Stalking Horse Sales and Pharmaceutical Royalties: A Complete Guide

In restructuring parlance, a stalking horse bid is an initial binding offer on a bankrupt debtor's assets, made by a chosen buyer, that sets the floor price for an auction. The term originates from the decoy horse used by hunters—here, the stalking horse bidder leads the pack, establishing a minimum acceptable price and terms which other bidders must exceed. In U.S. Chapter 11 practice, stalking horse agreements are commonplace: they facilitate Section 363 asset sales by guaranteeing the assets will be sold for at least the stalking horse's bid.

The mechanism is particularly relevant for intangible and hard-to-value assets—such as pharmaceutical patents and royalty streams—where an initial bid can anchor the valuation and entice other offers. Drug royalty rights, essentially the right to receive future payment streams from product sales, are intangible assets that specialized investors value and purchase. In distress, a debtor may auction these rights to generate immediate cash for creditors.

Across 18 major pharma and biotech bankruptcies examined since 2012, break-up fees averaged 2.5–3% of purchase price, with auction competition generating price increases of 24–100% above initial bids in approximately half of cases. The pharmaceutical sector's unique asset characteristics—patent-protected royalties, pipeline optionality, and complex regulatory profiles—attract specialized buyers including royalty investors like Royalty Pharma and DRI Healthcare, private equity firms, and strategic acquirers.

United States: The Section 363 Framework

In U.S. bankruptcies, stalking horse bids are a well-established feature of asset auctions under 11 U.S.C. § 363. The debtor, often with court approval, selects an initial bidder to contractually agree to purchase specific assets at a negotiated price, subject to higher bids at auction. The stalking horse bid thereby acts as a reserve price—no sale will occur for less than that amount. This offers the bankrupt estate a degree of certainty and prevents low-ball bids, while giving the initial bidder an advantageous position in the auction.

Given the distressed nature of these sales, the stalking horse's offer may be below theoretical fair market value, but it ensures a sale and often reflects a realistic price under the circumstances. If other bidders emerge, an open auction is held; if not, the stalking horse wins by default.

Deal Protections for the Stalking Horse

To encourage a strong initial bid, bankruptcy courts allow certain incentives (collectively, "bid protections") for the stalking horse bidder. These are negotiated in the asset purchase agreement and approved by the court as reasonable measures to preserve estate value.

Break-Up Fee: A cash fee (often a few percent of the purchase price) payable to the stalking horse if it is outbid at auction. This compensates the initial bidder for acting as the price-setter and for diligence costs. Courts scrutinize break-up fees to ensure they are necessary to induce the bid and not so large as to chill competition. Reasonable fees—often in the 2–4% range—are routinely approved as an administrative expense when they incentivize a bid that maximizes value.

Expense Reimbursement: Repayment of due diligence and transaction costs if the stalking horse doesn't win ensures the bidder isn't penalized for participating.

Minimum Overbid and Other Terms: The stalking horse often negotiates favorable auction procedures. These can include a minimum overbid increment (any competing bid must exceed the stalking horse bid by a set amount, often enough to cover the break-up fee and more), and deadlines or qualifications for bidders (such as requiring evidence of financing). By setting the rules, the stalking horse gains an edge—for example, the initial bidder can require an overbid that at least covers its break-up fee, ensuring it is made whole if topped.

Case Studies: US Chapter 11 Sales

The most detailed stalking horse precedents emerge from Delaware and Southern District of New York bankruptcy courts, where pharmaceutical cases have established clear parameters for bid protections.

BIND Therapeutics/Pfizer (2016)

BIND Therapeutics represents a textbook successful stalking horse auction. BIND filed on May 1, 2016 in Delaware after Hercules Capital demanded repayment of a $13.2 million loan. Pfizer served as stalking horse with a $20 million bid (approximately $19.7 million cash plus assumed liabilities) for BIND's ACCURINS nanoparticle technology platform and pipeline candidates including BIND-014.

The break-up fee was approximately $500,000 (2.5%) with expense reimbursement subject to court approval. The overbid deadline was July 22, 2016, followed by a July 25–26 auction in New York. Two qualified competing bidders emerged, including NanoCarrier Co. as backup bidder, driving the final price to $40 million—a 100% increase over the floor. Pfizer ultimately prevailed, with court approval on July 27, 2016. Total timeline: 88 days from filing to sale approval.

PhaseBio Pharmaceuticals (2022)

PhaseBio illustrates how stalking horse processes can be superseded by settlement. Filing on October 23, 2022 in Delaware, PhaseBio had Chiesi Farmaceutici as stalking horse with a $40 million upfront cash bid plus up to $60 million in milestones tied to FDA approval of bentracimab (a ticagrelor reversal agent).

The break-up fee was $2 million (5% of upfront consideration) with a $750,000 expense reimbursement cap. However, a dispute with development partner SFJ Pharmaceuticals created litigation risk. Through mediation with Judge Michelle Harner, SFJ emerged as final buyer via settlement for $32.9 million cash, with Chiesi receiving expense reimbursement from settlement proceeds. The stalking horse's role was significant enough to warrant reimbursement even though the auction was pre-empted. Timeline: 68 days from filing to settlement approval.

Aceto Corporation (2019)

Aceto demonstrates parallel stalking horse processes for different business segments. Filing February 19, 2019 in New Jersey, Aceto ran two simultaneous sales:

The chemicals auction demonstrated how stalking horse mechanisms can drive significant value—$84 million above the floor price—while Rising Pharmaceuticals received no competing interest, closing at the stalking horse price.

Opioid-Related Bankruptcies

The major opioid-related pharmaceutical bankruptcies—Mallinckrodt, Endo International, and Purdue Pharma—primarily utilized plan-based reorganizations rather than traditional Section 363 stalking horse sales, reflecting the complexity of mass tort liability resolution.

Endo International

Endo International provides the clearest example of a credit bid stalking horse in this category. Filing August 16, 2022 in the Southern District of New York, Endo's first-lien creditors formed Tensor Limited as a stalking horse vehicle to credit bid approximately $5.863 billion (the face value of first-lien secured debt) plus $127 million cash.

Qualified competing bids required full cash repayment of all first-lien debt plus $5 million for unencumbered assets plus $122 million wind-down amount—a threshold no competing bidder met. The auction scheduled for March 2023 was ultimately abandoned after multiple extensions, with Tensor's credit bid accepted without competition. The case converted to a plan of reorganization confirmed March 22, 2024, with emergence on April 23, 2024—615 days from filing. Because Tensor was a creditor vehicle credit bidding its own debt, no traditional break-up fee was negotiated.

Purdue Pharma's Avrio Health Sale

Purdue Pharma's Avrio Health sale represents a conventional stalking horse within the broader reorganization. Atlantis Consumer Healthcare (an Arcadia subsidiary) served as stalking horse for Purdue's OTC business (Betadine, Senokot, Colace, Slowmag) with a $397 million bid. The break-up fee was $11.9 million (3%) with approximately $4 million expense reimbursement cap—totaling $16 million in bid protections. No qualified competing bids emerged, and Atlantis acquired the assets at its stalking horse price.

Purdue Pharma's final plan was confirmed November 2025 with $6.5 billion from the Sackler family and at least $7.4 billion total creditor recovery—over six years after filing.

Credit Bid Stalking Horses

Several pharmaceutical bankruptcies featured credit bid stalking horses where pre-petition secured lenders acquired assets using debt as currency rather than cash. This structure typically eliminates break-up fees since the bidder already holds claims against the estate.

Pernix Therapeutics (2019)

Pernix exemplifies the loan-to-own strategy. Filing February 18, 2019 in Delaware, Pernix had Phoenix Top Holdings (formed by Highbridge Capital Management affiliates, the pre-petition secured lender) as stalking horse. The bid consisted of $5 million cash plus a credit bid of approximately $70.6 million in outstanding debt, totaling $75.6 million.

Critically, the purchase agreement contained no break-up fee—unusual for stalking horse sales but logical given Highbridge's insider status and credit bid structure. Expense reimbursement was provided but the cap was not publicly disclosed. No competing bids emerged, and Currax Holdings (another Highbridge affiliate) closed the transaction 56 days after filing. Assets included Treximet, Silenor, Khedezla, and Zohydro.

Omega Therapeutics (2025)

Omega Therapeutics demonstrates a similar structure with Pioneering Medicines 08-B as stalking horse with a $9.92 million credit bid plus $1.5 million rollup of prepetition debt. The credit bid structure meant no traditional break-up fee.

Pre-Arranged Transactions

Some pharmaceutical restructurings use Plan Funding Agreements (PFAs) that function similarly to stalking horse arrangements but operate through plan confirmation rather than Section 363 sales.

Aegerion Pharmaceuticals (2019)

Aegerion used this approach. Filing May 20, 2019 in the Southern District of New York, Aegerion had a pre-arranged acquisition by Amryt Pharma (Dublin-based) for 100% of reorganized equity at an implied enterprise value of $395 million (excluding cash).

The PFA included an $11,850,000 termination fee and $4,000,000 expense reimbursement cap—payable only upon consummation of a superior transaction. With support from 67%+ of convertible bondholders and 100% of other secured debt holders, no superior proposal emerged. The plan was confirmed September 10, 2019—113 days from filing. Assets included JUXTAPID (lomitapide) and MYALEPT (metreleptin).

Insys Therapeutics (2019)

Insys is notable for having no stalking horse at filing. The company filed June 10, 2019 in Delaware—five days after a $225 million DOJ settlement for criminal racketeering—before a stalking horse transaction could be negotiated. Instead, Insys conducted an open Section 363 auction.

BTcP Pharma ultimately acquired Subsys (fentanyl spray) through a profit-sharing arrangement: no upfront purchase price but a 45% royalty rate on Subsys profits, with estimated value to the estate of approximately $20 million plus a $250,000 escrow deposit. Hikma Pharmaceuticals separately acquired manufacturing equipment plus naloxone and epinephrine nasal spray pipeline products for $12.2 million.

Court Standards for Break-Up Fees

US bankruptcy courts have developed circuit-specific standards for evaluating stalking horse bid protections.

Third Circuit (Most Stringent)

Under In re O'Brien Environmental Energy (181 F.3d 527, 1999) and In re Reliant Energy Channelview (594 F.3d 200, 2010), break-up fees must qualify as "actual and necessary costs of preserving the estate" under Section 503(b). Fees must have induced the initial bid or preserved the bidder's participation.

The Third Circuit rejected a $15 million break-up fee (3.2%) in Reliant Energy because the bid was not conditioned on the fee—the bidder only required the debtor to seek court approval. In Energy Future Holdings (2021), the Third Circuit rejected a $275 million termination fee to NextEra Energy after regulatory approval failed.

Fifth Circuit (Dual Standard)

Under In re ASARCO (650 F.3d 593, 2011) and Matter of Bouchard Transportation (74 F.4th 743, 2023), pre-approved bid protections receive business judgment deference, while post-sale requests face Section 503(b) scrutiny. In Bouchard, the court approved a 3% break-up fee ($3.3 million) plus $885,000 expense reimbursement, calling the stalking horse arrangement "the lesser of multiple evils."

SDNY (Modified Business Judgment)

Under In re Integrated Resources (147 B.R. 650, 1992), courts apply three factors: (1) whether the relationship is tainted by self-dealing; (2) whether the fee hampers rather than encourages bidding; and (3) whether the amount is reasonable relative to purchase price. The challenging party bears the burden of proof.

Delaware (Recent Trends)

Break-up fees are typically capped at approximately 3% of cash purchase price. In 2024–2025, the US Trustee has increasingly objected to superpriority status for bid protections, arguing that only Section 364(c)(1) and Section 507(b) authorize superpriority administrative expenses. In In re First Mode Holdings (2024), debtors sought a 3% break-up fee plus $550,000 expense cap; after UST objection, protections were approved with administrative (not superpriority) status. In In re Ideanomics (2024), only expense reimbursement (up to $500,000) was approved for an insider sale, with no break-up fee.

Canada: CCAA Cross-Border Proceedings

Canada's insolvency regime (primarily under the Companies' Creditors Arrangement Act for restructurings or the Bankruptcy and Insolvency Act for liquidations) similarly uses stalking horse sale processes, often in coordination with U.S. proceedings for cross-border cases. Canadian courts may approve stalking horse bids as part of a sale and investment solicitation process, setting a baseline offer subject to higher bids.

Aralez Pharmaceuticals/Nuvo Pharmaceuticals (2018)

Aralez Pharmaceuticals represents the most detailed Canadian pharmaceutical stalking horse case. Filing August 10, 2018 simultaneously in Ontario Superior Court (CCAA) and Southern District of New York (Chapter 11/Chapter 15 recognition), Aralez ran a coordinated cross-border sale process with the Ontario Commercial Court and Richter Advisory Group as Monitor.

Two stalking horse bidders were designated:

Deerfield also served as secured lender and DIP lender, providing $15 million DIP financing. The bid deadline was November 26, 2018, with auction scheduled for November 29. For Canadian operations and Toprol-XL, no qualified bids were submitted by deadline. For Vimovo royalties, one qualified bid emerged as backup bidder. Both stalking horse bidders won at their initial prices.

Canadian sale approval came December 7, 2018, with US approval on December 27. Total timeline: approximately 119 days. Specific break-up fee terms were not publicly disclosed, though court filings referenced that Nuvo was entitled to a "customary termination fee" if not the successful bidder.

Canadian Courts: Competing Standards

Canadian jurisprudence reveals a geographic split on stalking horse approval standards.

The Nortel Line (Ontario—Dominant Approach): Under Re Nortel Networks Corp. (2009) and Re Brainhunter Inc., courts treat approval of a stalking horse as approval of the sale process rather than the specific bid. Courts focus on whether the stalking horse provides stability—reassuring employees, customers, and creditors that a floor price will be achieved. Break-up fees are treated as "insurance premiums" rather than mere expense reimbursement, and courts defer to business judgment. This approach generally approves fees in the 1–3% range alongside separate expense reimbursement.

The Freshlocal Line (British Columbia/Quebec—More Restrictive): Under Re Freshlocal Solutions Inc. (2022 BCSC 1616), courts require application of CCAA Section 36, BIA Section 65.13, and the Soundair test to stalking horse approval. This approach views break-up fees as properly limited to actual expense reimbursement only and requires competitive processes before stalking horse selection.

Key precedents include Royal Bank of Canada v. Soundair Corp. (1991 ONCA) with its four-factor test requiring receivers to demonstrate sufficient effort to get best price, Re Nortel Networks Corp. (2009 OSCJ) approving stalking horse bidding processes with break-up fees for CDMA/LTE businesses, and CCM Master Qualified Fund Ltd. v. blutip Power Technologies (2012 OSCJ) with its three-part test emphasizing fairness, commercial efficacy, and price optimization.

Europe: Emerging Stalking Horse Mechanisms

Historically, European insolvency sales have not commonly featured stalking horse bids in the same formalized way as North American bankruptcies. In many European jurisdictions, distressed asset sales might occur through pre-pack administrations or private sales without an auction, and break-up fees for initial bidders have been used sparingly due to legal constraints.

EU Harmonization and Pre-Pack Directives

The EU is moving toward incorporating stalking horse techniques into its restructuring toolkit. A new EU Directive on harmonising insolvency law (politically agreed in late 2025) includes provisions for pre-packaged asset sales.

Under this framework, an independent insolvency practitioner (a "monitor") can oversee a confidential marketing phase and identify a buyer before formal proceedings commence. When the case goes to court for approval of the sale, the monitor-selected offer can serve as a stalking horse bid, setting the baseline deal.

The Directive explicitly allows calibrated break-up fees or expense reimbursements for that bidder, so long as they are proportionate and don't deter competition. Article 26(2) explicitly permits stalking horse bids with break-up fees: if a stalking horse is outbid at auction, it receives expense reimbursement plus a break-up fee in "commensurate and proportionate amount." Member states have 33 months after publication for transposition, with full implementation expected by 2028–2029.

UK Pre-Pack Administration

UK pre-pack administration currently represents the most developed European going-concern sale mechanism but lacks US-style bid protections. Under the Insolvency Act 1986 and 2021 Administration Pre-pack Sales Regulations, connected party sales within the first 8 weeks require either creditor consent or an independent evaluator's written report.

Pre-packs represent approximately 29% of UK administrations, with 50% going to connected parties. However, UK administrations do not feature formal auctions, break-up fees, or overbid procedures—sales occur immediately upon or shortly after administration appointment.

Adaptimmune Therapeutics (2025) sold Tecelra and pipeline therapies to US WorldMeds for $55 million upfront plus $30 million milestones, but this was a distressed strategic sale rather than formal insolvency.

Netherlands and Germany

Netherlands WHOA (effective January 2021) and German StaRUG focus on debt restructuring rather than asset sales, but complement traditional bankruptcy pre-pack processes. Following the ECJ's Heiploeg judgment (April 2022), Dutch pre-packs have revived with clarified employee transfer rules.

Even before formal legislation, some European cases have improvised stalking-horse-like arrangements in complex cross-border deals. In major aviation insolvencies during the COVID-19 downturn, certain bidders negotiated upfront purchase agreements for aircraft assets with break-up fees and minimum overbid requirements, effectively acting as stalking horses even in non-US proceedings.

Comparative Bid Protection Data

Royalty Investors and Specialized Buyers

Pharmaceutical bankruptcy auctions attract specialized buyers with expertise in royalty streams and patent-protected assets. These investors target distressed pharma assets because patent-protected royalties offer predictable cash flows, lower risk than R&D, and returns uncorrelated with equity markets. Discount rates applied to commercial-stage royalties average 8.7–16%, compared to 40–50% for preclinical assets.

Royalty Pharma (RPRX) commands 60%+ global market share in biopharmaceutical royalty acquisitions. With over $2 billion in debt capacity raised in 2025 for acquisitions, the company recently paid $315 million for royalty interests in Nuvalent's neladalkib and zidesamtinib. Historically, Royalty Pharma acquired the Kalydeco royalty for $3.3 billion from the Cystic Fibrosis Foundation.

DRI Healthcare (TSX: DHT.UN) has deployed over $3 billion acquiring 77 royalties on 50 drugs since 1989, targeting 15% IRR. Its portfolio includes royalties on Eylea, Spinraza, Stelara, Zytiga, and Keytruda.

HealthCare Royalty Partners, acquired by KKR in 2025, has committed $7+ billion since 2006 with approximately $3 billion AUM, spanning 55+ products across 10+ therapeutic areas.

OMERS Life Sciences (Canadian pension fund) has made significant recent investments: $650 million to Verona Pharma (with Oaktree), $200 million for MAVYRET/MAVIRET royalties from Enanta, and $150 million for ORLADEYO royalty from BioCryst.

Market Trends

Biotech bankruptcy filings reached 14–28 filings in 2023 (a record depending on definition scope), with 2024 recording 13–14 filings—near the 10-year peak. The pre-2022 norm was 5–9 annual filings.

A notable trend in 2023–2024 life sciences bankruptcies has been "naked" Section 363 sales without stalking horses: NanoString, Athenex, Sientra, Invitae, Impel, and Gritstone bio all pursued open auctions. In the NanoString case, Bruker Corporation's winning bid was 78% higher than the stalking horse offer, demonstrating how competitive processes can maximize value. Sullivan & Cromwell analysis suggests that distressed biotechs' ongoing capital needs and time pressure may preclude pre-filing stalking horse negotiation.

Opioid litigation continues to shape pharmaceutical bankruptcies, with over $50 billion in national settlements.

Conclusion

Stalking horse sales serve as a powerful tool at the intersection of bankruptcy law and M&A, aligning legal procedure with market forces to sell assets efficiently. They are particularly invaluable in the life sciences sector, where assets like drug patents or royalty streams have complex valuations and where finding a buyer is not guaranteed.

By locking in a credible opening bid on a pharmaceutical royalty stream, the debtor's estate ensures that valuable IP will not be fire-sold for trivial amounts. The stalking horse bidder, in turn, gains a degree of control—the deal is theirs to lose, bolstered by negotiated fees and bidding advantages.

For professionals in law, finance, and the life sciences, the stalking horse sale represents a blend of legal strategy and financial calculus. Legally, it requires court approvals and adherence to fiduciary duties (ensuring the process maximizes value for creditors, with protections only as generous as necessary). Financially, it requires savvy valuation—a stalking horse must bid an amount low enough to leave upside (to avoid overpaying if they end up the winner by default) yet high enough to deter trivial challengers and satisfy the court that the price is fair.

In pharmaceutical royalty deals, specialist investors like royalty funds may serve as stalking horses, bringing deep knowledge of drug markets to price the asset. These bidders account for patent lifespan, sales projections, and regulatory risks in formulating a bid. If the asset is attractive (a royalty on a blockbuster drug), competing bidders might emerge and drive up the price. If not, the stalking horse still provides a going-concern solution—the royalty stream or drug IP transfers to a capable buyer, often preserving some value for creditors where liquidation might have yielded little.

Stalking horse sales remain the dominant structure for pharmaceutical asset sales in Chapter 11, with break-up fees of 2–3% and expense reimbursement caps of $500,000–$4 million receiving routine approval absent self-dealing concerns. The pharmaceutical sector's specialized buyer universe—royalty investors, healthcare-focused private equity, and strategic acquirers—creates auction dynamics that generated price increases of 24–100% in approximately half of cases studied.

The stalking horse mechanism has proven its worth from Delaware to Ontario and now, potentially, Brussels. It exemplifies a marriage of law and finance: contract incentives (break-up fees, overbid rules) aligned with auction theory to produce the best outcome in a distress scenario. As cross-border insolvencies become more common, U.S. and Canadian-style stalking horse sales are influencing practices worldwide—with Europe's new directive paving the way for broader adoption.

Credit bid stalking horses by secured lenders increasingly dominate larger cases, while the EU's November 2025 Directive on Insolvency Harmonization will introduce stalking horse mechanisms with "commensurate and proportionate" break-up fees to European jurisdictions by 2028–2029, signaling global convergence toward US-style auction processes.

Disclaimer

The information presented in this article is for educational and informational purposes only and does not constitute legal, financial, investment, or tax advice. The author is not a lawyer, licensed financial adviser, or registered investment professional.

Nothing in this article should be construed as a recommendation to buy, sell, or hold any security, investment product, or financial instrument, including pharmaceutical royalty interests. Stalking horse sales, bankruptcy proceedings, and royalty transactions involve complex legal and financial considerations that require qualified professional guidance tailored to specific circumstances.

Case studies and transaction details referenced herein are based on publicly available court filings, press releases, and secondary sources. While efforts have been made to ensure accuracy, the author makes no representations or warranties regarding the completeness, accuracy, or currentness of any information provided. Court rulings, transaction terms, and market conditions are subject to change.

Readers considering participation in bankruptcy auctions, royalty acquisitions, or related transactions should consult with qualified legal counsel and financial advisers licensed in the relevant jurisdictions before making any decisions. Past transaction outcomes do not guarantee future results.

This article may contain forward-looking statements regarding regulatory developments, market trends, and industry practices. Such statements are inherently uncertain and subject to risks that could cause actual outcomes to differ materially from those anticipated.