Tuesday, February 28, 2012

Real math on bio-bucks….

The LifeSciVC takes a look at the payout rates on pharma partnerships.

We all know that pharma-biotech partnerships & acquisitions usually launch with press releases touting huuuuge potential financial implications, with the eye-popping figures referred to as "bio-bucks" - headline figures that probably won't ever be completely reached. ("Bio-bucks" aren't limited to pharma-biotech partnerships. For example, LIFE bought Ion Torrent for a headline figure of $725M, which amounted to $350M at closing, with $375M contingent on performance. (Of which LIFE might have already made good - though some reports say the milestones are based on future (2012) revenues.))

The link at the top of this post is some very clever analysis of actual versus expected payout since 2005. In summary:

-38% of the announced value is captured up front.

-the remaining 62% of value is split among paid (24%) the amount still possible will ultimately , still possible (40%), and canceled (37%).

-so, $4.3B of a possible $7.0B in milestones have been resolved - either paid or negated, with 40% achieved and 60% categorized as "nevergonnahappen." (Since the deals analyzed reach cover the 2005-2009 period, you could make a strong case that the likelihood of payout on not-yet-achieved milestones is likely much, much lower than 40%.)

-If you optimistically assume that milestones TBD follow this same pattern, $1.1B of milestones will likely be realized, and $1.7 are nevergonnahappen.

Extrapolating this:

38% paid upfront
25% milestones likely to be paid.
37% "vapor," likely nevergonnahappen.

That's actually a LOT better than I expected. To think that most deals are likely to pay out 63% of their headline value is a surprise to me.

Accounting for the time value of money makes for a simple rule for pharma acquisitions ~50% of value realized on a net present value basis, 50% vapor.

(Note: connected to my post of 2 days ago regarding changing business models for early stage biotech, I suspect that the asset-lite, specialized biotech companies being developed may experience a better milestone payout rate, since their specialization would suggest more focus and understanding of milestones in a given therapeutic area. However, a by-product of the specialization is that there are likely to be less deals; more focus = a smaller target market of potential acquirers.)

What I would be curious to know is how milestones fall into the nevergonnahappen category. How much of the milestone failure is related to management of the acquiree taking their eye of the ball post-deal? How much of the milestone failure can be attributed to cultural & communication divisions between pharma and biotech? How much of the failure is related to pharma screw-ups and changing priorities? And finally, how much milestone failure can be explained by pharma being snookered by high expectations into buying crap assets. Any guesses?

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