Examples of Milestone-Based M&A
In the case of Sanofi and Genzyme, the final value of each CVR depends mostly on development of Genzyme’s late-stage mAb therapeutic Lemtrada for multiple sclerosis but initially on reaching production volumes for the marketed enzyme-replacement therapies Cerezyme® and Fabrazyme® in 2011. This first milestone would have earned Genzyme shareholders $1 per CVR but was not met.
Former Genzyme shareholders will receive $1 per CVR if Lemtrada is approved by the FDA before March 31, 2014; $2 per CVR if sales total $400 million during specified periods; $3 per CVR if sales total $1.8 billion during any four consecutive calendar quarters; $4 per CVR if sales total $2.3 billion during any four consecutive calendar quarters; and $3 per CVR if sales total $2.8 billion during any four consecutive calendar quarters. CVRs will be linked to net global sales, and any four quarters used to obtain one CVR cannot be used in future CVRs. If the second sales-related milestone is achieved despite not achieving the regulatory milestone, CVR holders will be entitled to receive an additional $1 per CVR.
Even though investors of the former Genzyme missed out on earning their first CVR, linked to manufacturing milestones, they heard encouraging news from Sanofi in October and then November 2011, when the company trumpeted success with Lemtrada in two Phase III trials.
Back then, Sanofi said it would apply during Q1 of this year for FDA and EU approvals for Lemtrada, which is already on the market as a leukemia drug, sold under the name Campath. The applications have yet to occur, as Sanofi is working to publish final late-stage results in April. One indication that a launch is still planned came March 10, 2012, when the company posted an opening for the new position of director-MS global marketing-Lemtrada.
During their acquisition talks, Genzyme had projected peak Lemtrada sales of $3.5 billion a year, while Sanofi estimated about $700 million. The companies resolved their difference by agreeing to CVRs.
Another example of an acquisition made with CVRs is Shire’s purchase of FerroKin. The deal was driven by FerroKin’s Phase II iron chelator, FBS0701. It is designed to treat iron overload following blood transfusions.
The CVRs in Shire’s agreement with FerroKin were linked to clinical development, regulatory, and commercial milestones. FBS0701 has been granted orphan drug designation in the U.S. and Europe. FerroKin had projected first market launch of the drug could potentially be in 2016. Estimates suggest the global market for iron chelation is currently worth over $900 million and growing, according to Shire.
The more products a company has on the market, the more buyers will pay to pick up that firm. But companies pursuing biopharma M&A deals are hammering out more than the price in cash or shares these days. Buyers and sellers also have to come to terms on the potential value of pipeline drugs.
Investigational candidates further along in development will boost the purchase price up. But to hedge their risks, acquirers will also tie more milestone-based fees to their agreements. The financial markets will have to recover significantly to give early-stage companies, and their pursuers, more capital to spend more freely.