March 15, 2023

Bridging Valuation Gaps in Life Science Deals Through Spin-Offs & CVRs

Life science targets with clinical or near-clinical products often come with early-stage pipeline assets, the value of which is dependent on the achievement of a development or milestone that remains uncertain. The target may see great potential in these pipeline assets, but large pharma buyers who are primarily interested in the clinical assets are often not willing to agree to a purchase price that fits the target’s valuation expectations for these pipeline assets.

Enter two deal structures that can bridge this gap: spin-off mergers and CVRs. This Freshfields blog discusses the pros and cons of each option in public M&A. This excerpt addresses the business reasons why a buyer might want to consider a spin-off:

Spin-off mergers are often considered by buyers in the biopharma industry who wish to acquire a target company’s clinical or near-clinical stage products, but who are not interested in its early-stage products. They provide a means for the buyer to leave behind the assets it does not wish to own (or to pay for) and for the target shareholders to continue to realize value from those assets. This is especially true for buyers facing patent expirations, who may be seeking to supplement their portfolios with revenue-generating in-market or near-market assets without the burden of cost-intensive pipeline products.

CVRs represent the right of the target’s shareholders to receive payments when specified milestones are achieved and are the public company equivalent of the earnouts often used to bridge valuation gaps in private deals. The blog acknowledges that both alternatives present their own challenges, but predicts that these structures may start to have more widespread appeal—outside the life sciences industry—as volatility and uncertainty exacerbate valuation gaps.

– Meredith Ervine