LS&HC Horizons 2023 - Flipbook - Page 31
Hogan Lovells | 2023 Life Sciences and Health Care Horizons | Transactions
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Using CVRs to bridge valuation gaps in life sciences M&A transactions
Several M&A deals announced in recent
months highlight the continued interest
in the use of contingent value rights (CVRs)
in acquisitions of publicly-held life sciences
companies. Buyers have increasingly turned
to CVRs to bridge the valuation gap that arises
when a buyer is reluctant to value a target
company’s products as highly as the target
company believes warranted based on its own
projections. Particularly for publicly-held
life sciences companies with clinical stage
products, CVRs may effectively serve as a form
of earnout to address the inherent uncertainty
that arises when a buyer seeks to value the
future performance of a product.
Like earnouts, however, contractual provisions
relating to CVRs must be carefully drafted and
negotiated (with particular focus on the buyer’s
obligation to seek to achieve milestones,
avoiding individual actions by CVR holders,
and describing milestones clearly) to reduce
the likelihood of litigation.
Despite the need for cautious drafting, we
anticipate that CVRs will remain a key tool
for bridging valuation gaps and offering
compelling acquisition proposals to public
life sciences companies.
CVRs allow former target company
shareholders to participate in the future value
created by a specific product if that product
achieves some or all of the target company’s
expectations. To that end, CVRs in life science
transactions are generally milestone-based:
target company shareholders are entitled to
additional post-closing payments if one or
more milestones are achieved within a specified
period of time. These milestones may include,
for example, clinical trial developments,
regulatory approvals, sales targets, or receipt
of third party payments.
Joseph E. Gilligan
Partner, Washington, D.C.
Robert N. Hayes
Counsel, Washington, D.C.
