July 2, 2010 12:01 AM

Dealmaker of the Week: Philip Richter of Fried, Frank, Harris, Shriver & Jacobson

Posted by Claire Zillman

The contingent value right (CVR) doesn't come up in mergers and acquisitions often. When it does, it typically is found in pharmaceutical transactions, though not among publicly traded companies. Celgene Corporation's $2.9 billion acquisition of Abraxis BioScience Inc., announced Wednesday, is one of the few exceptions, thanks to the efforts of Abraxis lead counsel Philip Richter, a corporate partner at Fried, Frank, Harris, Shriver & Jacobson. Richter melded the interests of both public companies through a CVR that will give Abraxis shareholders an increased deal value should the merged company hit certain milestones or achieve specific revenue goals. 

CVRs are popular in pharma deals since there is a broad range of outcomes for the deals depending on the performance and regulatory approval of certain products, says Richter. These M&A instruments are used to bridge different views over the value of a target company. Public companies traditionally have avoided CVRs because the rights have to be registered as securities with the SEC and because public company stockholders are not as intimately familiar with target companies and thus have difficulty assessing the target company's value, according to this article from The Deal.

In the Celgene-Abraxis merger, the value of Abraxis hinged on the performance of its star drug, Abraxane, a Food and Drug Administration-approved breast cancer medicine that brought in $315 million in sales last year, accounting for 88 percent of Abraxis's revenue, as Bloomberg reported.

"Potentially, much greater value for Abraxis could be achieved," says Richter, who's represented Abraxis since 2005. The only way to complete the deal was with an arrangement that accounted for the huge market potential of Abraxane. Richter turned to a CVR. "Celgene understood that a creative transaction was needed to get this deal done now," he says, "This CVR aligned the interests of the buyers and sellers."

This isn't Richter's first time utilizing a CVR. In July 2008, he represented APP Pharmaceuticals, Inc.--once a unit of Abraxis--in its purchase by German global health care group, Fresenius SE. Fresenius paid $23 per share for APP, but the deal also included a CVR that would pay up to an additional $6 per share, or $970 million, if certain earnings targets were reached, according to The New York Times.   

This time around, Richter and his team structured the instrument so that the value of Abraxis will increase by $250 million if Abraxane receives FDA approval for treatment of nonsmall cell lung cancer; the amount jumps $300 million if Abraxane gets approved by the FDA for pancreatic cancer. Beyond this, the value could spike by an additional $100 million if Abraxane garners approval for pancreatic cancer on an abbreviated time line. Shareholders also will receive a cut of cash royalty payments should Abraxane surpass certain net revenue thresholds, according to a statement from both companies about the deal.

The purchase by Celgene was the right move for Los Angeles-based Abraxis because of Celgene's focus on oncology, Richter says. Celgene already markets best-selling pill Revlimid, a blood cancer drug.

Abraxis general counsel Charles Kim describes the deal as "very complex," but says such innovative dealmaking by Richter is nothing new. "He fights hard for his clients and is an incredible business adviser. That's why we've relied on him all these years."

Photo courtesy of Fried, Frank, Harris, Shriver & Jacobson

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