Milestones mitigate risk in biotech deals

Milestone payments are becoming an increasingly familiar aspect of many biotech deals, notes Reuters, as buyers try to mitigate the risks inherent with big purchases. Take Celgene's $2.9 billion buyout of Abraxis; the biotech giant set aside $650 million in milestone payments if Abraxis' key drug Abraxane hit certain goals. "These structures are a great way for buyer and seller to share the risk that's related to drug development," analyst Brett Skolnik tells Reuters. Milestones also encourage buyer and seller to look beyond the merger, making it more likely the deal will be beneficial to both sides in the long term.

Such payments help bridge the valuation gap between sellers who may think their companies are worth more than the market indicates, and buyers who are concerned about getting burned by an underperforming acquisition. "They hedged their bet, somewhat, by putting about 20 percent of the value of the deal in the form of milestone payments. That's some protection that keeps the overall valuation in moderation in case a goal fails to be met," an unnamed investment banker tells Reuters. So far this year, 70 biotech deals have included milestone payments, compared with 61 deals this time last year. The highest volume of milestone deals came in 2007, when 259 deals included the stipulation.

- read the Reuters report for more

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