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Understanding Contingent Value Rights (CVRs)

Updated: Feb 18

Contingent Value Rights (CVRs) are financial instruments that derive their worth from contingent events associated with the value of an underlying asset. Often employed in mergers and acquisitions (M&A), they offer a way to bridge the valuation gap between the buyer and the seller, representing potential additional compensation if specific milestones or events occur within a stipulated period. For investors, understanding CVRs can offer unique investment opportunities, adding another layer of strategy to their investment portfolio.

Understanding Contingent Value Rights (CVRs)

A CVR is a type of right that a company may give to its shareholders that entitles them to additional value if a specified event occurs within a specified timeframe. The trigger events can be varied - ranging from regulatory approval of a new drug in a pharmaceutical merger to the attainment of specific financial goals. From the investor’s perspective, CVRs are speculative investments that offer potential upside rewards but also come with considerable risks. If the contingent event does not occur, the CVR might expire worthless.

Examples of Contingent Value Rights (CVRs)

Sanofi-Genzyme Acquisition (2011): One of the most prominent examples of the use of CVRs was in the 2011 acquisition of Genzyme by Sanofi. Sanofi agreed to pay $20.1 billion, or $74 per share, in cash for Genzyme, but there was a disagreement on the future revenue potential of Genzyme's experimental multiple sclerosis drug, Lemtrada. To bridge this valuation gap, Sanofi issued a CVR, traded under the symbol GCVRZ, offering Genzyme shareholders the opportunity to share in the upside of Lemtrada achieving regulatory approval and other revenue milestones. If all milestones were met, each CVR would pay up to $14 in cash. However, the drug didn't reach the expected sales targets, leading to lawsuits by shareholders claiming that Sanofi had hindered the drug's success.

Bristol-Myers Squibb (BMS) - Celgene Acquisition (2019): The $74 billion merger between BMS and Celgene also included the issuance of a CVR. Shareholders of Celgene would receive one tradable CVR for each share of Celgene, amounting to a payment of $9 per CVR upon the approval of three drugs (ozanimod, liso-cel, and bb2121) by specified dates. Unfortunately, despite two drugs gaining approval within the stipulated timeframe, the third drug (liso-cel) didn't meet its approval deadline, rendering the CVRs worthless.

Investing in Contingent Value Rights (CVRs)

Investing in CVRs requires a comprehensive understanding of the contingent events and the timeline. These instruments are speculative in nature and could result in a total loss if the specified conditions are not met. On the other hand, they can also provide significant gains if the milestones are achieved, making them an appealing, high-risk, high-reward option for investors. CVRs can be traded on the open market like any other securities, meaning their value can fluctuate based on investors' changing perceptions of the likelihood of the contingent event being realized. It's important for investors to keep an eye on how these rights are trading and any news that might impact their ultimate value.

CVRs and Risk Management

Given their nature, CVRs introduce a unique risk-return profile to an investor's portfolio. They are highly tied to specific events that may or may not happen, adding a layer of uncertainty that is not present with traditional securities. Consequently, they may not be suitable for risk-averse investors. For those willing to take on this risk, CVRs can potentially offer substantial returns. However, investors should carefully evaluate the terms of the CVR, the likelihood of the contingent event, and its alignment with their investment goals and risk tolerance.

Contingent Value Rights (CVRs) present a unique avenue for investors to tap into the potential upside of specific business outcomes or milestones. While the inherent uncertainty and risk associated with these instruments demand a careful and well-researched investment strategy, they can provide a worthwhile addition to a diversified portfolio for those investors who are comfortable with a higher degree of risk. As with all investments, investors should seek professional advice before committing capital to these complex financial instruments.

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