When Most of the Price Is Contingent: Questions for Life Sciences Sellers

In many life sciences sales, especially of earlier-stage companies, the buyer pays a modest amount at closing. The rest comes only if the asset succeeds, through development, regulatory and sales milestones, and sometimes through royalties on future sales. How much of the headline value is contingent varies widely. In the life sciences sales I have advised on, it has ranged from under half to more than 90 percent, measured as the share of upfront plus potential milestone payments that is payable only if milestones are achieved (royalties excluded).

That structure is common for early-stage assets, and it can be fair. For many early-stage companies, it is the only realistic path to a sale. SRS Acquiom’s 2025 Life Sciences M&A Study found that about nine in ten private biopharma deals in its data that closed from mid-2023 to mid-2025 included milestone or other earnout payments. In a Sidley survey, nearly half of public life sciences acquisitions announced in 2025 included contingent value rights, the public-company version of the same idea.

But a contingent dollar is not a closing dollar. Once the deal closes, the people who negotiated for the sellers move on. The company becomes part of someone else’s business. The sellers’ recovery then depends on a few pages of contract language that may not be read closely again for years. Two recent Delaware cases, involving Johnson & Johnson’s purchase of Auris Health (Johnson & Johnson v. Fortis Advisors LLC, Del. Jan. 12, 2026) and Alexion’s purchase of Syntimmune (Shareholder Representative Services LLC v. Alexion Pharmaceuticals, Inc., Del. Ch. Sept. 5, 2024), show how much can turn on those pages. In each, the court found that the buyer had breached its promises about at least some of the milestones, but only after years of litigation. In Alexion, the court found both that a milestone payment was owed and that the buyer had breached its efforts covenant. In Auris, the Delaware Supreme Court reversed the ruling on one milestone.

Here are the questions I have found worth pressing on before a board signs off. Practice varies. Not every point applies to every deal, and few sellers get everything on this list. The aim is to know what you are giving up when you give it up. The first two questions are about value and leverage. The next five are about the contract itself. The last three are about life after closing.

1. What is the headline number really worth? Break it into cash at closing, development and regulatory milestones, sales milestones and royalties. Then, with your advisers, assign your own rough probability and timing to each. A sales milestone that requires exceptional revenue many years out deserves far less weight than a near-term development event the buyer already plans to reach. Boards that run this exercise often find that the expected value is a fraction of the headline. That is better learned before a stockholder asks than after. The data point the same way. In SRS Acquiom’s data on life sciences deals, only 9.5 percent of all potential earnout dollars had been paid by mid-2025, counting milestones not yet due. Biopharma milestones that had come due by then had paid about 19 cents on the dollar. If the buyer’s assurances about a milestone are part of why you are willing to take it contingent, ask to put them in the agreement. Acquisition agreements usually have the buyer promise that it relied on nothing outside the contract. After Auris, buyers’ counsel are being advised to seek the same promise from sellers. A seller that gives it generally cannot fall back on assurances left outside the agreement. In the Auris case, only the buyer had disclaimed reliance, and the court found that the buyer had induced the sellers to accept one contingent payment by describing that milestone as highly certain while concealing bad news, including a patient death, an FDA investigation and expected delays. Because nothing in the agreement had the sellers disclaiming reliance, the exclusive-remedy clause did not bar their fraud claim.
2. Who is really on your side of the table? In my experience, leverage decides most of what follows, and leverage is not only about the buyer. Early in the process, ask whether any significant holder or other key stakeholder has interests that differ from the rest of the sellers. Examples include an ongoing commercial relationship with the buyer, a role with the buyer after closing, or a preference that is paid mostly from the upfront cash. Those interests are often legitimate, but they can change how hard your side is willing to push on the contingent terms. A board that understands this early can set priorities accordingly. One that discovers it late tends to spend its negotiating capital on the wrong points.
3. How exactly is each milestone defined? The definition decides whether and when you get paid. Even a clear-sounding trigger, such as the start of a pivotal trial (a late-stage study intended to provide key evidence for regulatory approval) or a regulatory approval, raises questions. Which trial or approval counts? Is a trial “started” when the first patient is dosed or when the protocol is filed? Does approval in Europe count, or only in the United States? What if the product is approved for a narrower use than planned, or the regulator requires a different path than the one both sides expected? Does the milestone count if it is achieved by a licensee, an affiliate, or a subsequent acquirer of the asset? Is there a deadline after which the milestone lapses? The Auris case shows why this matters. The agreement tied several milestones to a specific FDA clearance route. When the FDA’s review route came into question after closing, the Delaware Supreme Court held that the sellers had accepted that risk for the first of those milestones, because the agreement tied that payment to the original route alone. Sit down with your scientists, list the scenarios they worry about, and check how the definitions handle each one.
4. Who controls the path to each milestone? After closing, the buyer usually decides whether to fund, run, delay or shelve the program. If the agreement includes a promise about how hard the buyer must try (lawyers call this an efforts covenant), read it closely. Many agreements use “commercially reasonable efforts,” and the definition matters. Is the buyer measured against how it treats its own comparable products, or against what a similar company would do with a similar product? Some buyers resist any efforts obligation at all. In SRS Acquiom’s data, the share of biopharma deals applying a commercially reasonable efforts standard to at least one development milestone fell from about 90 percent to about 75 percent between the 2021 to 2023 and 2023 to 2025 closing periods. The study links buyers’ reluctance to the recent Delaware cases. If you cannot get an efforts standard, ask at least for an express promise that the buyer will not take action intended to avoid or reduce a payment. That is narrower because it does not affirmatively require the buyer to pursue the milestone. In Auris, the Court of Chancery found that the buyer breached the contract’s anti-avoidance provision as well as an efforts covenant measured against its priority products. Depending on leverage, sellers sometimes also negotiate specific development commitments, prompt notice if the program is paused or abandoned, or a requirement that any later buyer or licensee of the asset take on the payment obligations. That last point is not theoretical. Alexion was itself acquired a few years after it bought Syntimmune, and the program was terminated during the review that followed. Spending floors and a right to take the asset back if the buyer abandons it are more common in licenses than in outright sales, but they can be worth raising.
5. How are sales measured, and how long do royalties run? Sales milestones and royalties both turn on the definition of “net sales.” Look at which deductions from gross sales are allowed, such as rebates, discounts and returns. Check whether those deductions are listed in full or left to the buyer’s accounting practices, and how sales by licensees and sales of combination products are treated. Small drafting differences can move large payments. If royalties are part of the deal, look at how long they last and what ends or reduces them. Loss of patent protection and generic or biosimilar competition are common examples. Ask whether the buyer can reduce your royalty by what it pays others for licenses it needs, and whether there is a floor below which these reductions cannot push the rate. A modest royalty can shrink quickly once these adjustments stack up, and the order in which they apply can matter as much as the rate.
6. What will you actually be able to see? In my experience, this is the question sellers most often underweight. A payment you cannot verify is only as reliable as the buyer’s report. Ask what reports the sellers will receive, how often, and whether they will be detailed enough to check the calculation. Ask, too, whether they will cover progress toward development milestones and not just amounts owed. Is there a right to have an independent accountant audit the buyer’s books, with the buyer paying for the audit if it turns out to have underpaid by more than a set amount? How long must records be kept? Do audit rights survive the end of the royalty period and reach licensees’ records? Do late payments carry interest? These protections are familiar in licensing agreements, but buyers do not always offer them in acquisitions. They are easier to ask for early, ideally at the term sheet or letter of intent stage, than to win late.
7. What can reduce or delay a payment once it is earned? Ask whether the buyer can hold back milestone or royalty payments to cover claims it later makes against the sellers, such as a claim that a representation in the agreement was wrong. A broad right to hold back payments can turn a dispute over a small claim into a reason to withhold a large milestone. Ask, too, what happens if the buyer sells the program, licenses it out or is itself acquired. Some sellers negotiate for the remaining payments to speed up in those situations. Others settle for a requirement that the new owner take on the obligations. Ask whether the original buyer stays liable once a successor assumes them. If the buyer is a thinly capitalized subsidiary, ask who stands behind the payments and whether its parent will guarantee them.
8. If there is a dispute, how will it be resolved? Disputes over contingent payments are common, and they tend to arrive years after closing. In SRS Acquiom’s data, 31 percent of life sciences earnout deals with a milestone due had a dispute, formal or informal, over at least one milestone, and most of the money paid to date on disputed milestones came through renegotiation. Decide in advance where disputes will be heard and who decides what. Accounting questions, such as how net sales were calculated, often go to an independent accountant. Questions about whether the buyer tried hard enough usually go to a court or an arbitrator. Check whether individual sellers can bring a claim or only their representative, how long claims stay open, and whether the agreement limits damages. If the buyer breaches an efforts promise, damages may require a court to estimate what the lost milestone would have been worth, and that leaves both sides uncertain. It can be worth considering whether to agree in advance on an amount, or a method, for that situation. In public deals, read the provisions on who may bring a claim under the CVR with particular care, because they can decide whether a holder may sue at all.
9. Who speaks for the sellers after closing? Contingent payments can stretch over many years. Someone has to track progress, review the buyer’s reports, exercise whatever audit rights exist and, if needed, pursue a dispute. In private deals, that role usually falls to a stockholder representative, often a professional firm, paid from an expense fund set aside at closing. Both of the Delaware cases above were brought by professional representatives. Settle who it is, who will advise it, and whether the expense fund would cover a real dispute rather than just routine administration. SRS Acquiom’s 2026 Deal Terms Study reports averages of roughly half a million dollars for 2025 life sciences deals with milestones, an amount that may be inadequate to fund a contested dispute. Also settle what the representative may agree to without going back to the sellers, such as an amendment or a settlement.
10. Who gets paid, how, and when? Read the payment provisions as if you were the person waiting for a contingent payment ten years from now. Who is the payee? Through what paying agent? To which accounts? What happens when those details change, or when a holder dies or a fund winds down? Provisions drafted with closing day in mind do not always age well.

Next, look at how each payment will be shared among your own holders. In a venture-backed company, liquidation preferences can mean that upfront cash and later milestone payments fall very differently on preferred holders, common holders and founders. Model how each payment will flow through the charter and any side agreements. Option holders and employees who share in milestone payments raise their own questions. Finally, work through the tax treatment early with your tax advisers. Contingent payments can affect when sellers recognize gain. Part of a deferred payment may be treated as interest, and payments to employees can be subject to their own timing rules.

Before you sign: a short checklist 

1. Have we put our own probability and timing on each payment, and are the buyer’s key assurances written into the agreement?
2. Do any of our significant holders have interests that differ from the rest of the sellers?
3. For each milestone, do we know exactly what event triggers it, where, by when and by whom?
4. What exactly must the buyer do to pursue each milestone, and, at a minimum, has it promised not to take action intended to avoid or reduce a payment?
5. Have we read the net sales definition and every royalty reduction, and is there a floor?
6. What reports and audit rights will we have, and are they detailed enough to check the numbers?
7. Can the buyer hold back payments, and what happens if the program or the buyer changes hands?
8. Where and how will disputes be decided, and who has the right to bring them?
9. Who will represent the sellers, and is the expense fund large enough for a real dispute?
10. Do we know who receives each payment, how it is shared among our holders, and how it will be taxed?

None of this means contingent consideration is a bad bargain. It is often the most practical way to bridge the gap between how a buyer and a seller value an early-stage asset. A seller with limited leverage may reasonably accept thin protections to get a deal done. But treat the contingent payments as options you are holding, not cash you already have. Spend your negotiating capital on the few terms that decide whether those options pay out. And keep a written record for the board of which protections you asked for and did not get.

Laurent Campo is a partner at PLG in Washington, D.C., where he advises on mergers and acquisitions and securities matters, including life sciences transactions. He can be reached at lcampo@potomaclaw.com.

This article is for general use and should not be construed to provide legal advice as to particular factual situations.