Contingent Value Rights Gain Traction in Biotech Deals Amid Market Uncertainty

In an era of market volatility and heightened uncertainty in the biotech sector, companies are increasingly turning to contingent value rights (CVRs) to bridge valuation gaps and secure deals. This trend reflects the industry's efforts to maximize potential returns while mitigating risks in an environment where every dollar of value is crucial.

The Rise of CVRs in Biotech Transactions

Contingent value rights are becoming a popular tool in biotech mergers and acquisitions, offering a way to reconcile differing expectations between buyers and sellers. Brad Stewart, Life Sciences National Leader at BDO USA, explains that CVRs "play a role when there's a difference in people's certainty on the outcome." This mechanism allows companies to set aside intangible factors and focus on concrete, verifiable events to determine future payouts.

Recent deals involving major players like Sanofi illustrate this trend. The pharmaceutical giant has included CVRs in transactions with Blueprint Medicines and Vigil Neuroscience. In the latter case, shareholders received an upfront payment of $8 per share, with the potential for an additional $2 per share if the oral TREM2 candidate VG-3927 achieves commercial sales. This structure increased the potential deal value from $470 million to $600 million.

Challenges and Considerations in CVR Implementation

While CVRs offer flexibility in deal-making, they come with their own set of challenges. The case of Alexion and Syntimmune highlights the importance of careful crafting and clear terms in CVR agreements. A court ruling in June found that Alexion had breached its obligation to make "commercially reasonable efforts" to develop programs outlined in an earnout agreement, resulting in a significant financial penalty.

The complexity of CVRs extends to their timelines, which can span several years. Verve Therapeutics' acquisition by Eli Lilly includes a CVR payable when the first patient is dosed with the base editing therapy VERVE-102 in a U.S. Phase III trial for atherosclerotic cardiovascular disease, with a 10-year window for achievement.

Market Dynamics and Investor Perspectives

The current market environment is particularly conducive to CVR negotiations. With many biotechs facing cash shortages and struggling to find partners, CVRs offer a way to "unstrand" assets that might otherwise be left without a home. However, investor reactions to CVRs can vary. Some fast-moving investors may prefer all-cash deals, while others see CVRs as an opportunity to potentially benefit from future market improvements.

Stewart notes that in more robust markets, buyers often prefer to close deals quickly by offering higher upfront payments. In contrast, down markets with less competition allow for more creative deal structures, including the use of CVRs.

As the biotech industry continues to navigate uncertain waters, contingent value rights are likely to remain a key tool in deal-making, offering a bridge between present uncertainties and future potential.