Seven Things Life Sciences Buyers and Sellers Should Know About CVRs

The life sciences industry has recently seen a proliferation of Contingent Value Rights (CVRs), the public M&A equivalent of the earnout used in private deals.  Sally Wagner Partin, Sharon Flanagan, and Hannah Brown explain what you need to know about them.

CVRs are a mechanism for bridging valuation gaps between buyers and sellers in public M&A transactions when there is not an agreement on price.  CVRs are especially attractive in life sciences transactions because target companies already face high beta outcomes that depend on uncertain future events like clinical trial results, regulatory approvals, and successful product commercialization.  Recent public deals that involved the use of CVRs include AstraZeneca’s acquisition of CinCor Pharma last February, French biopharmaceutical company Ipsen’s acquisition of Albireo Pharma in March and Novartis’s acquisition of Chinook Therapeutics announced June 2023.

Here are seven things life sciences buyers and sellers should know about CVRs:

1. CVRs have been gaining popularity in recent in years, particularly in the life sciences industry, and CVRs are more common in the life sciences industry than one might expect.
2. In our analysis of all announced U.S. public transactions from January 1, 2018 through April 30, 2023, we found that over the last year approximately 29% of the M&A deals announced in the life sciences and healthcare space included the use of a CVR. This is compared to 17% in the period from January 1, 2018 through April 30, 2023 and 10% in the period from January 1, 2013 through December 31, 2017.
3. CVRs are even more prevalent in relatively smaller public M&A life sciences transactions. CVRs were used in approximately 45% of all public life sciences M&A deals announced in the last five years that had an equity value of less than US$500 million.
4. CVRs can be price-driven, for example providing CVR holders a payment if the average market price of the issuer’s equity security is less than a pre-set target price. Or they can be event-driven, for example providing CVR holders a payment if certain regulatory milestones are achieved.
5. CVRs can be complicated to structure, but the life sciences industry has shown some standardization in the terms of CVRs. The vast majority of life sciences deals using CVRs that were considered in our study provided for event-driven (none of the life sciences transactions included price-driven CVRs), non-transferable, and cash-settled CVRs.
6. Based on the study sample, the median potential value of a CVR, as compared to the guaranteed value a shareholder will receive in a deal, is approximately 18%.
7. Of CVRs in the life sciences industry included in our study, 30% included a subjective standard of required efforts (i.e., the efforts that the buyer expends on its own internally developed programs) and 47% an objective standard (i.e., the efforts that a reasonable company would expend on a similar program). Other CVR agreements were silent, had another standard, or even specifically disclaimed that the buyer would have to use any specified efforts to achieve the milestone.

Despite their complexity, CVRs are appealing because they can be structured and customized to meet the circumstances of a particular transaction.  The use of CVRs has the potential to provide a flexible tool that can offer a solution to a host of unknowns and risks associated with the future performance of a target company, but CVRs require careful consideration of a variety of factors, including the appropriate milestones and metrics, other key terms, and the potential risks and rewards for both buyers and sellers.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.