Pharma CVRs are an unhealthy M&A habit

Biotechnology investors and executives tend to be an optimistic lot, so CVRs crop up reasonably often

  
Test tubes are seen in front of a displayed Bristol Myers Squibb logo in this illustration taken, May 21, 2021.

Test tubes are seen in front of a displayed Bristol Myers Squibb logo in this illustration taken, May 21, 2021.

Reuters/Dado Ruvic/Illustration

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

NEW YORK - Contingent value rights are a clever way of bridging the price gap between a drugmaker and a would-be acquirer. But what starts as a right can turn into a litigious rumpus.

Bristol Myers Squibb faces a lawsuit that alleges it slow-walked a cancer drug approval in order to avoid a $6.4 billion top-up payment for its acquisition of Celgene in 2019. When it bought its rival for $74 billion, Bristol Myers said it would throw in more money later if three drugs were approved by certain deadlines. Since that didn’t happen, the CVR ended up worthless.

Biotechnology investors and executives tend to be an optimistic lot, so CVRs crop up reasonably often. A company selling itself to a rival understandably hopes a therapy yet to hit the market will be a success, and that regulators will give it the green light. A big acquirer has reason to be more skeptical. A CVR, which pays out a bonus amount upon success, can paper over the difference.

Bristol Myers Squibb’s CVR already had a low chance of paying out because it required three drugs to be approved within a limited time. Assuming each had a 75% chance of success, that’s roughly a 40% chance of hitting the jackpot. And that’s not factoring in the deadline. Bristol Myers says Covid-19 held up the U.S. Food and Drug Administration’s inspection of a Texas manufacturing plant. All three drugs were eventually approved, but too late for CVR holders.

There are worse examples. Payouts based on sales or profit can be even more problematic because the new owner has some control over what happens next. Sanofi agreed to pay $315 million in 2019 to settle CVR-holder claims that it slowed development and didn’t market a drug adequately. And while investors can sell their CVRs, the market isn’t very deep. Biotechnology already attracts a specialized investor; the complexity of CVRs narrows the field even further.

The aggrieved investors in Bristol Myers Squibb’s CVRs may get something, if the drugmaker decides to settle. It may not take too much: While the CVR was designed to pay out $9, it mostly traded below $3. The easiest way to settle such disputes would be for drugmakers to eschew CVRs altogether.

CONTEXT NEWS

- Bristol Myers Squibb is being sued for $6.4 billion for allegedly delaying the U.S. Food and Drug Administration’s approval of Liso-cel, its cancer drug.

- The company bought Celgene for $80 billion in 2019, and paid partly in contingent value rights, which are effectively the right to receive an extra payment if certain targets are hit later.

- The CVR would have paid $9 a share, or $6.4 billion in total, if Bristol Myers received approval for three drugs by specified deadlines. The company missed the deadline for Liso-cel, receiving approval in February.

- The lawsuit was brought by UMB Bank, as a trustee for holders of the contingent value rights. UBM said Bristol Myers did not use a diligent effort as required under the agreement to receive approval, withheld or delayed submitting information, and did not prepare its manufacturing plant for FDA inspection.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe | Editing by John Foley and Amanda Gomez) ((robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.net))


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