Contingent value rights on the rise in life sciences and healthcare M&A

Abstract

Background | Financial advisers in the field of life sciences and healthcare M&A observed an apparent upward trend in the use of a unique form of payment called Contingent Value Right (CVR). In the context of public Mergers & Acquisitions (M&A), CVRs are contractual agreements in which the buyer commits to paying an additional consideration to the seller when specific payment triggers are met. Upon further research, multiple sources either confirmed or anticipated the increase in the use of CVRs, particularly within the life sciences and healthcare industry in the United States (Golden & Hanks, 2023; KPMG, 2023; Miller, 2023; Wagner Partin et al., 2023). Over the past decade, the average number of M&A transactions including a CVR, across all industries, was roughly 6 per year. However, in the first months of 2023 alone, the life sciences sector witnessed at least four public acquisitions with a CVR as part of the deal structure (AstraZeneca, 2023; Becker, 2023; Ipsen, 2023; Satsuma Pharmaceuticals, 2023). Interestingly, this trend appears to be quite notable in the United States while being completely absent in Europe.

Research questions | In this research, the primary objective was to address the knowledge gaps related to the apparent upward trend CVRs in biopharma deal structures. We aimed to uncover underlying reasons driving this trend and to discern the factors contributing to their frequent use in the United States compared to Europe. Furthermore, we set out to identify the specific situations in which CVRs prove to be particularly valuable. Our ultimate goal was to gather insights and formulate recommendations for the financial advisers at Van Lanschot Kempen.

Relevance | Knowledge of emerging instruments such as CVRs is essential for staying competitive in the highly specialized field of financial advisory. More specifically, clients in the life sciences and healthcare sector look for advisors with both financial expertise and industry-specific knowledge. In the end, this report will assist financial advisers at Van Lanschot Kempen in providing ‘personal’, ‘specialized’, and ‘entrepreneurial’ solutions to their clients, in line with three of their four core values.

Methods | This study used literature research and expert interviews to gain insights into the trends shaping the use of CVRs in the broader biopharma M&A industry. In addition, a case study of the Lilly-Sigilon acquisition (June 29, 2023) was carried out (Eli Lilly & Company, 2023a). The reason to include a CVR in the deal structure is shaped by a variety of factors that may not always be readily apparent. Therefore, these factors should be assessed on a case-by-case basis. By using this combination of research methods, we managed to obtain insights into the use of CVRs at both the industry level and the company level.

Conclusion & recommendations | Based on our research, we have strong indications that the use of CVRs in biopharma deal structures will continue to increase. Moreover, once a legal precedent is set, we foresee that this trend will expand into Europe. We identified four reasons for a biopharma companies to include a CVR in their deal structure, namely to bridge a valuation gap, to mitigate risk, to sweeten the deal, or due to lack of alternative options. We recommend financial advisers to educate themselves on the structure and valuation of CVRs, two of the most complicated aspects of this instrument, and to engage legal professionals who understand the structure and applicability of CVRs in the European context.