LS&HC Horizons 2022 - Flipbook - Page 38
Hogan Lovells | 2022 Life Sciences and Health Care Horizons
38
Transactions
Using CVRs to bridge valuation gaps in life sciences M&A transactions
The past three years, have witnessed significant expansion 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.
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.
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.
Joseph Gilligan
Partner, Washington, D.C.
Robert Hayes
Counsel, Washington, D.C.
