So Raleigh’s Sprout Pharmaceuticals sells itself for $1 billion plus royalties in the future within 48 hours of winning approval for its “little pink pill” – is this a Jackie and the beanstalk story with success sprouting overnight?
By the way, initial reaction on Wall Street to Valeant’s buy is very negative.
Shares in Canada-based Valeant tumbled $15.85 a share to $229.06 in trading Thursday after the news broke.
The deal isn’t a fairy story. Valeant will pay $500 million up front, assuming it does close. Another $500 million comes early next year. And it may not have a happy ending if Wall Street investors are an early indicator of where the deal may be headed.
But in the sense of it happening overnight – that’s highly unlikely, says Jim Verdonik, one of the triangle’s most experienced deal-making attorneys for startups who works at Ward and Smith, P.A. in Raleigh.
“Most overnight success stories actually take a long time,” Verdonik told WRAL TechWire shortly after the Valeant-Sprout deal was announced. “So, I doubt the founders think this happened quickly.”
CEO Cindy Whitehead says she and the other 33 employees at Sprout will stay on with Valeant and remain based in Raleigh after the deal closes.
Verdonik speculates that privately held Sprout, which began raising $50 million from investors even before an FDA subcommittee voted to back its Addyi drug – the “female Viagra” – in June, has been in talks to be sold before the FDA granted final approval on Tuesday.
“A deal like this has probably been in discussions for quite some time,” Verdonik explained.
“A billion dollar drug license deal I did took over a year and a half from the time the client started talking to the acquirer to the time they signed the deal. That deal was earlier stage – the acquirer did the Phase II clinical trial and obtained FDA approval. So, they received a $20 million upfront payment and each time something good happened, my client was paid a milestone payment. They are still being paid substantial royalties. The royalty stream was projected at between $1 billion and $2 billion. To the extent a deal is based on royalties, you want to pick a buyer who can maximize the royalty stream.”
Sprout very well could have had multiple suitors given the uniqueness of its drug. And Verdonik said the Sprout team had to find the right “partner.”
“You don’t want waste too much time focusing on a potential buyer who is not a good fit. Investors often influence decisions about which company to sell to,” he said. “Often, an investor has had other portfolio companies that did successful deals. They know the people at the buyer and can get some comfort that the potential buyer is serious.”
Obviously, Valeant was dead serious. And Valeant is getting to know Raleigh, having purchased Salix Pharmaceuticals earlier this year for $11 billion.
Private means private
Because Sprout is a private company, it isn’t required to disclose much about its own dealings, so just how long Sprout was talking to buyers remains shrouded.
However, the Wall Street Journal did get a tip and published a story ahead of the Valeant-Sprout announcement, citing an anonymous source.
“Sprout is a private company. Being private is a big advantage, because they do not have to say much in public about their fundraising or their product development,” Verdonik pointed out. “Sprout filed a Form D with the SEC to report their $50 million capital raise. That’s all they are required to do.”
From June through August, Sprout lobbied aggressively to win FDA approval – a process for which it has been criticized. But that public pushing went on at the same time the private deal-making talk likely went on.
“Since Sprout is a private company, Sprout could have signed a deal earlier that was contingent on getting FDA approval. I don’t know if there was an earlier agreement between Sprout and Valeant, but that is a possibility,” Verdonik explained.
“Timing of announcing the deal usually depends more on the timing needs of the public company that is the buyer than on the seller.”
Sprout had tried and failed before to win FDA approval after acquiring the rights to the drug. But along the way, Verdonik said it’s likely Sprout was laying the groundwork for possible deals.
“After a company secures its patent position, it often identifies companies in the women’s healthcare industry and begins to find out what potential buyers want,” he said.
“Sprout may have been talking with Valeant and other potential buyers when they were designing their clinical trials to produce the best data that would ensure a high price. That could have been years ago. It’s impossible to say when Sprout narrowed its discussions from several women’s health companies to Valeant.”
After the champagne corks popped with the FDA news, Sprout faced the prospect of turning a dream into a reality. That $50 million was raised in part for commercialization, which would have included a jump in employment from 34 to 200.
The work would not have been easy. Now, Valeant can help with the heavy lifting.
“Once you get FDA approval, the skill sets required to achieve further success change,” Verdonik said. “M & D is replaced by M & M – Manufacturing and Marketing. M & M takes a lot more resources and different skills from R & D. Some founders fall into the trap of thinking they can do both. That transition is a lot harder than some people think.”
For Sprout, the FDA approval didn’t represent the end-game. And Whitehead says she intends to keep driving Addyi. The determination to keep pushing earned praise from Verdonik, who has worked with many founders and startups since the days of the Internet boom two decades ago.
“I congratulate Sprout’s founders for one thing,” Verdonik said “Founders sometimes move the goal posts. People often start with one goal and then after achieving that goal, they set other goals. Sometimes just admitting that you won the game and its time to move on is difficult. The Sprout team seems to have avoided the temptation to keep playing the game until they failed.”
Right now, it appears Sprout and company are growing quickly into a full-grown success.