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Why Valeant Gave Up on the ‘Female Viagra’

November 7, 2017, 3:01 PM UTC

This article originally ran in Term Sheet, Fortune’s newsletter about deals and dealmakers. Sign up here.

Valeant Pharmaceuticals is giving Addyi, the female libido drug dubbed ‘the female Viagra,’ back to its former owners. This is quite a big deal as Valeant bought Sprout Pharmaceuticals, the company behind the drug for a whopping $1 billion just over two years ago.

Here’s a quick summary of what happened: Sprout is a Raleigh, N.C.-based developer of a drug intended to treat hypoactive sexual desire disorder — a persistent lack of libido — in pre-menopausal women. Under then-Sprout CEO Cindy Whitehead’s leadership, the company raised nearly $100 million in venture funding and was approved by the FDA after two failed attempts. Days later, Valeant agreed to buy Sprout for $1 billion in cash.

And then things turned sour. Short seller firm Citron Research compared Valeant to Enron & the Securities and Exchange Commission opened an investigation into the pharma giant’s accounting methods. CEO Michael Pearson was ousted after a disastrous earnings report, and Sprout took a back seat.

Last March, Sprout’s investors filed a lawsuit against Valeant claiming it overcharged consumers for the pill and failed to successfully commercialize it. The complaint had said that sales of the pill may have totaled less than $10 million in 2016, far short of the $1 billion targeted by July, 2017. As Fortune reported last year, the drug’s sales flailed since many insurers denied coverage for the pill, and Addyi was facing criticism for its high price point and reportedly low efficacy rates.

This brings us to today. Valeant has, in essence, given up on “the little pink pill.” The embattled pharma giant is expected to hand over Sprout to its former owners without charging an upfront fee. According to the terms of the deal, Sprout’s shareholders would drop the pending lawsuit and Valeant would get a 6% royalty on global sales of Addyi. In turn, Valeant will loan the company $25 million to “fund initial operating expenses.”

“Returning Sprout to its former owners will enable us to further streamline our portfolio and reduce complexity in our business,” Valeant CEO Joseph C. Papa told Fortune in a statement.

Related: The Entrepreneur Behind ‘Female Viagra’ Wants to Make Women ‘Really F**king Rich’

Here’s where it gets interesting. We have yet to see whether Whitehead, who now invests in female-focused companies through her new venture The Pink Ceiling, will return as CEO of Sprout 2.0. Here are my thoughts:

Though Whitehead is not named as one of the shareholders acquiring Sprout back from Valeant, she had privately owned the company with her then-husband Bob Whitehead before selling it in the summer of 2015. She declined to comment on the pending deal, but she tweeted shortly after the announcement was made yesterday: “It always seems impossible until it’s done.”

It’s unclear whether Whitehead would step in as the chief executive of the newly-regained company. She’s currently the founder and CEO of The Pink Ceiling, a cross between VC fund, incubator, and consulting firm. However, after talking to her last week about her previous ambitions for Addyi, it’s very likely she’ll be involved with Sprout in some capacity.

This is not something you see in M&A too often. As my colleague Jen Wieczner notes, “The deal marks a spectacular failure of Valeant’s onetime acquisition strategy, as well as an incredible win for Cindy Whitehead, who now stands to make even more from the sexual dysfunction treatment she helped create than the $1 billion she initially sold it for.”

This is a pretty sweet deal for the former shareholders and could turn into a huge opportunity. Sprout’s investors already got a big windfall from the billion-dollar acquisition, so in theory, they could double dip. If the company beefs up its business and gets sales off the ground, its investors could even see a second, potentially even bigger, exit.

Term Sheet interviewed Whitehead last week about Addyi, women’s sexual health, and sexual harassment. Read the full interview here.