Biotech VCs wait for big checks from string of buyout deals

Holding most of the cards in M&A deals, drugmakers have increasingly scored biotech buyouts with much of the payments to startup investors delayed unit certain goals are met. The danger of the deals is that investors face slim odds of raking in all the milestone payments tied to the buyouts, as many of the programs that must succeed in order for payments to be made often fail. One biotech backer from Atlas Venture has taken a stab at calculating the actual earnings from a sample of such deals.

Plucking numbers from a variety of public sources and data from individuals, Atlas Partner Bruce Booth writes that 24% of milestone payments were actually received from buyout deals involving drug developers from January 2005 to December 2009. Those payments amounted to $1.7 billion to biotech investors, and some of the milestone money remains on the table as related programs advance, but the figure illustrates how the big "potential" buyout figures seldom become real dollars. His research shows that 40% of the milestones from those 35 deals could be collected, yet 37% of the payments are out the window because programs to which they are tied have been tossed.

The so-called "biobucks" tied to these deals are often overlooked in the press after the deals are closed, but biotech investors obviously pay close attention to how much money they will actually receive from M&A events. With VCs dropping from the ranks of potential sources of capital, hope that the "biobuck"-laden deals bear fruit for these investors and entice them to make more bets on biotech startups. With IPOs hard to come by for small drug developers, drugmakers might offer venture backers their best shot at returns on their biotech investments.

Booth and his firm are among the ranks of VCs still waiting for big checks from drugmakers that have bought their portfolio companies. In the past two months, the VC firm has seen two of its drug developers--Stromedix and Avila--scooped up in deals that provided only part of the total payouts upfront. For instance, Biogen Idec ($BIIB) snapped up Stromedix for $75 million upfront and the lion's share of the potential payout, $487.5 million, tied to the success of the startup's fibrosis programs. Booth is asking his counterparts in the industry to help him compile a more complete picture of how much in the way of biobucks they are actually pocketing.

- get more from Booth's blog

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