Article originally published in The Lawyer on October 14, 2010

Despite global economic conditions, deal-making by large pharmaceutical companies has remained relatively buoyant, say Daniel Pavin, Grant Castle and Alexandra Pygall.

Acquisitions in the pharmaceuticals sector are being driven by factors such as the need to replenish shrinking product pipelines, the need to maintain revenues as patents on top-selling products expire, and the strategic diversification of business lines and expansion into emerging markets.

Two general trends that may be observed, each of which is largely independent of underlying deal imperatives, are that buyers are becoming more risk averse and deal terms are becoming more complex. An illustration of the latter being driven by the former is the increasing use in life sciences M&A deals of structured or deferred consideration, payable only on the achievement of certain events or performance targets. Common terminology used in such acquisitions is ’earn-outs’, ’contingent value rights’ (CVRs) and ’contingent payment rights’.

Without a crystal ball, the outcome of future events crucial to the value of a target often cannot be determined, but the seller wants reward for its investment and the buyer does not want to pay over the odds. Contingent consideration structures based around milestones in the life of the target’s key products can help to bridge the ‘expectation gap’.

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