Contingent Value Rights

A contingent value right (CVR) is a security handed to target-company shareholders alongside cash or stock in a merger, promising an extra payment only if a specified milestone is hit within a set window. CVRs exist to bridge a valuation gap: if the buyer and seller disagree about whether some future event will happen, the CVR lets the seller keep upside from that event without the buyer having to pay for it up front.

They're most common in pharmaceutical and biotech deals, where a drug's value depends heavily on whether it clears a regulatory approval or hits a sales target that hasn't happened yet. A CVR typically trades separately once issued, but its price behaves less like a stock and more like a binary option — worth close to nothing until the milestone date, then either paying out in full or expiring worthless.

Worked example

A pharmaceutical company is acquired for $20 in cash per share plus one CVR worth up to $5 if a pipeline drug wins FDA approval within three years. If approval is granted on time, CVR holders collect the full $5. If the drug is rejected or delayed past the deadline, the CVR expires worthless and shareholders are left with only the $20 cash. Because CVRs are illiquid and hard to value, many shareholders sell them immediately at a steep discount rather than hold through the uncertainty.