Contingent Value Rights: Biopharma's Unique Deal Currency

Introduction

Contingent value rights have become one of the most distinctive deal instruments in biopharma M&A. While earnouts exist across all M&A sectors, CVRs are essentially unique to healthcare. They combine the risk-allocation function of an earnout with the liquidity and transferability of a registered security, allowing target shareholders to receive immediate value for their upside exposure rather than waiting years for milestones to be achieved. The surge in CVR usage from 7 deals in 2024 to 27 deals in 2025 reflects the growing complexity of biopharma transactions and the widening valuation gaps between buyers and sellers as asset scarcity drives competitive auction dynamics.

A CVR is a registered security (typically listed on a public exchange) that entitles the holder to receive a specified cash payment per share if one or more defined milestones are achieved within a specified time period. If the milestones are not achieved, the CVR expires worthless.

Contingent Value Right (CVR)

A transferable financial instrument issued by an acquirer to target shareholders as part of the acquisition consideration. Each CVR represents the right to receive a defined cash payment (e.g., $2.00 per share) if a specified milestone (e.g., FDA approval of a specific drug by a specific date) is achieved. CVRs are distinct from earnouts in three ways: they are registered securities that can be traded on public exchanges, they are issued directly to shareholders (not paid to the company), and they create a publicly observable market price that reflects the market's real-time assessment of milestone probability. CVRs are governed by a CVR Agreement that specifies the milestones, payment amounts, efforts covenants, and expiration dates.

How CVRs Fit in Deal Consideration

In a typical CVR transaction, the acquirer pays a combination of cash (and/or stock) at closing plus one or more CVRs per target share. The CVR component represents the portion of the purchase price that is contingent on future milestones.

The transferability distinction is the most significant. In a standard earnout, target shareholders must wait for milestones to be achieved. Shareholders who want liquidity or who disagree with the milestone probability have no recourse. With CVRs, shareholders who want immediate liquidity can sell the CVR on the open market, and shareholders who are more optimistic about milestone achievement can buy additional CVRs. This creates a market-based price discovery mechanism that allocates the milestone risk to the parties most willing to bear it.

The most heavily negotiated provision in any CVR agreement is the acquirer's obligation to work toward achieving the CVR milestones. This is the same "ordinary course" versus "commercially reasonable efforts" debate that governs earnout obligations, but with a twist: because CVRs are publicly traded securities, the acquirer's behavior is subject to public scrutiny and potential securities litigation, not just contractual dispute resolution.

The Efforts Spectrum

Best efforts requires the acquirer to take every reasonable action to achieve the milestone, even if doing so is not in the acquirer's broader strategic interest. This is the strongest standard and is rarely agreed to by acquirers because it effectively surrenders post-acquisition strategic flexibility.

Commercially reasonable efforts requires the acquirer to pursue the milestone in the manner a similarly situated company would pursue a product of similar commercial potential and stage of development. This is the most common standard and provides a balance: the acquirer must invest reasonable resources but is not required to prioritize the CVR-related product above all others.

Ordinary course requires the acquirer to continue operating the acquired asset consistent with past practice but does not require affirmative investment or prioritization. This is the weakest standard and gives the acquirer the most flexibility, including the ability to deprioritize the CVR-related program if other portfolio assets are more promising.

Diligent efforts (the standard in the Sanofi/Genzyme CVR) requires the acquirer to use "such efforts and employ such resources normally used by persons in the pharmaceutical industry" for a product of similar commercial potential. Courts have interpreted this standard as requiring meaningful investment, not just passive continuation. In the Sanofi case, the court found that failing to assemble a timely sales force and failing to develop infusion centers for patient access could constitute a breach of diligent efforts, even though Sanofi argued that its decisions reflected reasonable commercial judgment about Lemtrada's limited market potential as a third-line therapy.

The practical implication for healthcare bankers is that the efforts covenant language directly determines the buyer's post-closing flexibility and the seller's practical ability to enforce the CVR. Buyers want the weakest standard that the seller will accept; sellers want the strongest standard the buyer will agree to. The negotiation typically settles on "commercially reasonable efforts" with specific carve-outs that define what the buyer is and is not required to do (e.g., minimum R&D spending levels, commitments to maintain a dedicated sales force, requirements to pursue specific regulatory filings).

The 27 CVR deals in 2025 displayed several notable patterns that reflect the evolving use of this instrument.

CVRs as a larger share of total consideration. CVRs averaged 37% of total deal value in 2025 according to Jefferies data, a substantial increase from historical norms of 15-25%. In some transactions, the CVR component exceeded the upfront payment: Eli Lilly's acquisition of Adverum Biotechnologies included a CVR potentially worth 2.5 times the upfront cash payment, and Day One Biopharmaceuticals' acquisition of Mersana Therapeutics offered $25 per share upfront with an additional $30.25 per share from a CVR. These structures reflect the extreme valuation gaps in the current market, where sellers (biotech companies with clinical-stage assets) believe their pipelines are worth significantly more than buyers are willing to commit upfront.

Broader use beyond clinical milestones. While the majority of 2025 CVRs remained tied to traditional regulatory milestones (FDA approval, clinical data readouts), an increasing number included commercial milestones (revenue thresholds) and combination structures (regulatory milestone plus a subsequent commercial milestone). This broadening reflects the use of CVRs in later-stage acquisitions where the product is already approved but the commercial trajectory is uncertain.

CVRs as auction currency. In competitive auctions for scarce pipeline assets, CVRs have become a strategic bidding tool. A buyer can offer a lower upfront price combined with a generous CVR and still present a competitive headline number to the target board. For sell-side bankers running auction processes, evaluating competing bids now requires sophisticated probability-weighted analysis of CVR terms, not just comparison of upfront cash values. Two bids with the same headline value but different CVR structures (different milestones, different efforts covenants, different expiration dates) can have materially different expected values.

How the Market Prices CVRs

CVR market prices reflect the market's real-time probability assessment of milestone achievement, discounted for time value. If a CVR pays $5 upon FDA approval and the market assigns a 60% probability of approval within the next two years, the CVR should trade at approximately $2.80-$3.00 (probability-weighted payout minus a small discount rate).

In practice, CVR prices fluctuate with clinical trial data, FDA communications, competitive developments, and management commentary. A positive Phase III readout can cause a CVR to jump 30-50% overnight as the market re-prices the probability of subsequent FDA approval. An FDA Complete Response Letter (rejection) can cause the CVR to drop to pennies.

CVR Implied Probability

The probability of milestone achievement implied by the CVR's market trading price. Calculated as: CVR Market Price / CVR Payment Amount. If a CVR that pays $10 upon milestone achievement is trading at $4, the market-implied probability is 40%. CVR implied probabilities are closely watched by healthcare investors and analysts because they provide a real-time, market-based assessment of clinical and regulatory risk that supplements probability of success data derived from historical base rates. When the CVR-implied probability diverges significantly from analyst-estimated probability, it may signal a trading opportunity or an information gap.

CVR Liquidity Challenges

Despite being publicly listed, many CVRs trade with limited liquidity. Daily trading volumes can be thin (a few thousand shares), creating wide bid-ask spreads and making it difficult for institutional holders to sell large positions without significant price impact. This illiquidity means the CVR market price may not fully reflect fundamental probability, creating potential mispricing. Healthcare-focused hedge funds and special situations investors actively trade CVRs, seeking to exploit the gap between market-implied probability and their own clinical assessment.

Non-Transferable CVRs

Some transactions issue non-transferable CVRs that function more like traditional earnouts but are structured as securities for accounting and governance purposes. Non-transferable CVRs do not trade on public exchanges, eliminating the liquidity benefit for shareholders but simplifying the administrative burden for the acquirer (no exchange listing, no public reporting of CVR-related developments).

Multiple Independent CVRs

Complex transactions may issue multiple CVRs tied to different milestones. A biotech acquisition involving a lead asset in Phase III and a second asset in Phase II might issue separate CVRs for each asset's regulatory approval, with different payment amounts reflecting the relative value and probability of each milestone. This structure gives shareholders granular exposure to specific pipeline outcomes and creates separate trading markets for each risk.

Revenue-Based CVRs

Some CVRs pay amounts tied to revenue achievement rather than binary milestones. These function more like financial earnouts in tradeable security form. Revenue-based CVRs are less common because the metric is harder to define cleanly (the same accounting disputes that plague financial earnouts apply) and because the variable payment amount makes market pricing more complex.

For Sell-Side Advisory

CVRs can be a powerful tool for maximizing headline price in competitive auctions. If two bidders are offering similar upfront cash, the one willing to offer a more generous CVR (higher payment, longer duration, weaker efforts covenant that paradoxically gives the seller less comfort but is acceptable if the upfront is sufficient) may win the deal. The sell-side banker's role is to help the target board evaluate the probability-weighted value of different CVR proposals and advise on whether the CVR structure adequately protects shareholder interests.

For Buy-Side Advisory

CVRs allow acquirers to compete in auctions with higher headline bids while limiting actual cash outlay and risk. The key buy-side consideration is the efforts covenant: overly aggressive obligations can constrain the acquirer's post-acquisition strategic flexibility and create litigation risk. The buy-side banker should model the probability-weighted cost of the CVR (expected payment amount times milestone probability) and compare it to the alternative of paying a higher upfront price without the CVR.

The next article covers the multi-layered regulatory approval process in healthcare M&A, explaining why healthcare deals take 6-12+ months to close versus 3-4 months in other sectors.