Contingent value is back in vogue

This week another takeover included a CVR element, confirming a trend that has been gaining traction over the past year.

Analysis

Reports of the death of the contingent value right in biopharma appear to have been greatly exaggerated. Including CVRs in deals fell out of favour after Sanofi’s notorious takeover of Genzyme, but this security seems now to be back in vogue, an analysis by Evaluate Vantage reveals.

Funds that had invested in Celgene, for instance, are currently grappling with the increasing likelihood that the CVR attached to their company’s acquisition by Bristol Myers Squibb might not pay out. And this week brought news of another transaction that included a CVR element, as Ligand took out Pfenex for up to $516m.

$78m of the price hinges on an undisclosed regulatory milestone being achieved by the end of 2021, and the right to receive this cash, equivalent to $2 per Pfenex share, has been structured as a CVR. It is not yet clear whether this CVR will, like Bristol’s, be publicly tradable.

Valuation disconnect

Tradable or not, CVRs are typically written into deals to bridge a valuation gap between what a seller wants to receive and what a buyer is willing to pay.

You think your company is worth more than I do? Fine, I’ll pay you that – but only in the event of a bull-case scenario playing out. This is the basic logic underlying CVRs, and it is probably no coincidence that these securities become more popular during a bull market, when the disconnect between buyers and sellers is at its peak.

The Vantage analysis seems to bear this out. After treading water for several years, the issuance of CVRs along with biopharma deals surged in the middle of 2019, and in the quarter just ended CVR numbers accelerated; meanwhile, in the last 12 months the Nasdaq biotech index has gained 26%, to exceed the high it had hit in mid-2015.

True, the absolute numbers are relatively small, but the pattern is hard to ignore. After the 2011 Sanofi/Genzyme deal, annual numbers of deals with a CVR attached remained in the single digits until 2019, when 13 such transactions were signed; and the first half of 2020 has already seen nine CVR-containing transactions. This excludes Ligand/Pfenex, which is a third-quarter deal.

One question is why buyers still accept a CVR as part of an acquisition, especially after Genzyme holders ended up having to sue Sanofi to recover what they believed they had been due under a CVR relating to the multiple sclerosis drug Lemtrada (Value of Sanofi’s Genzyme security rests with the law courts, January 10, 2014).

The Celgene CVR appears also to be skewed in Bristol’s favour. The acquirer not only has some control over when the relevant milestones might occur – with the caveat that it has a fiduciary duty to respect the interests of all security holders – it can also buy out the CVR at any time.

Despite all this CVRs are again a popular financial instrument for biopharma. Investment bankers will be thankful that, with asset prices departing ever further from reality, there still exists a way to get deals across the finish line.

Selected biopharma acquisitions that included a CVR
Buyer Target Date Deal value excl CVR CVR value (max disclosed)
Bristol-Myers Squibb Celgene Q1 2019 $71.2bn $6.4bn
Sanofi Genzyme Q3 2010 $20.1bn $4.1bn
Allergan Tobira Q3 2016 $534m $1.2bn
Celgene Abraxis Q2 2010 $2.9bn $650m
Shire Dyax Q4 2015 $5.9bn $646m
Biogen Stromedix Q1 2012 $75m $488m
Actavis Furiex Q2 2014 $1.1bn $360m
Alexion Achillion Q4 2019 $930m $295m
Ipsen Clementia Q1 2019 $1.0bn $263m
Cubist Optimer Q3 2013 $551m $255m
Lundbeck Alder Q3 2019 $1.8bn $195m
Biomarin Prosensa Q4 2014 $680m $160m
Actavis Durata Q4 2014 $675m $147m
Lundbeck Chelsea Q2 2014 $530m $128m
Cubist Trius Q3 2013 $707m $111m
Note: includes only deals that specified a formal contingent value right (CVR), whether tradable or not, rather than simple contingent milestone payments. Source: EvaluatePharma & company announcements.

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