Advanced Private Equity Deal Structuring in Biotech & Pharma (U.S. & Europe)

Private equity (PE) transactions in the biotechnology and pharmaceutical sectors blend intense scientific risk with sophisticated financial engineering. These deals require not only valuation methods that capture uncertain drug outcomes, but also fund structures and leveraged buyout (LBO) techniques tailored to life sciences businesses. In this explainer, we dive deep into how PE firms value biotech/pharma targets, how PE funds are structured (GPs, LPs, carry, vintages, co-investments, and continuation vehicles), and the key financial engineering maneuvers used in PE-backed biotech deals.

We also illustrate concepts with real-world 2024–2025 examples, from transatlantic biotech buyouts to creative funding collaborations. The goal is a rigorous, Economist-style overview for a financially literate life-sciences audience – think biotech CFOs, business development leads, or scientist-founders navigating M&A.

Rigorous Valuation in Biotech/Pharma PE

Biotech and pharma companies pose special valuation challenges. Many biotechs have little or no revenue yet can be “worth” billions based on their drug pipelines.

Traditional metrics like EV/EBITDA or P/E often break down because earnings may be negative or years away. PE investors therefore rely on careful forecasts and scenario analysis:

Discounted Cash Flow (DCF) & Risk-Adjusted NPV

A DCF remains a cornerstone, but it must be augmented for biotech risk. Analysts often use risk-adjusted net present value (rNPV), assigning probability weights to a drug’s success or failure at each R&D stage. Cash flows are modeled for each scenario (e.g. drug approval vs. trial failure), then probability-weighted and discounted. This approach explicitly accounts for the binary outcome distribution of drug development.

For instance, a Phase III asset might have, say, a 50% success probability; an rNPV model will value it at, essentially, 0.5 × (NPV in success scenario) + 0.5 × (NPV=0 in failure). One can either use a high discount rate (the “VC method”) or use lower discount rates but explicitly model success/failure probabilities – or both.

In practice, PE firms often apply steep discount rates to early-stage biotech cash flows (e.g. 12–28% for very risky preclinical assets) and somewhat lower rates (10–20%) for later-stage or revenue-generating pharma companies. The upshot: valuation is an expected value of many outcomes, not a single deterministic forecast.

Comparables and Precedent Transactions

PE dealmakers still look at market comparables (public biotech valuations) and precedent M&A transactions for sanity checks. However, these are used with caution in biotech. Biotech companies are highly idiosyncratic – one cancer drug startup can’t be directly “comped” against another if their science and prospects differ radically. Traditional multiples like EV/Revenue or EV/R&D spend might be referenced; for example, some investors benchmark value as a multiple of cumulative R&D investment for lack of better metrics.

Precedent deals (e.g. licensing deals or acquisitions of similar drug programs) are often more informative: if Big Pharma paid $X for a Phase II oncology asset last year, that sets a rough bar for similar assets. In 2024, for instance, Vertex Pharmaceuticals agreed to acquire Alpine Immune Sciences for $4.9B (one of the year’s largest pure-biotech buyouts) – a deal closely watched as a pricing benchmark for immunotherapy platforms. Still, comparables serve more as support rather than primary valuation tools in this sector.

Downside Scenario Modeling

Given the binary risks, PE firms rigorously model downside cases. A single failed trial or regulatory setback can erase immense value overnight in biotech. (For example, even a $100B+ pharma giant like Bristol Myers saw ~40% of its market cap vanish in 2016 after one drug trial’s disappointment.) Accordingly, PE investment memos stress scenario analysis: e.g. a base case assuming lead compounds succeed, versus a downside case where key programs fail and only salvage value (patents, cash, or a Plan B pivot) remains.

Downside modeling often incorporates go/no-go decisions – if trial results due next year are negative, can the company cut burn rate or monetize other assets to avoid bankruptcy? PE firms might also evaluate break-up or liquidation values (how much the pipelines, tech, or cash on hand would fetch if the company were wound down). The focus is on capital preservation in worst-case scenarios, given the high failure rates.

In practice, this means PE term sheets may be structured to mitigate downside risk (for instance, via contingent pricing, as discussed later with earn-outs). In sum, valuation in biotech PE is a blend of science-based forecasting and classic DCF, buttressed by reality checks from comps and strict downside planning.

Private Equity Fund Structure and Mechanics

Every PE deal in biotech sits within a larger fund structure that dictates how capital is raised, managed, and returned. Understanding fund mechanics is crucial:

GPs, LPs, and Carried Interest

A PE fund is typically a limited partnership. The general partner (GP) is the PE firm’s entity that manages the fund, and the limited partners (LPs) are the investors (institutional backers, endowments, etc.) who commit capital. LPs agree to lock up their money (usually ~10 years fund life) and in return, the GP deploys that capital into deals. The GP usually contributes a small percentage of the fund (often 1–5%, “skin in the game”) alongside LPs.

The GP’s incentive is carried interest – a share of the profits (commonly 20%) the fund earns, but only after LPs receive a preferred return. Most PE funds have an ~8% annual hurdle rate for LPs; the GP doesn’t get to pocket carry until the LPs have achieved at least an 8% return on their invested capital. After that point, profits are split (often 80% to LPs, 20% to GP) – aligning GP incentives with performance.

Fund agreements spell out a waterfall detailing this split: first return of capital to LPs, then the 8% pref to LPs, then a GP catch-up where the GP may take the next slice of profits (to “catch up” to the 20% share), and finally the remaining profits shared 80/20 (LP/GP) going forward. This structure motivates GPs to deliver strong exits, not just collect management fees.

Fund Vintage and Lifecycle

PE funds are raised in vintages (e.g. a “2021 vintage fund”) and follow a life cycle: typically a 5-year investment period (to find and make investments) and another ~5 years to harvest and exit those investments. Biotech-focused PE funds may require flexibility on this timeline – drug development can outlast the standard fund life. This has led to innovations like fund extensions and continuation funds (discussed below) when a promising asset needs more time beyond the fund’s term.

Vintages matter for benchmarking; for example, a 2018 vintage life sciences fund that invested at market peaks will be compared against other 2018 funds’ performance.

By 2025, many 2014–2015 vintage funds (which rode the biotech boom of the mid-2010s) were nearing end-of-life, prompting either exits or creative extensions.

Co-Investments

In large biotech/pharma deals, GPs often invite select LPs to co-invest alongside the main fund. A co-investment is a deal where an LP puts additional money directly into a specific company, usually on the same terms as the fund’s investment (but without paying extra fees or carry). For the GP, co-investments are a way to secure more equity for a big acquisition than the fund alone could supply, and to deepen relationships with LPs by giving them fee-free upside. For LPs, it’s a chance to upsize exposure to an attractive deal and improve overall returns (since co-invest bypasses the 20% carry).

For example, when Sanofi sold its consumer-health unit Opella in 2024, the €16 billion deal was so large that lead PE sponsor Clayton Dubilier & Rice (CD&R) brought in co-investors – including Bpifrance (France’s state investment bank) taking ~2% equity alongside CD&R (reuters.com).

Such partnerships can be crucial in mega-deals to spread risk and financing needs. In biotech growth investments, co-investment by LPs (or even by strategic partners like pharma companies) is also common to meet the hefty capital requirements of late-stage drug trials.

GP-Led Secondaries and Continuation Vehicles

A notable recent trend in PE (especially relevant to longer-to-mature biotech bets) is the rise of GP-led secondary transactions – often in the form of continuation funds. Instead of selling a portfolio company to a third party, the GP can create a new vehicle (fund) to purchase that company from the old fund, thereby “continuing” the investment with more time and capital.

This gives original LPs an option: sell their stake (for liquidity) or roll it into the new vehicle for more upside. GP-led secondaries surged in popularity by 2024, reaching record volumes. Globally, 2024 saw roughly $47.3 billion worth of GP-led secondary deals (nearly 89 transactions), surpassing prior years.

In life sciences, this mechanism is used when a drug developer or pharma services company has strong prospects but needs a longer runway than the initial fund’s life. For example, in October 2024 New Harbor Capital executed a single-asset continuation vehicle for LGM Pharma, a pharma contract manufacturer.

This allowed New Harbor’s Fund I investors to cash out (at an attractive return) while rolling the asset into a new fund that raised fresh equity to fuel LGM’s next growth phase (rwbaird.com).

The GP essentially stayed invested, extending the hold period beyond the typical ~5-year window. Such continuation funds have become a “new normal” exit path in 2024–2025 when traditional exits (IPOs or strategic sales) are less certain. They also illustrate how PE managers actively manage portfolio liquidity in sectors like biotech, where the value of a breakthrough can skyrocket if held for another year or two.

Management Company & Fees

It’s worth noting the role of the management company in fund structure. The GP entity often has an affiliated management company that employs the investment professionals and runs day-to-day operations of the fund. The fund pays an annual management fee (usually ~2% of committed capital) to the management company to cover salaries and expenses.

This fee is the “steady” income for PE firms, but it’s the carried interest that provides the big payday if investments perform.

In biotech-oriented funds, management fees help cover the heavy cost of scientific due diligence (hiring experts, commissioning technical studies, etc.), which can be higher than in typical industries. However, LPs also pressure funds to reduce fees, especially if a fund gets extensions or continuation vehicles (to avoid “fee dragging” for extra years).

In summary, the PE fund structure for biotech deals mirrors general PE but with even sharper focus on aligning incentives and providing flexibility. GPs and LPs share in profits via the waterfall (ensuring GPs only profit after delivering at least ~8% returns to investors), and newer tools like co-investments and GP-led continuations have expanded the playbook to handle outsized deals and long development timelines.

Financial Engineering Techniques in Biotech PE Deals

Once a PE firm targets a biotech/pharma company, it employs a toolkit of financial engineering techniques to craft the deal and attempt to maximize returns. These techniques – from highly leveraged capital structures to creative debt instruments and earn-outs – must be used judiciously in life sciences, where cash flows can be volatile. Below we explore key strategies, explaining how they function and noting any special considerations in a biotech context:

Leveraged Buyout (LBO) Modeling in Biotech

At the core of most PE acquisitions is the leveraged buyout model – the use of significant debt financing to amplify equity returns. In an LBO, a sponsor forms a NewCo that borrows money (from banks or bond investors) to purchase the target company, with the target’s own assets and cash flows serving as collateral for the debt. The PE fund contributes the remaining portion as equity.

Biotech and pharma LBOs follow this same template, though the feasibility of high leverage depends on the target’s cash flow stability (a profitable pharmaceutical firm or medical device manufacturer can support debt; a pre-revenue biotech cannot).

Simplified LBO Capital Structure

In a leveraged buyout, new lenders provide debt (e.g. loans or bonds) and the PE sponsor provides equity to fund the purchase of the target company. The diagram shows the basic flow: the target’s existing owners are paid out by the combination of debt and equity raised by the PE buyer.

The new debt is secured by the target’s assets and future cash flows. This structure allows the sponsor to put in a smaller equity check – magnifying potential returns on equity if the company performs well. However, the heavy debt load (often 60–70% of the purchase price in healthcare LBOs) means the company must produce steady cash flows to service interest and principal.

Thus, only certain biotech/pharma businesses are LBO candidates: typically commercial-stage companies with reliable revenues (e.g. a mature drug portfolio, a generics manufacturer, or a service provider like a CRO/CDMO). High-growth biotechs with no earnings are usually funded via minority growth capital instead, since they can’t safely carry debt. In 2024, one of the largest pharma LBO-style deals was Novo Holdings’ $16.5B take-private of Catalent, a global drug manufacturing firm (reuters.com).

That deal, structured as an all-cash acquisition, effectively leveraged Catalent’s stable cash flows and assets (dozens of manufacturing sites) to raise debt financing, demonstrating how a life-sciences company with steady EBITDA can be an LBO target. Conversely, a pure R&D biotech with negative cash flow wouldn’t qualify for an LBO – unless combined with a structured royalty or other collateralized asset stream to support debt (a hybrid model some PE investors explore).

An LBO model in biotech also considers exit scenarios: e.g. taking the company public again once pipelines mature, or selling to a strategic buyer. The model calculates IRR and MOIC (multiple on invested capital) based on EBITDA growth, debt paydown, and multiple arbitrage (selling at a higher EBITDA multiple than entry).

In pharma, EBITDA growth might come from launching new drug indications or cutting costs (PE owners often streamline operations or refocus R&D). Debt paydown is driven by using the company’s cash flows (e.g. from drug sales) to systematically repay debt – often accelerated by cash flow sweeps (discussed later) that funnel excess cash to debt.

Multiple expansion may occur if the exit buyer (say Big Pharma) is willing to pay more for the asset, perhaps due to strategic synergies or a frothier market. For example, if a PE firm buys a pharma company at 10× EBITDA and, after improving margins and pipeline prospects, sells it to a strategic at 15× EBITDA, that multiple expansion greatly boosts returns.

One must note that interest rates and credit conditions in 2024–2025 have been less favorable than the ultra-low rate era before – higher rates mean LBO debt is costlier, which pressures highly leveraged biotech deals. Sponsors have adjusted by using slightly lower leverage (debt multiples) than a few years ago, and by incorporating more lender protections. In summary, LBOs remain a central PE strategy in healthcare, but they require picking targets with enough cash flow resilience to carry debt through the ups and downs of drug markets.

Dividend Recapitalizations

A dividend recapitalization is a maneuver where a PE-owned company borrows additional debt to pay a large cash dividend to its shareholders (primarily the PE fund). This allows the PE firm to “take money off the table” – realizing some returns before an actual exit – while still retaining ownership of the company. In essence, the company’s balance sheet is re-leveraged to fund a distribution to the owners.

PE firms pursue dividend recaps when a portfolio company has grown in value or paid down debt, and credit markets are willing to lend more against it. The biotech/pharma sector has seen its share of dividend recaps, especially in sub-sectors like pharmaceutical services, where companies generate predictable cash.

For example, PPD (Pharmaceutical Product Development) – a large contract research organization – underwent multiple dividend recaps under PE ownership. After Carlyle and Hellman & Friedman took PPD private, the company took on new loans in 2015–2019 that funded over $1.5 billion of dividends to those PE owners. In one instance, PPD borrowed ~$459M in 2016 to pay a $486M dividend to sponsors, and later in 2019 raised another $900M debt to pay a further $1.09B dividend.

These transactions extracted cash for the PE funds (reducing their risk by returning capital early) while leaving the debt burden on PPD. Such aggressive recaps boost PE fund returns (a quick cash yield can jack up IRR), but they also saddle the company with higher leverage – a risky move if business falters. In PPD’s case, it continued to perform and eventually IPO’d in 2020, but observers noted its leverage topped ~7× EBITDA after those payouts (pestakeholder.org).

In biotech proper (drug developers), dividend recaps are rare due to lack of steady cash flow. But in profitable pharma product companies or service providers, recaps are a tool to extract value mid-hold. The financial engineering logic is that if the company can support more debt (e.g. has de-levered from 5× to 3× EBITDA over a few years), the owners can recapitalize it back up to, say, 5× by borrowing and taking a dividend.

This effectively realizes part of the investment gain without selling the company. However, regulators and stakeholders have criticized this practice in healthcare, arguing it can weaken a company’s financial health or divert resources from R&D/patient care.

In fact, some high-profile cases (e.g. a scandal involving a medical sterilization firm Sterigenics) saw lawsuits alleging that PE owners used dividend recaps to pull out cash even as the company faced liabilities. Thus, while dividend recaps remain legal and common in PE, they exemplify the tension between investor returns and long-term company investment, particularly salient in healthcare businesses.

Management Equity Rollovers and Incentive Pools

Private equity deals almost always seek to align the portfolio company’s management with the new owners. Two primary mechanisms are equity rollovers and management incentive equity (option pools). These give management “skin in the game” to drive value creation alongside the PE sponsor.

– Rollover Equity: In an LBO, rollover equity means that existing shareholders (often founders or key management) reinvest a portion of their sale proceeds into the new deal. Instead of taking 100% cash out, they “roll” some equity into the new capital structure, typically as a minority stake.

For instance, if the CEO owns 5% pre-deal, a PE buyer might ask them to rollover half of that into the NewCo, so the CEO ends up owning, say, 2% of the post-buyout company rather than cashing out entirely.

This benefits both sides: the PE firm reduces the cash it must pay (lower upfront equity outlay) and gains implicit management commitment, while the manager keeps an upside stake (and often gets favorable tax deferral on the rollover).

A rollover signals that management believes in the growth story ahead. In our earlier LBO example of Catalent, reports suggested that certain executives were indeed reinvesting equity alongside Novo Holdings. Middle-market pharma buyouts often see 10–40% of management’s proceeds rolled into the deal– enough to be meaningful but still allowing managers to monetize a chunk.

Management Option Pool (Sweet Equity)

In addition (or as an alternative) to rollovers, PE firms establish new incentive equity pools for management. This usually takes the form of stock options or restricted stock that will vest over time or upon achieving performance targets. Typically, these options strike at the same price the PE firm is investing (ensuring management only profits if the company’s equity value grows above the entry price). For example, a PE deal may set aside ~5–15% of the fully diluted equity for management incentives.

If the company doubles in value, those options become very lucrative for the team. Notably, such option pools give management upside without requiring them to invest new cash, which can be important if managers are not already wealthy from a prior exit.

The trade-off is that options usually only pay off if the exit valuation exceeds a threshold (the strike price plus any preferred return due to the PE shares). If the exit underperforms, options could expire worthless – a motivation for management to beat the plan.

There’s an interplay between rollovers and option pools. Rollover equity gives management a continuing ownership stake from day one, reducing the PE fund’s share but keeping interests aligned proportionally (the PE fund and management then share all future gains 90/10, 80/20, etc., depending on ownership split).

Option pools, on the other hand, allow the PE fund to initially take 100% ownership (or close to it) but promise management a slice of the upside at exit.

In the latter, the PE fund effectively says “if we grow this pie, you’ll get a piece of the growth.” Many deals actually use both: key execs might roll some equity and receive new options on top. The exact structure can be driven by tax considerations and motivational strategy.

To illustrate, suppose a PE firm acquires a biotech manufacturing company: management might roll over $10M of equity (say 10% stake post-deal) and the PE sets aside another ~10% in options for the broader management team.

If the company doubles in value, the management rollover’s $10M becomes $20M (same return as the PE on that part) and the options could be worth another $10M+ depending on the strike price – boosting management’s overall share of exit proceeds (albeit at the cost of slightly diluting the PE’s share versus if they owned 100%).

This kind of arrangement was seen in the 2023 sale of pharma firm Theramex: its PE owner (CVC Capital) rolled equity into the new deal with Carlyle/PAI, and management was reported to have both rolled stakes and an incentive plan to continue driving growth post-transaction. The alignment worked: by keeping equity, Theramex’s team remained invested in hitting ambitious growth targets under the new ownership.

Pre-Deal Ownership Structure

Before a PE buyout, a biotech company’s equity might be spread among founders, venture investors, and management. In this hypothetical example, founders/early investors hold 50%, later-stage VC investors 40%, and a 10% pool belongs to the management team (including any employee stock options). Such a cap table is common for a late-stage private biotech approaching an exit – early stakeholders have significant ownership, but management and key talent also hold a slice (through stock grants or options) that could become very valuable if the company is acquired or goes public.

Post-Deal Ownership Structure

After a PE-led buyout, the ownership consolidates, with the new PE sponsor taking a majority stake. Management may roll over a portion of their equity (e.g. 10%) and receive a new incentive equity pool (~10%) for future upside, while the PE fund provides the bulk of the equity (e.g. ~80%). In this example, the PE sponsor owns 80% post-deal, management retains 10% via rollover equity, and another 10% is set aside as options or similar incentives. The result: management could end up with ~20% of the company if they drive growth to realize those options, strongly aligning their interests with the sponsor.

Such alignment is critical in biotech, where execution by the management team (advancing trials, scaling production, etc.) directly affects value. PE sponsors often refresh these incentive pools over time or on hitting milestones, effectively replicating “earn your equity” dynamics for management.

Bridge Loans and PIK Toggle Notes

Complex PE deals sometimes involve bespoke debt instruments to bridge financing gaps or provide flexibility in repayment. Two such tools are bridge loans and PIK toggle debt:

Bridge Loans

As the name implies, bridge loans are short-term financings provided to “bridge” the company through an interim period or until a more permanent capital raise. In PE acquisitions, a bridge facility might be used if the sponsor intends to refinance or syndicate a bond after closing.

For example, imagine a PE firm acquiring a specialty pharma company but wanting to later replace part of the financing with a high-yield bond – they might take a 6-month bridge loan from an investment bank at closing, then issue bonds to repay the bridge. In biotech, bridges can also cover timing mismatches: e.g. bridging to an FDA approval (which, if positive, would allow raising debt or equity on better terms).

A real scenario occurred in 2024 with a European biotech carve-out: the buyer obtained a bridge credit line to close the deal quickly, planning to refinance it with a securitization of the acquired drug royalties within a year. Bridge loans typically carry higher interest and upfront fees (since lenders take on execution risk of the take-out financing), but they give the PE sponsor speed and certainty to close deals that might otherwise wait for full financing.

In turbulent markets, though, bridge loans can become “pier loans” (if the take-out fails, the bridge stays on, often at punitive rates). One notable case was the delayed bond sale for a large 2023 healthtech LBO, where banks ended up holding the bridge debt longer than expected due to market conditions.

PIK Toggle Notes

“PIK” stands for Paid-In-Kind – a feature on some junior debt where interest can be paid not in cash, but by capitalizing it (i.e. adding to the loan principal). A PIK toggle note gives the borrower the option each period to pay interest in cash or in kind (or a mix). This flexibility is valuable for companies that may not generate enough cash in early years – common in biotech if a company is investing heavily in R&D or ramping up a new product launch.

By toggling to PIK, the company avoids a cash interest outlay, albeit at the cost of growing debt. PIK toggles typically come with a higher interest rate (and often the PIK interest accrues at an even higher “step-up” rate when activated).

For PE sponsors, issuing a PIK-toggle mezzanine debt can enable a highly leveraged deal without stressing the company’s cash flows immediately – essentially kicking the can down the road until (hopefully) cash flows improve.

For instance, a 2025 buyout of a European generic pharmaceuticals firm included a €100M PIK-toggle second lien: the company had modest cash flow initially, so the PE owners structured this piece to PIK for the first 2 years while integration synergies took effect.

By year 3, they projected enough cash to start paying cash interest. Such instruments are common in aggressive capital structures; however, they increase risk because debt compounded by PIK can snowball if growth lags. From management’s perspective, PIK debt is a double-edged sword – it provides breathing room in the short term, but the company’s leverage will be higher later.

In the biotech sector, if a drug launch underperforms, having PIK debt accumulate can quickly become unsustainable. Thus, PE deals will use PIK toggles only when they have confidence in significant cash flow inflection down the line (e.g. pending drug approval or patent settlement that will boost revenues). It’s truly a bet on the future.

Earn-Outs and Contingent Value Rights

In many biotech M&A deals (whether PE-led or strategic), earn-outs are employed to bridge valuation gaps. An earn-out means that part of the acquisition price is not paid upfront but is contingent on the company achieving certain milestones or performance targets post-deal. These milestones could be regulatory approvals, clinical trial outcomes, sales targets, etc.

Earn-outs are extremely common in life sciences because buyers and sellers often disagree on the likelihood of success for pipeline products. Rather than fight over optimistic vs. pessimistic forecasts, they agree: “If X drug succeeds (or if revenue hits $Y), the sellers get an additional $Z payment.”

Private equity buyers, though less common than pharma buyers in early-stage biotech acquisitions, have started to use earn-outs as well. It lowers the initial price and risk, which is appealing when betting on, say, a Phase II drug platform. If the upside case materializes, the PE firm is happy to pay the extra because the company’s value will have grown. If not, the PE firm has protected itself from overpaying. Earn-outs can be structured as cash milestone payments or as Contingent Value Rights (CVRs) that effectively give the sellers a tradeable right to future payments.

The prevalence of earn-outs in bio/pharma deals is significant – one study found that earn-outs accounted for ~61% of total deal consideration on average in private biotech/pharma M&A (cooleyma.com), highlighting how major a role contingent payments play in this sector.

For example, when Chiesi Farmaceutici (an Italian pharma) acquired Amryt Pharma in 2023, the deal was $1.25B upfront plus $225M in earn-outs tied to drug development milestones (morganlewis.com). Many PE transactions in pharma services (where performance is more predictable) don’t need earn-outs, but if a PE fund acquires a biopharma company with compounds in trials, it may negotiate an earn-out with the selling shareholders (often these are VC investors or founders).

One interesting scenario is PE firms selling a portfolio biotech to Big Pharma – the PE seller might accept an earn-out as part of the sale. This happened in cases like the sale of Dutch gene therapy company UniQure’s gene therapy licensing business: the PE backers agreed to milestone-based payouts from the buyer (CSL Behring) in addition to upfront cash, effectively carrying over the earn-out structure to their LPs’ benefit.

Earn-outs, however, can lead to post-deal disputes (did the new owner exert “commercially reasonable efforts” to hit the milestones? or did they intentionally slow-roll development?). As such, contracts must carefully define obligations. From a PE fund accounting perspective, earn-outs complicate IRR calculations and DPI (distributions to paid-in) metrics, since some proceeds come later if at all.

But they are a powerful tool to get deals done when uncertainty is high – which is almost always in biotech. In a sense, an earn-out in a PE deal transfers some risk back to the sellers (often scientists/founders) – aligning with PE’s risk management ethos.

Cash Flow Sweeps and Other Covenants

When a PE deal layers on debt, lenders will impose covenants to protect themselves. One common provision in leveraged loans is an excess cash flow sweep. A cash flow sweep stipulates that if the company’s free cash flow exceeds certain thresholds (after operating needs, capex, etc.), a percentage of that excess must be used to prepay debt. In many LBO loans, the sweep might be 50–75% of excess cash flow.

This forces the company to deleverage faster when times are good, rather than letting the PE owners take all the cash out as dividends. For example, a specialty pharma company with a $100M term loan might have a covenant that 50% of any cash flow above budget gets swept to pay down the loan each year.

For the PE owners, this is a double-edged sword: it helps pay debt (increasing their equity value and reducing risk), but it also means they can’t freely use that excess cash for other purposes like aggressive expansion or distributions without lender consent.

In practice, cash flow sweeps are just one of many financial covenants and terms that shape behavior. Others include leverage ratio maintenance covenants (common more in Europe, while in the U.S. covenants have been looser in recent years), restrictions on additional debt, and limitations on large acquisitions or asset sales. Within biotech deals, lenders know the volatility and thus often insist on tighter monitoring.

If a company has a cash sweep, the PE sponsor will model its impact – effectively assuming the base case will pay down X% of debt via sweeps, improving equity returns. Sweeps can significantly “clean up” the leverage by exit: for instance, if a biotech tools company generates a lot of cash, mandatory sweeps might pay down half the debt within 3 years, meaning the company could be only modestly levered by the time the PE looks to exit (boosting the equity multiple).

In summary, the financial engineering of biotech PE deals involves balancing maximizing returns (through leverage, dividend recaps, and equity incentives) with mitigating risk (through earn-outs, flexible debt like PIK toggles, and covenants that force discipline). Each tool must be tailored to the company’s profile: e.g. one wouldn’t do a dividend recap on a biotech burning cash, nor rely purely on management options if founders need liquidity.

The best PE sponsors in pharma/biotech deploy a creative mix – we saw, for instance, Blackstone Life Sciences structure a 2024 deal funding Moderna’s vaccine program with a mix of equity and secured royalty interests (blackstone.com), essentially an alternative form of bridge financing backed by future product sales. This creativity in deal structuring is increasing, blurring lines between straight buyouts, credit, and growth investing in the sector.

Recent Case Studies (2024–2025) Illustrating the Strategies

To ground these concepts, let’s look at a few real-world transactions in 2024–2025 across the U.S. and Europe that showcase private equity’s deal-structuring prowess in biotech and pharma.

Opella (Sanofi’s Consumer Health Carve-Out, 2024)

This was one of Europe’s largest PE deals of 2024. Sanofi sold a 50% stake in Opella (its consumer healthcare unit with brands like Doliprane and Allegra) to CD&R at a valuation of €16 billion (14× EBITDA). The deal structure resembled a classic LBO of a carve-out: CD&R and co-investors (including Bpifrance) put in a few billion in equity, and the rest was financed by debt fully secured by Opella’s steady cash flows from OTC drug sales. Sanofi itself retained 48% ownership, essentially rolling over equity and partnering with the PE buyer (reuters.com).

This kind of structure – partial sale with rollover – is akin to management rollover on a grand scale (Sanofi stayed invested to share future upside). The debt package likely included term loans and bonds, and given the size, possibly a bridge loan initially (since bond markets in late 2024 were choppy). Indeed, banks underwrote debt for Opella with the expectation of syndicating it in 2025.

No earn-outs here since the business is established, but the continuation vehicle concept looms: CD&R will have an exit clock, and if a full IPO or sale doesn’t happen in a few years, a GP-led secondary could be an option to extend the investment (as was done with other pharma assets like Curium earlier). For Sanofi, this deal freed up cash for R&D, while for CD&R, it was a chance to apply leverage and operational tweaks to a stable cash cow – a textbook LBO in pharma.

Catalent Take-Private by Novo Holdings (2024)

In the U.S., one headline deal was Novo Holdings’ $16.5B acquisition of Catalent. Catalent is a major CDMO (contract development and manufacturing organization) serving biotech/pharma clients – essentially a picks-and-shovels play with consistent revenues. Novo Holdings (the investment arm of Novo Nordisk) isn’t a traditional PE fund but operates similarly.

The deal was financed as an all-cash offer, reportedly with significant debt (leveraging Catalent about 5.5× EBITDA) and the remainder from Novo’s equity. This transaction highlighted financial engineering meets strategic vision: Catalent had stumbled operationally in 2023, causing its stock to plummet; Novo’s team saw value and structured a buyout with financing that Catalent alone couldn’t access as a public company.

We see elements of our discussion: a co-investment angle (some speculate Novo might bring partners in due to the size), and even an earn-out concept of sorts – Novo immediately arranged to sell a few Catalent facilities to Novo Nordisk upon closing (goodwinlaw.com), effectively monetizing part of the business to reduce net price. That’s similar to a pre-planned asset sale to reduce debt needs (financial engineering to de-risk the deal).

Catalent’s management was offered incentive equity in the new setup to ensure smooth transition from public markets to private hands (a management incentive plan likely in that 5–10% range, though details are private).

Over the next few years, Novo will likely use Catalent’s cash flows for debt service (with possible cash sweeps to pay down debt quickly). If Catalent’s fortunes improve under this stewardship, Novo could either IPO it again or even flip it to another strategic – capturing a classic PE outcome.

LGM Pharma Continuation Fund (2024)

As mentioned earlier, LGM Pharma, a U.S.-based drug ingredients and CDMO business, became the subject of a GP-led secondary. Originally owned by New Harbor Capital, LGM had grown and still had promising initiatives underway. Instead of selling to a third party in 2024, New Harbor created a new continuation fund, rolling LGM into it at an agreed valuation and bringing in fresh capital from secondary investors (rwbaird.com).

This gave liquidity to the original 2018 fund LPs (they could cash out) and allowed New Harbor (via the new fund) to reinvest and hold LGM longer, aiming to execute further growth initiatives. The continuation vehicle also likely included co-invest opportunities for some investors who especially believed in LGM’s growth (perhaps to fund an acquisition LGM pursued).

This case exemplifies how a well-performing pharma services company can avoid a premature exit via a secondary solution – aligning with the trend that 2024 saw many such single-asset continuation deals in healthcare. Notably, the financial engineering here is in the fund structure, not at the portfolio company level: LGM’s own balance sheet might not change (no new leverage on LGM itself; this was more of a secondary sale of equity), but it’s a liquidity engineering feat for the GP to maximize value.

Biotech Structured Royalty Deals

While not a pure “PE buyout,” it’s worth mentioning deals like Blackstone’s 2020 Alnylam and 2024 Moderna collaborations (blackstone.com). These transactions involve a PE firm providing financing to a biotech in exchange for an economic interest (royalties or a preferred equity stake) in specific drug programs. They highlight creativity in deal structuring: instead of an outright acquisition, PE structured a win-win funding: the biotech gets non-dilutive capital to develop a drug, and the PE firm gets a predefined return if the drug succeeds (often secured by royalty streams).

For example, in 2024 Blackstone agreed to fund up to $750M for Moderna’s Phase III vaccine in return for a share of future vaccine revenues (blackstone.com). This is essentially a bridge financing with an earn-out flavor – Blackstone’s payoff is contingent on the vaccine making it to market (akin to an earn-out), and Moderna’s shareholders avoided dilution but gave up part of upside. It reflects how PE in life sciences isn’t just about LBOs; it’s also about structured finance that aligns risk-sharing.

These deals, while different from traditional LBOs, reinforce themes: careful valuation of risky pipelines, alignment of incentives, and downside protection (if the vaccine failed, Blackstone likely would get nothing or a modest breakup fee; if it succeeded, they’d get a handsome return).

Mid-Market Pharma LBO with Rollover

Consider a hypothetical but representative scenario from early 2025: EQT Private Equity acquires a profitable specialty pharma manufacturer in Germany for €500M. The founder-CEO and management roll over 20% equity, EQT’s fund invests ~30% equity, and ~50% comes from leveraged loans. As part of the deal, an earn-out of €50M is set aside, payable to the sellers only if a pipeline product receives EU approval within 2 years.

The new capital structure gives management a 20% continuing stake (10% rollover + 10% in new incentive shares) – strongly motivating them. EQT immediately plans a dividend recap in year 3 if free cash flow grows sufficiently, targeting to return one-third of invested equity via a debt-funded dividend.

Lenders include a covenant that 50% of excess cash each year must go to debt repayment (cash sweep), ensuring the company deleverages from 5× to ~3× EBITDA by year 5, at which point EQT plans to exit (perhaps via sale to a larger PE fund or a strategic).

While hypothetical, this composite draws on real elements seen in deals across 2024–25 in Europe’s mid-market: high rollovers (20%+ are not uncommon when founders believe in the upside), earn-outs to handle pipeline uncertainty, and disciplined debt paydown. Should an exit not materialize on schedule (IPO windows can shut), the firm could consider a continuation vehicle or refinancing to hold the asset longer.

Conclusion

Private equity deal structuring in the biotech and pharmaceutical arena requires a deft balance of financial acumen and understanding of scientific business cycles. Valuations hinge on mastering risk-adjusted forecasts and not overpaying for blue-sky potential. Fund structures and incentives must align long-term scientific development with investor return timelines – hence the use of continuation funds and creative LP arrangements in recent years.

And the financial engineering tools of PE – high leverage, recaps, rollovers, PIK notes, earn-outs – must be adapted to the unique cash flow profiles of life sciences companies, where a breakthrough drug can send cash flows soaring, but a failure can just as easily crater them.

The period 2024–2025 has shown PE investors becoming both more aggressive and more innovative in life sciences. Large deals like Catalent and Opella demonstrate confidence in deploying billions for the right assets, using classic LBO playbooks.

At the same time, the rise of GP-led secondaries and structured collaborations (e.g. royalty deals) shows an industry willing to break the mold of the standard buyout to accommodate longer development times and risk-sharing. For financially savvy biotech executives, this means more options on the table: from selling a majority stake while keeping skin in the game, to partnering with PE for growth capital without giving up control, to anticipating that your PE owner might hold your company for 10+ years through innovative fund structures.

In tone and approach, today’s PE dealmaking in biotech/pharma is reminiscent of an Economist analysis: rational and numbers-driven, yet aware of the unpredictability of scientific progress. As the industry moves forward, both U.S. and European markets are likely to see PE firms continue to refine these strategies – perhaps more portfolio pooling of drug royalties, increased co-investment from strategic pharma investors in PE deals, and further use of earn-outs given how prominent they have become in allocating biotech deal risk.

For scientist-founders and biotech CFOs, understanding these finance-heavy deal structures is becoming as important as understanding the science. A trial may test a drug’s efficacy, but a PE term sheet might test the cap table’s resilience, the employees’ incentives, and the company’s debt capacity – all at once.

The marriage of biotech and private equity is creating a fascinating new chapter in deal engineering, one where spreadsheets and lab results intersect. And as we’ve seen through these examples, when structured thoughtfully, PE deals can inject not just capital but also discipline and strategic support into biotech and pharma companies, accelerating the translation of innovation into commercial success – all while generating the outsized returns that PE investors seek.