CVRs: The Rarely Traded Deal-Sweetener That Divides Risk Between Buyers and Sellers

Imagine this: Two companies are merging, but they can’t agree on the price. The buyer thinks a drug under development is risky and worthless. The seller insists it’s a goldmine. Neither wants to budge. Enter CVRs—contingent value rights—a financial instrument designed specifically to break such deadlocks. These derivatives tie their payouts to future events, such as drug approvals or sales milestones. If the milestone hits within the timeframe, investors get paid. If not, the CVRs expire worthless, much like an option. While rare on stock exchanges, CVRs have become increasingly common in high-profile acquisitions since the 2008 financial crisis.

How CVRs Bridge the Valuation Gap in Mergers

CVRs most commonly emerge during acquisition negotiations in biotech and pharmaceuticals, where opinions about a drug’s value can diverge wildly. Picture this scenario: an acquiring company bets a pre-market drug is overhyped and risky, wanting to pay next to nothing. Meanwhile, the acquired company’s shareholders demand full credit for potential value. CVRs solve this impasse by making future payouts conditional on hitting agreed-upon targets.

Instead of negotiating a single purchase price, the deal now has two components: an immediate payment plus a contingent payment triggered by specific events. These events might include FDA approval within three years, or sales reaching $500 million annually. Because both companies agree on the milestones upfront, they both feel the negotiation reflects their respective confidence levels. The acquiring company avoids overpaying for a speculative asset. The acquired company’s shareholders maintain upside potential if the product succeeds. It’s this flexibility that has made CVRs popular in biotech, with deals from AstraZeneca and other major pharmaceutical firms featuring such provisions.

The most famous modern example occurred in 2011, when Sanofi-Aventis acquired Genzyme for $74 per share. Genzyme shareholders also received one CVR per share, worth potentially $14 more if all milestones were met. This structure allowed Sanofi to limit its immediate cash outlay while still offering Genzyme shareholders significant upside if the company’s pipeline delivered results. That delicate balance is precisely what makes CVRs useful for high-stakes mergers.

Understanding the Two Types of CVRs: Tradeable vs. Non-Tradeable

CVRs come in two flavors, and the distinction matters enormously for investors. Most CVRs issued by acquirers are non-transferrable. This means if you hold shares in the target company at the moment of delisting, you receive the CVRs as part of your merger consideration. You hold them in your brokerage account until the milestones are met (or the deadline passes), but you cannot sell them to someone else. The issuing company prefers this approach because trading CVRs on an exchange triggers additional regulatory filing requirements, costs, and disclosure obligations.

Tradeable CVRs, however, are far more interesting for investors willing to speculate on deal outcomes. When CVRs trade on a stock exchange, their prices fluctuate based on market participants’ beliefs about whether the underlying milestone will be achieved. Unlike non-transferrable CVRs—which require you to have owned the acquired company’s stock before the merger closed—you can buy tradeable CVRs at any point up until they expire and delist. This flexibility transforms CVRs into a distinct speculative asset class, separate from the merging companies’ own valuations.

In Sanofi’s acquisition of Genzyme, the CVRs traded publicly on an exchange. This openness to market pricing meant investors could profit by betting against the company’s official projections. If you believed Genzyme’s pipeline had a higher success probability than market prices reflected, you could buy CVRs at a discount. Conversely, if you thought the milestones were unlikely, you could sell or short them. This dynamic creates real risk-taking opportunities for sophisticated investors comfortable with biotech uncertainty.

What Every CVR Investor Must Know: The Customization Trap and the Good-Faith Problem

Here’s the critical fact most newcomers miss: every CVR is utterly bespoke. Sanofi’s Genzyme CVR had six separate milestones tied to drug approvals and sales thresholds. Another company’s CVR might have three, or ten, or depend on entirely different metrics. Each has unique expiration dates, different payout structures, and different trigger events. Some CVRs distribute a single lump sum; others pay out in tranches over years as commercialization progresses.

This customization makes due diligence non-negotiable. Before buying any CVR, you must dig into the SEC filings, understand every milestone, and assess the probability of each being met. Many retail investors skim the headlines, see a familiar company name, and buy without reading the fine print. That’s a recipe for disaster because CVRs can expire worthless, leaving you with zero return on your investment. Unlike owning stock in a real company, CVRs generate no dividends, no voting rights, and no residual value if the milestone isn’t reached.

But there’s a deeper, more insidious risk that contract language often glosses over. CVRs create perverse incentives inside the acquiring company. The acquirer must use “good faith” to pursue the milestone, according to standard CVR contracts. Yet if hitting the milestone requires substantial investment in a speculative product the acquiring company now doubts, that good-faith obligation suddenly conflicts with shareholder interests at the acquirer. The acquirer might have only agreed to the acquisition to acquire the target’s other assets or technology. Now it’s supposed to invest millions more to make the CVR milestone achievable—money that benefits former competitors’ shareholders rather than its own shareholders.

This structural tension rarely gets litigated, but it haunts every CVR investor’s calculus. You’re not just betting on science or market success. You’re betting that the acquiring company won’t de-prioritize your milestone in favor of other strategic goals. That’s a bet on corporate behavior, not just external market conditions. Sophisticated CVR investors factor this governance risk into their pricing, often demanding significant discounts to account for the possibility that management will drag its feet on milestone-related development.

The Bottom Line: CVRs Reward Due Diligence and Risk Tolerance

CVRs remain rare precisely because they’re complex, customized, and carry significant risks that aren’t always obvious. They do serve a genuine purpose: allowing strategic buyers and sellers to bridge valuation gaps when uncertainty is highest. For investors, tradeable CVRs offer genuine asymmetric bet opportunities—if you do the homework to assess milestone probability better than the market has.

But they’re not suitable for passive investors or anyone uncomfortable reading dense legal filings. The lesson is straightforward: CVRs can amplify returns for those who understand them, but they punish those who treat them like ordinary stocks. Read the SEC filings. Understand the milestones. Assess the acquirer’s commitment to hitting them. Only then does betting on CVRs make sense.