Biotech is sitting in the ebb of its perennial swing between darling and pariah of Wall Street.

Large drug developers are no longer paying top dollar for biologic drugs that may treat the most horrendous diseases but don't have a proven record of doing so. And the public markets are no friend to biotechs hoping to fund clinical research solely on the promise of an idea. Indeed, throughout 2011, planned offering prices were consistently slashed by as much as half as biotechs made lackluster debuts.

The result: a return to milestone payments in biotech dealmaking. Popular in the 1990s after the biotech crash of the late 1980s, milestone payments fell by the wayside in the 2000s when the sequencing of the human genome helped bring biotech back into popular favor. But the payments, which are also known as contingent value rights, have had a resurgence, beginning in early 2011. And it's only expected to continue as buyers exchange a once-fevered overconfidence in unreliable biotechs for a more tempered approach.

In one deal featuring milestone payments, Forest Laboratories Inc. in February agreed to buy Clinical Data Inc., whose antidepressant, Viibryd, had received regulatory approval, for $1.2 billion, or $30 per share -- about $3 less than the level at which the company had been trading. An additional $6 per share, or $240 million is available, dependent on sales milestones for Viibryd.

Milestones played an even greater role in Sanofi SA's February agreement to buy Genzyme Corp. for $20.1 billion, with a further $3.8 billion tied to milestone payments. The economic decline since then, and regained understanding that biotech is indeed risky, is encouraging other acquirers to try to establish more risk sharing through milestones.

"At Cantor, we're spending a lot of time working on creative deal structures to bridge the gap in valuation," says Robert Dentice, Cantor Fitzgerald's co-head of healthcare investment banking.

Of course, some drugmakers are still willing to risk acquisitions on unproven products. Gilead Sciences Inc. announced in November it will pay $137 per share, or $11 billion, for Pharmasset Inc., which has no products on the market and only recently launched Phase 3 trials for its lead drug. But Pharmasset has three hepatitis C drug candidates that are believed to be possible best-in-class drugs. With their multibillion-dollar market potential, treatments for diseases such hepatitis C, multiple sclerosis and diabetes have been incredible deal drivers in 2011.

The key for drug developers that want to access these markets is finding the best-in-class drug, as Gilead is attempting with Pharmasset. But as long as biotechs continue to innovate, finding the best drug remains a challenge -- a challenge that is good for dealmaking.

Sanofi's acquisition of Genzyme relies heavily on the company's hopes for multiple sclerosis drug Lemtrada, thought to be one of the most innovative drugs in clinical trials for the neurodegenerative disease. Companies from Biogen Idec Inc. to Novartis AG have also made acquisitions based on winning the battle for the best MS treatment.

Diabetes has also spurred acquisitions and will continue to be a driver in coming years as companies try to get their share of the substantial cash flow generated by treating it. Human Genome Science Inc.'s diabetes drug, albiglutide, could contribute to making it a target for GlaxoSmithKline plc, as the two companies have a partnership on the drug. Even more attractive is Human Genome's Benlysta, a drug to treat lupus, an autoimmune disease. Benlysta, which recently won approval from the Food and Drug Administration, is similar to an "orphan drug" in that it serves a small patient population and carries a hefty price tag.

Orphan drugs, which target small populations suffering from rare diseases, often cause a twinkle in the eye of dealmakers. Even if they don't sell to as many people as, say, Pfizer Inc.'s blockbuster Lipitor, their high price tag could potentially garner substantial revenue. As Big Pharma companies see patents expire on their most profitable products, orphan drugs could be a potential savior.

Pfizer, Sanofi, Elan Corp. plc and Amgen Inc. have all made deals or tried to make deals in the orphan-drugs sector. Sanofi's acquisition of Genzyme, for example, includes Fabrazyme, Genzyme's treatment for Fabry disease, which generates billions in revenue. Genzyme has multiple orphan products in its pipeline.

However, even the potential of orphan drugs may not be enough to encourage large companies to return to the days of biotech deals without milestone payments. And even if it was, another ebb in the risky biotech sector is never too far off.