company relinquishes control over execution and development timelines which can impact milestone achievement and payment,” she said.
Sanofi has employed the CVR function multiple times this year. Beyond Blueprint and Vigil, it also did so with vaccines startup Vicebio.
“As a seller, you want to make sure that you give yourself enough margin because you’re losing control of the program, so you’re not in control of those timelines. In terms of the timelines of those, that is probably one of the easier points to discuss in the deal,” Giovanni Mariggi, partner at Vicebio investor Medicxi, said in an interview.
CVRs used to be viewed as a signal that the buyer got a heavy discount, Mercier said, but they are now considered “more achievable and more meaningful.” They’ve become more of a “package deal” with the upfronts.
IDRx, developer of a gastrointestinal stromal tumor drug, got a package deal when it was acquired by GSK in January. About 85% of the deal value came via an upfront payment of $1 billion. Shareholders likely weren’t going to support a deal with an upfront payment of less than $1 billion, former IDRx CFO Brad Dahms told Endpoints. The company was days away from revealing its IPO pitch, but the GSK deal was more attractive.
“They can make transactions possible that might not otherwise happen as they can align long-term value creation with shareholder interests and a buyer’s strategic goals,” Araris CEO Dragan Grabulovski said.
Taiho bought the antibody-drug conjugate startup for $400 million upfront in March, but Araris shareholders could get another $740 million if milestones are met.
Nicholas Galakatos, global head of Blackstone Life Sciences, said they can “provide a mechanism for win-win outcomes” for buyers and sellers. They allow buyers to manage clinical and commercial risk, and sellers could get value down the road, if the milestones are achieved.
Not all companies meet the predetermined milestones, though, meaning they have to be comfortable with the risks. That was evidenced this week when Harmony Biosciences’ fragile X drug failed a Phase 3 study, likely throwing into question a bulk of the $140 million in CVR payments that are part of Harmony’s 2023 acquisition of Zynerba Pharmaceuticals.
