When Pharmaceutical Promises May Become Tradable Assets: CVRs, Royalties, and the Market for Contingent Drug Payments
The pharmaceutical industry runs on promises. Drug companies promise to pay royalties when products succeed. Acquirers promise additional payments if clinical trials reach their endpoints. Academic institutions license their discoveries in exchange for future revenue streams they may never see. These promises—contingent value rights, milestone payments, and royalty interests—represent billions of dollars in potential value. But can they actually be bought and sold?
This question matters enormously to shareholders who receive CVRs as merger consideration, universities monetizing their intellectual property, and investors seeking exposure to pharmaceutical cash flows. The answer, it turns out, is far more complex than a simple yes or no. These instruments exist in a legal and commercial gray zone where theoretical tradability collides with practical barriers, where contractual rights meet bankruptcy law, and where sophisticated investors hunt for arbitrage opportunities that less specialized holders cannot capture.
Understanding the tradability of pharmaceutical payment rights requires diving deep into deal structures, litigation outcomes, and market mechanics. What emerges is a picture of instruments that are legally transferable in theory but practically illiquid in reality—and a market where this illiquidity creates both risk and opportunity.
The Birth of Contingent Consideration in Pharmaceutical Deals
Contingent value rights emerged from a fundamental problem in pharmaceutical mergers: how do you price a drug that hasn't been approved yet? When the compound in question could be worth billions or nothing at all, buyers and sellers find themselves staring across a valuation chasm that traditional deal structures cannot bridge.
The solution appeared in the late 1980s through a series of SEC no-action letters that established the framework for CVRs. The structure was elegant in concept: instead of fighting over whether an experimental drug justified a premium, parties could agree on contingent payments tied to specific milestones. If the FDA approved the drug, shareholders would receive additional cash. If not, they would receive nothing. The CVR effectively transformed pharmaceutical uncertainty into a tradable option.
The Viacom/Paramount deal in 1994 brought CVRs into mainstream M&A practice, but the instrument found its natural home in pharmaceutical transactions where binary outcomes—approval versus rejection—created precisely the kind of valuation disputes that CVRs were designed to resolve. By the 2000s, CVRs had become a standard tool in the pharmaceutical dealmaker's toolkit, used in transactions ranging from billion-dollar blockbuster acquisitions to smaller biotech purchases.
What made CVRs attractive to sellers was the preservation of upside. Target shareholders didn't have to accept the acquirer's conservative valuation of an experimental compound; they could participate in the success if their optimistic view proved correct. Buyers, meanwhile, avoided paying full price for assets that might never pan out. The structure seemed to offer something for everyone—except that the something often turned out to be far less valuable than anticipated.
The Sanofi-Genzyme Deal That Defined CVR Litigation
No transaction better illustrates both the promise and the peril of contingent value rights than Sanofi's $20.1 billion acquisition of Genzyme in 2011. The deal included one tradable CVR for every Genzyme share, listed on NASDAQ under the ticker GCVRZ, with potential payments of up to $14 per CVR tied to milestones for Lemtrada, a multiple sclerosis treatment.
The Genzyme CVR was remarkable for its transparency. Unlike most CVRs, which cannot be traded, GCVRZ gave shareholders the ability to exit their contingent positions immediately—or to double down by purchasing additional CVRs in the secondary market. Initial trading saw the CVRs valued around $2.60, implying the market saw meaningful probability that Lemtrada would meet its milestones.
Then the problems began. The first milestone—FDA approval by March 31, 2014—required Sanofi to pursue Lemtrada's development with "diligent efforts." But Sanofi was simultaneously developing Aubagio, a competing MS drug that didn't carry any CVR obligations. Every dollar of Lemtrada revenue would trigger payments to CVR holders; every dollar of Aubagio revenue belonged entirely to Sanofi.
The incentives were obvious, and the litigation that followed alleged that Sanofi acted on them. According to the lawsuit filed by UMB Bank as CVR trustee, Sanofi "embarked on a slow path to FDA approval" and "filed a poor application to the FDA that triggered an initial rejection." The complaint alleged a deliberate "go-slow" strategy that prioritized Aubagio because, as one analysis put it, Sanofi could "keep 100% of the profits" without sharing with CVR holders.
The FDA ultimately approved Lemtrada in November 2014—more than eight months after the CVR deadline. That miss cost shareholders $1 per CVR, but the real damage came from subsequent sales milestones that were also never achieved. The total potential payout of $3.8 billion evaporated.
GCVRZ became a playground for litigation speculation. As the CVRs traded down to around $0.08 in March 2016, some investors saw an opportunity. These weren't naive retail shareholders but sophisticated funds betting that a settlement would exceed the trading price. In October 2019, Sanofi agreed to pay $315 million to resolve the litigation. After legal fees and expenses—approximately $107 million for litigation funding and trustee costs—CVR holders received about $0.88 per CVR. Those who had purchased at the lows saw returns exceeding 1,000 percent.
The Sanofi-Genzyme saga established several principles that continue to govern CVR markets. First, tradable CVRs create liquid claims that sophisticated investors can acquire to prosecute litigation. Second, "diligent efforts" covenants, while standard, are difficult to enforce and subject to interpretation. Third, acquirers with competing products face inherent conflicts of interest that generic contract language may not adequately address. And fourth, CVR holders should expect significant friction in recovering value—even when their claims have merit, substantial proceeds flow to intermediaries rather than beneficial owners.
Bristol-Myers Squibb and the $6.7 Billion Question
If Sanofi-Genzyme defined the first generation of CVR litigation, Bristol-Myers Squibb's acquisition of Celgene represents the second—and potentially more consequential—chapter. The $74 billion merger, which closed in November 2019, included CVRs worth $9 per share tied to FDA approval of three drugs: ozanimod (for multiple sclerosis), liso-cel (a CAR-T therapy for non-Hodgkin lymphoma), and ide-cel (a CAR-T therapy for multiple myeloma).
The total potential CVR payout approached $6.4 billion—the largest contingent consideration structure in pharmaceutical history. Unlike the Genzyme CVRs, all three drugs needed to receive FDA approval by their respective deadlines for any payment to occur. This all-or-nothing structure created a high-stakes scenario where a single missed milestone would result in zero payout regardless of how close the other drugs came to approval.
Two of the three drugs met their deadlines. Ozanimod (Zeposia) was approved in March 2020. Ide-cel (Abecma) received approval on March 26, 2021, just five days before its deadline. But liso-cel (Breyanzi) missed its December 31, 2020 deadline by approximately 36 days, receiving FDA approval on February 5, 2021.
Those 36 days erased $6.4 billion in shareholder value. The question at the heart of the ensuing litigation is whether that miss was inevitable or whether Bristol-Myers Squibb failed to apply the "Diligent Efforts" required by the CVR agreement.
The lawsuit, initially filed by UMB Bank as trustee, alleges that BMS engaged in "blatant misconduct" and "slow-rolled" the FDA submission process. Plaintiffs claim that BMS made a "highly atypical decision to exclude critical and mandatory information" from its initial filing, then took an extra two months to submit a "major amendment" that "automatically extended" the FDA review timeline. The complaint further alleges that BMS failed to adequately prepare manufacturing facilities for FDA inspection, with problems identified at both Juno's Bothell, Washington plant and Lonza's Houston, Texas facility.
The litigation has followed a tortuous path. In September 2024, Judge Jesse Furman of the Southern District of New York dismissed the case—but not on the merits. Instead, the court found that UMB Bank "was never properly appointed trustee" because the trustee replacement process had been supported by beneficial owners rather than registered owners (Cede & Co. as DTC nominee). This technical deficiency, after three years of litigation, forced plaintiffs back to square one.
The setback proved temporary. Following a court-ordered reconfirmation process, Judge Furman denied Bristol-Myers Squibb's motion to dismiss in December 2025, ruling that the allegations could constitute breach of contract and breach of the implied covenant of good faith and fair dealing. The case now proceeds toward trial with damages estimated at $6.7 billion.
Some analysts project that Bristol-Myers will ultimately settle, perhaps in the range of $3 to $4 billion based on the Sanofi precedent. But even a settlement of that magnitude would represent a transformative outcome for CVR holders—and a stark warning to acquirers about the risks of contingent consideration structures. The case demonstrates that CVRs are not merely accounting entries to be managed but contractual obligations that, if breached, can result in liability exceeding many companies' annual profits.
The Dismal Arithmetic of CVR Payouts
Bristol-Myers and Sanofi represent high-profile failures, but they are far from anomalous. The data on CVR outcomes makes sobering reading for anyone considering contingent consideration as a value-preservation mechanism.
According to analysis by Cleary Gottlieb of 65 pharmaceutical and biotech CVR deals, only about 33 percent of completed CVRs resulted in any payout whatsoever. Of those, merely 13 percent achieved full milestone completion. The remaining deals either paid partially or—in the vast majority of cases—expired worthless.
| CVR Outcome | Percentage |
|---|---|
| Full payout achieved | 13% |
| Partial payout | 20% |
| No payout (expired worthless) | 48% |
| Still pending | 19% |
Data from SRS Acquiom examining 128 deals with 1,013 possible milestone events found that only about 11 percent had paid out by 2023, while roughly 36 percent had been missed or had their programs terminated. The remainder were still pending, their ultimate fate uncertain.
These statistics reveal a structural reality: CVRs are designed to bridge valuation gaps, but the underlying uncertainty that creates those gaps also makes non-payment the most likely outcome. When acquirers and targets disagree about a drug's prospects, the disagreement often exists for good reason—the drug genuinely faces significant development risk. CVRs don't eliminate that risk; they merely reallocate it.
Consider the economics from the acquirer's perspective. A company purchasing an experimental compound has strong incentives to pursue development if the drug shows promise. No rational acquirer abandons a potential blockbuster simply to avoid CVR payments. The drugs that fail to meet CVR milestones typically fail because of genuine scientific, regulatory, or commercial challenges—not because acquirers deliberately torpedoed them.
This is not to excuse conduct like that alleged against Sanofi, where an acquirer allegedly slow-walked development to favor a competing product. But such cases appear to be exceptions rather than the rule. The far more common scenario involves drugs that simply don't work as hoped, markets that prove smaller than projected, or regulatory pathways that prove more challenging than anticipated.
The Shire-SARcode deal illustrates the pitfalls of milestone specification. Shire acquired SARcode with CVRs worth up to $425 million tied to lifitegrast, a dry eye treatment. The drug was ultimately approved—seemingly a success. But the CVR milestone required something more specific: completion of a particular clinical study with specific endpoints. The study missed its endpoints even though the drug subsequently received approval based on other data. Shareholders received nothing despite the underlying drug's commercial success.
These outcomes have consequences for how market participants value CVRs. If only a third of CVRs pay out, and even successful cases often yield partial payment, rational investors will discount CVR values heavily. This creates the persistent pricing inefficiency that attracts specialized investors—and that leaves ordinary shareholders holding "illiquid, lottery-like tickets" they cannot effectively monetize.
How CVR Prices Actually Get Determined
For the small minority of CVRs that trade publicly, price discovery occurs through a specialized market with characteristics quite different from ordinary equity trading. Understanding these dynamics is essential for anyone trying to assess what a CVR is actually worth.
Tradable CVRs function as something between equity and options. Like options, they have binary payoffs tied to specific events. Like equity, they can be bought and sold on exchanges, with prices fluctuating based on changing assessments of milestone probability. But unlike standard options, CVRs lack the mathematical precision that enables Black-Scholes pricing; there is no volatility parameter that captures the probability of FDA approval.
Market participants typically approach CVR valuation through probability-weighted scenario analysis. If a CVR pays $9 upon FDA approval, and the market believes approval is 30 percent likely, the probability-weighted value is $2.70. Adjustments for time value (discounting), credit risk (the acquirer might not pay even if the milestone is achieved), and liquidity (the difficulty of exiting a position) reduce this further.
The result, according to Wachtell Lipton analysis, is that CVRs often trade at substantial discounts to their theoretical value. The firm observed that Celgene-Abraxis CVRs traded at just 35 percent of probability-adjusted net present value thirty days after closing, while Fresenius-APP CVRs traded at 55 percent of theoretical value. This persistent discount creates the arbitrage opportunity that attracts specialized investors.
| CVR Example | Trading Price vs. Theoretical Value |
|---|---|
| Celgene-Abraxis CVR | 35% of probability-adjusted NPV |
| Fresenius-APP CVR | 55% of probability-adjusted NPV |
| Typical CVR discount range | 40-70% of theoretical value |
Who trades CVRs? Primarily hedge funds and arbitrageurs who are comfortable with illiquid positions, long time horizons, and binary outcomes. Merger arbitrage funds, which typically profit from capturing spreads between announcement and closing prices, often discount CVRs heavily because payouts may come years after deal closure. The institutional analyst who initiated coverage will likely have moved on before the CVR pays out—creating agency problems that further depress valuations.
One blog analysis characterized CVRs as trading at about $0.15 on the dollar while actually paying out (when they do pay) at about $0.54 on the dollar. This gap suggests systematic undervaluation, but capturing the spread requires patience, expertise, and tolerance for losses on the majority of positions that expire worthless.
The Sanofi-Genzyme CVRs demonstrated how savvy investors can profit from this inefficiency. Those who purchased GCVRZ at its nadir of $0.08 and held through the settlement at approximately $0.88 realized returns exceeding 1,000 percent. But this required both the conviction to buy after multiple milestone failures and the patience to hold through years of litigation. Most institutional investors lack the mandate or inclination for such positions.
The Royalty Monetization Revolution That Royalty Pharma Built
While CVRs emerged as a solution to M&A valuation disputes, pharmaceutical royalty monetization developed from a different need: the desire of royalty holders to convert uncertain future streams into certain present cash. The industry that grew up to serve this need has transformed how academic institutions, biotech companies, and even large pharmaceutical firms manage their intellectual property portfolios.
Royalty Pharma, founded by Pablo Legorreta in 1996, pioneered the systematic acquisition of pharmaceutical royalties as an investment strategy. What started as a novel concept—buying rights to payments on drugs developed by others—has grown into a $14 billion annual market with over $100 billion in aggregate royalties outstanding.
The company's early deals established the model. In 2004-2005, Royalty Pharma executed back-to-back transactions with Memorial Sloan Kettering Cancer Center, acquiring 80 percent of MSKCC's royalty interest in Neupogen and Neulasta for $400 million. In 2005, the company partnered with Gilead Sciences to acquire Emory University's HIV drug royalties for $525 million.
The transformative moment came in 2014 with the acquisition of the Cystic Fibrosis Foundation's royalty rights in Vertex's CF treatments for $3.3 billion—the largest single royalty transaction ever. The deal illustrated both the scale royalty financing had achieved and its philanthropic implications: the CF Foundation had invested $150 million in developing the drugs and received a return exceeding twenty times its investment, providing resources for continued research.
Royalty Pharma's June 2020 IPO valued the company at $26.2 billion and raised $2.2 billion—the largest IPO of that year and the second-largest pharmaceutical IPO in history. The successful public offering validated the royalty acquisition model and attracted new entrants to the market.
Today, Royalty Pharma's portfolio includes royalties on more than 35 commercial products, including blockbusters like Vertex's Trikafta (generating approximately $8.4 billion in annual product sales), Biogen's Tysabri, AbbVie and J&J's Imbruvica, and Astellas and Pfizer's Xtandi. The company has deployed over $25 billion to acquire pharmaceutical royalties since its founding.
| Major Royalty Acquirer | Market Share | Focus |
|---|---|---|
| Royalty Pharma | ~60% | Large-cap royalties, $100M+ transactions |
| HealthCare Royalty Partners | ~19% | Mid-market deals, $20-250M |
| Blackstone Life Sciences | ~16% | Development-stage funding |
| OMERS Life Sciences | ~5% | Diversified portfolio approach |
The market has grown substantially more competitive. HealthCare Royalty Partners, which went public in 2021 and was subsequently acquired by KKR in July 2025, controls approximately 19 percent of market share with a focus on mid-market deals between $20 million and $250 million. Blackstone Life Sciences has deployed $1.8 billion into the space, representing roughly 16 percent of origination activity. Other active participants include OMERS Life Sciences, DRI Capital, TPG Sixth Street Partners, XOMA Corporation, and Oberland Capital.
The royalty acquisition model works because it serves the interests of multiple parties. Royalty sellers—whether universities, foundations, or biotech companies—receive certain cash today in exchange for uncertain future payments. Buyers receive attractive risk-adjusted returns on capital deployed. And the pharmaceutical ecosystem benefits from increased liquidity that enables inventors to monetize their innovations without waiting decades for royalty payments.
How a Typical Royalty Sale Actually Works
Understanding royalty tradability requires understanding the mechanics of how these transactions actually occur. Unlike listed CVRs, which trade on exchanges with continuous price discovery, royalty sales are bespoke transactions negotiated between sophisticated parties over months-long timelines.
The process typically begins when a royalty holder identifies a need for capital or a desire to derisk their intellectual property portfolio. Academic institutions might seek to lock in returns on a successful license; biotech companies might need funds for other programs; individual inventors might prefer certain wealth to contingent future payments.
The seller approaches potential buyers—either directly or through investment banking intermediaries—and provides preliminary information about the royalty stream: the underlying product, royalty rate, remaining patent life, historical payments, and projected future revenues. Buyers provide indicative valuations based on this information, and if pricing expectations align, the parties proceed to due diligence.
Due diligence for royalty acquisitions is extensive and specialized. Buyers must evaluate multiple dimensions of risk: scientific (will the drug continue to work?), regulatory (will approval be maintained?), commercial (will sales meet projections?), competitive (will generic or biosimilar competition erode the market?), and legal (is the royalty actually enforceable?).
| Due Diligence Category | Key Questions |
|---|---|
| Scientific/Clinical | Efficacy durability, safety signals, label expansion potential |
| Regulatory | Approval maintenance, post-marketing requirements, exclusivity periods |
| Commercial | Market size, pricing pressure, payer dynamics, competitive threats |
| Legal/IP | Patent validity, chain of title, anti-assignment provisions |
| Financial | Historical payment accuracy, royalty calculation methodology |
Patent analysis forms a critical component. Buyers verify ownership and chain of title, confirm valid patent terms and expiration dates, assess claim scope and potential invalidity defenses, and evaluate the likelihood of patent term extensions. A royalty stream is only as good as the intellectual property protecting it.
License agreement review is equally important. Buyers must understand exactly how royalties are calculated (the definition of "Net Sales" matters enormously), identify termination triggers that could extinguish the royalty, assess change-of-control provisions, and evaluate sublicensing arrangements. Anti-assignment clauses—provisions that restrict the royalty holder's ability to transfer their rights—require particular attention, as they can determine whether a transaction is legally feasible.
Valuation employs sophisticated financial modeling. Risk-adjusted net present value (rNPV) is the preferred methodology for development-stage assets, applying probability weights at each development stage (Phase II to approval success rates typically range from 25 to 35 percent; Phase III to approval from 50 to 70 percent) and discounting at rates that reflect the remaining uncertainty (often 8 to 12 percent for approved products, 15 to 30 percent for clinical-stage assets).
For established royalty streams on approved products, buyers may employ more traditional discounted cash flow analysis, with discount rates reflecting therapeutic area volatility, competitive dynamics, and licensee credit quality. Comparable transaction analysis provides additional validation.
Negotiations focus on purchase price, payment structure (upfront versus milestone), caps on buyer returns, and extensive representations and warranties. Sellers must represent that they hold valid title to the royalty, that the underlying license agreement is in full force, that there are no pending disputes, and that historical payment data is accurate. Buyers typically require that sellers remain available to assist with royalty collection and provide certain cooperation rights.
The entire process, from initial engagement to closing, typically spans three to six months. This extended timeline—combined with transaction costs including legal fees, due diligence expenses, and potential investment banking commissions—makes royalty monetization impractical for smaller payment streams. The market effectively excludes royalties below $10 to $20 million in net present value.
The Synthetic Royalty Innovation
Traditional royalty monetization requires an existing royalty stream—typically originating from a license agreement between an inventor and a commercial partner. But what about companies that control products directly and wish to monetize future revenues without diluting equity or taking on recourse debt?
The answer is the synthetic royalty: a contractual arrangement in which a company creates a new royalty obligation on a product it controls, selling rights to a percentage of future revenues in exchange for upfront capital.
Synthetic royalties have grown explosively, increasing at approximately 33 percent annually from 2020 to 2024. According to Gibson Dunn, synthetic royalty transactions reached $925 million in 2024, establishing new records for this structure. The growth reflects biotech companies' desire for non-dilutive financing in a challenging equity market environment.
The economics are straightforward. A biotech company with an approved product generating $100 million in annual revenue might sell a 5 percent synthetic royalty for ten years. In exchange for $30 million today (a hypothetical price reflecting time value and risk adjustments), the company commits to paying $5 million annually for a decade. The buyer receives predictable cash flows; the seller receives non-dilutive capital without giving up equity or accepting the covenants that accompany traditional debt.
| Notable Synthetic Royalty Transactions | Amount | Product(s) |
|---|---|---|
| TherapeuticsMD / TPG Sixth Street | $300M | IMVEXXY, BIJUVA, ANNOVERA |
| Ironwood Pharmaceuticals | $150M | Linzess |
| ARIAD Pharmaceuticals | $200M | Iclusig |
| Revolution Medicines / Royalty Pharma | $1.25B | Oncology portfolio |
The synthetic royalty structure offers several advantages over equity or debt. Unlike equity financing, it requires no ownership dilution and preserves shareholder upside in the broader company. Unlike debt, payments fluctuate with product performance (providing downside protection if sales disappoint) and typically lack the covenants, financial maintenance requirements, and default triggers that characterize bank loans. The non-recourse nature means the company's other assets remain unencumbered.
Tax and accounting treatment, however, require careful analysis. Depending on deal terms, a synthetic royalty may be characterized as debt (with interest deductions over time) or as a sale (potentially triggering immediate income recognition). Features like repurchase options, guaranteed minimum payments, or caps on buyer returns influence the characterization. Companies must coordinate with tax advisors to achieve desired treatment.
The Legal Architecture Governing Royalty Transfers
The tradability of royalty interests depends not merely on willing buyers and sellers but on a complex legal architecture that determines what can be transferred, to whom, and with what effect. Understanding this architecture requires examining securities law, the Uniform Commercial Code, anti-assignment provisions, and bankruptcy law.
From a securities law perspective, the question of whether a royalty interest constitutes a "security" determines what registration and disclosure obligations apply. The analysis typically involves the Howey test for investment contracts: does the arrangement involve an investment of money in a common enterprise with an expectation of profits derived from the efforts of others?
Most straightforward royalty sales—where the buyer simply acquires rights to receive payments based on third-party product sales—do not meet the Howey test and thus avoid securities registration requirements. The buyer's returns depend not on the "efforts of others" in the Howey sense but on the commercial success of an underlying product, which is more akin to commodity price risk than investment manager performance.
For CVRs, the analysis differs. The SEC has provided guidance through no-action letters establishing a five-factor test. If a CVR is (1) an integral part of merger consideration, (2) confers no stockholder-like rights, (3) is non-transferable, (4) settles exclusively in cash, and (5) is not listed or traded, the instrument is treated as a contractual right rather than a security.
| SEC Five-Factor Test for CVR Non-Security Status |
|---|
| 1. Integral part of merger consideration |
| 2. No stockholder-like rights (voting, dividends) |
| 3. Non-transferable (except by operation of law) |
| 4. Cash settlement only |
| 5. Not listed or traded on any exchange |
This framework explains why approximately 97 percent of life sciences CVRs are structured as non-transferable. Tradable CVRs require Securities Act registration and ongoing Exchange Act reporting—costs that private equity acquirers, who dominate the pharma M&A market, typically refuse to bear. Moreover, tradable CVRs create litigation risk by enabling plaintiffs to purchase standing; anyone can buy CVRs in the open market and bring claims against the acquirer.
The Uniform Commercial Code governs security interests in personal property, including royalty rights. UCC Article 9 addresses what happens when anti-assignment clauses in license agreements conflict with secured parties' interests in royalty streams.
Section 9-408 provides that anti-assignment clauses are ineffective to prevent the creation, attachment, or perfection of a security interest in general intangibles (including license rights). This "override" provision enables royalty financing by ensuring that a secured party can take a valid security interest even if the underlying license prohibits assignment.
But Section 9-408 contains a critical limitation that practitioners call the "empty security interest" problem. While the override permits creation and perfection of the security interest, subsection (d) provides that the secured party (1) cannot enforce the interest against the licensor, (2) is owed no duties by the licensor, (3) need not be recognized by the licensor, (4) cannot require the licensor to pay them, (5) cannot use or assign the debtor's rights, and (6) cannot access trade secrets or confidential information.
In practical terms, a royalty buyer who relies solely on the UCC override may find themselves with a perfected security interest that the licensor refuses to honor. If the royalty seller goes bankrupt, the secured party has a valid claim in the bankruptcy estate but may struggle to actually collect the underlying payments without licensor cooperation.
The solution, as practitioners have developed it, involves obtaining contractual privity with the licensee—a direct agreement that the licensee will continue making royalty payments to the buyer even if the original royalty holder defaults or becomes bankrupt. This requires licensee consent, which anti-assignment clauses are designed to prevent. Sophisticated royalty transactions thus often involve three-party negotiations: the royalty seller, the royalty buyer, and the underlying licensee whose cooperation is essential for the deal to function.
When Royalties Meet Bankruptcy: The Mallinckrodt Disaster
The Mallinckrodt case illustrates what happens when royalty protection mechanisms fail. Sanofi-Aventis sold intellectual property rights to Acthar Gel—a therapeutic for inflammatory and autoimmune conditions—to Mallinckrodt for just $100,000 upfront plus a 1 percent annual royalty on net sales exceeding $10 million, payable in perpetuity.
At the time of sale, Acthar Gel was a modest product. But under Mallinckrodt's ownership, sales grew to nearly $1 billion annually by 2019. Sanofi's perpetual royalty became extremely valuable, generating payments of approximately $71.4 million between 2014 and 2020.
Then Mallinckrodt filed for Chapter 11 bankruptcy in October 2020, weighed down by opioid liabilities. The company proposed discharging its royalty obligations entirely, leaving Sanofi with only an unsecured, contingent claim in the bankruptcy.
Sanofi argued that future royalties were too indefinite to constitute a dischargeable "claim" because amounts varied yearly and didn't "arise" until Mallinckrodt hit annual sales triggers. The Third Circuit, affirming lower courts in April 2024, rejected this argument decisively. "Once the parties agree to a contingent right to payment, the claim exists," the court held. "And once the claim exists, bankruptcy can reach it."
| Mallinckrodt: Key Facts |
|---|
| Original sale price: $100,000 |
| Royalty rate: 1% on net sales > $10M |
| Annual product sales by 2019: ~$1 billion |
| Total royalties paid 2014-2020: ~$71.4 million |
| Bankruptcy filing: October 2020 |
| Outcome: Royalty discharged as unsecured claim |
The court explicitly noted how Sanofi could have protected itself. First, Sanofi could have taken a security interest in the royalty payment right—yet it secured only the $100,000 upfront payment, not the perpetual royalty. Second, instead of selling full title to the intellectual property, Sanofi could have retained ownership and granted a license, potentially qualifying for Section 365(n) protections that allow licensees (and by extension, licensors) to retain license rights after rejection. Third, Sanofi could have structured the arrangement through a bankruptcy-remote special purpose vehicle.
The Mallinckrodt decision sent shockwaves through the royalty financing market. According to Covington & Burling, no unsecured synthetic royalty financings by public biotech companies have occurred since the district court's December 2022 ruling. The market has shifted dramatically toward secured structures and bankruptcy-remote vehicles.
Proper structuring for bankruptcy involves several elements. True sale treatment—ensuring the royalty transfer is characterized as a sale rather than a secured loan—removes the royalty from the seller's bankruptcy estate. Special purpose entities with independent directors, orphan ownership, separateness covenants, and bankruptcy-remote provisions provide additional protection. Opinion letters from experienced counsel confirming true sale and non-consolidation analysis have become standard.
The Alexion Lesson on Commercially Reasonable Efforts
While CVR and royalty cases often involve allegations of intentional misconduct, the Alexion-Syntimmune litigation demonstrates that acquirers can breach their obligations through ordinary business decisions that fail to account for inherited contractual commitments.
Alexion acquired Syntimmune in September 2018 for $400 million upfront plus up to $800 million in milestone payments tied to development of ALXN1830, a monoclonal antibody for autoimmune diseases. The merger agreement required Alexion to use "Commercially Reasonable Efforts" for seven years.
What happened next illustrates how corporate priorities can conflict with contractual obligations. In 2020, Alexion launched its "10 by 2023" initiative, promising investors it would bring ten products to market by 2023. Resources flowed toward programs that could meet this goal; ALXN1830, which faced a longer development timeline, was deprioritized.
Then AstraZeneca acquired Alexion in July 2021, promising $500 million in recurring synergies. Every program faced review. In December 2021, despite safety committees approving continued dosing and an external expert concluding that immunogenicity issues did not represent a "show-stopper for progression," Alexion terminated ALXN1830 development.
The Delaware Court of Chancery, in a September 2024 opinion, found that Alexion breached its obligations. The key was the merger agreement's definition of commercially reasonable efforts: what "a comparable biopharmaceutical company would do when developing a similar product under similar circumstances." This outward-facing standard "did not leave room for Alexion to deprioritize and then terminate the development program based on idiosyncratic, company-specific priorities."
The court parsed the milestone criteria carefully, finding that Milestone 1—worth $130 million—had actually been achieved, entitling sellers to payment that Alexion failed to make. For subsequent milestones, the court awarded expectation damages of approximately $181 million, calculated using Alexion's own internal probability assessments. The total award, including interest, approached $310 million.
| Alexion/Syntimmune Damages Award |
|---|
| Milestone 1 (achieved but unpaid): $130 million |
| Expectation damages for future milestones: $181 million |
| Total award (with interest): ~$310 million |
The implications for deal structuring are significant. Acquirers who inherit milestone obligations cannot simply fold those obligations into ordinary portfolio management. An acquiring company's synergy targets or internal priorities do not override contractual commitments to prior sellers. And internal probability calculations, if maintained, become powerful evidence in damages litigation.
For sellers, the case validates the importance of outward-facing efforts standards. A definition tied to what the specific acquirer "customarily does" for its own products provides far less protection than a standard referencing industry norms or what a "comparable" company would do. The difference can be worth hundreds of millions of dollars.
Delaware and the Implied Covenant's Limits
Delaware law provides the backstop for most CVR and milestone disputes through the implied covenant of good faith and fair dealing. But courts have been careful to limit this doctrine, making explicit contractual protection essential.
The Delaware Supreme Court has characterized the implied covenant as a "cautious enterprise" and a "limited and extraordinary legal remedy." It cannot be used when the contract addresses the conduct at issue; it fills gaps only "when the contract is truly silent." And it cannot "rebalance economic interests after events that could have been anticipated."
The Fortis Advisors v. Johnson & Johnson case from September 2024 illustrates both the doctrine's power and its prerequisites. J&J acquired Auris Health for $3.4 billion upfront plus $2.35 billion in earnout payments tied to regulatory milestones for surgical robots. The evidence showed that J&J "thrust iPlatform into a head-to-head faceoff" against its competing robot in an internal initiative called "Project Manhattan," and that J&J "viewed the resulting delays as beneficial since it could avoid making the earnout payment."
The court found liability for both breach of contract and fraud—awarding over $1 billion, the largest Delaware earnout award ever. Critically, the fraud claim survived because the merger agreement lacked anti-reliance language that would have barred claims based on pre-signing representations.
By contrast, in Himawan v. Cephalon, the court rejected implied covenant claims where the agreement explicitly gave the buyer authority over "all matters relating to the company after the Closing" including regulatory decisions. When the contract grants discretion, the implied covenant cannot override it.
| Major Milestone/CVR Litigation Awards |
|---|
| Fortis v. J&J (Auris): >$1 billion |
| Alexion/Syntimmune: ~$310 million |
| Sanofi/Genzyme CVR settlement: $315 million |
| BMS/Celgene (pending): up to $6.7 billion |
The pattern that emerges is that sellers must negotiate explicit protections. Courts will not imply obligations that the parties could have bargained for. Discretionary language favoring buyers will be enforced as written. Anti-reliance provisions will defeat fraud claims. Sellers who accept boilerplate agreements leave value—potentially billions of dollars—on the table.
Why CVRs Remain Rare in Europe
While CVRs have become increasingly common in American pharmaceutical M&A—with 29 percent of life sciences acquisitions in 2025 including contingent consideration structures according to Wachtell Lipton—their usage in European transactions remains limited. Understanding this disparity requires examining the UK Takeover Code and broader regulatory differences.
The City Code on Takeovers and Mergers creates specific challenges for CVR structures. Rule 11 governs the nature of consideration in takeovers, imposing requirements for offer certainty and shareholder protection that complex contingent instruments can struggle to satisfy. The UK Panel on Takeovers and Mergers must be consulted when offering novel forms of consideration, adding regulatory friction that American deals avoid.
Transferable CVRs structured as securities create particular complications. Meeting listing and eligibility requirements within UK takeover timetables—which are generally shorter and more prescribed than American timelines—requires advance planning that many deals cannot accommodate. The result is that European contingent consideration typically takes simpler forms than the elaborate milestone structures common in American pharmaceutical M&A.
Some European deals have successfully employed CVR-like structures. The EDF acquisition of British Energy in 2008 included Nuclear Power Notes, listed on the PLUS market, that provided annual payments tied to nuclear production capacity for ten years. The BTG-Biocompatibles deal in 2010 included unlisted instruments providing additional consideration upon drug development milestones. But these remain exceptions rather than standard practice.
| US vs. European CVR Usage Comparison |
|---|
| US life sciences CVR prevalence (2025): 29% of deals |
| European CVR prevalence: <5% of deals |
| US tradable CVR rate: ~3% |
| European tradable CVR rate: <1% |
The absence of CVRs in European deals has implications for cross-border transactions. American sellers may expect contingent consideration that European buyers are reluctant or unable to provide. This structural mismatch can affect deal dynamics and valuations, particularly in situations where pharmaceutical development uncertainty creates significant valuation gaps.
China's Remarkable IP Securitization Experiment
While American and European markets focus primarily on pharmaceutical royalties, China has developed a distinctive approach to intellectual property monetization that emphasizes government support, small and medium enterprise access, and securitization structures.
The Chinese IP financing market has grown explosively. IP pledge financing reached 486.88 billion yuan in 2022, growing more than 40 percent for the third consecutive year. By the first three quarters of 2024, the figure had reached 792.23 billion yuan, a 24 percent year-over-year increase. IP securitization products numbered over 150 by 2023, with cumulative issuance exceeding 33 billion yuan.
The growth reflects sustained government support. Beginning with CNIPA, Ministry of Finance, and China Banking Regulatory Commission initiatives in 2010, Chinese authorities have systematically built infrastructure for IP-backed financing. Pilot projects launched in 2016 across Shenzhen, Guangzhou, Beijing, and Nanjing; a 2017 State Council plan proposed IP securitization as a policy priority; and 37 key cities have been designated for IP operations, accounting for nearly 45 percent of national patent transactions.
| China IP Financing Growth |
|---|
| 2022 IP pledge financing: 486.88 billion yuan |
| 2024 (Q1-Q3) IP pledge financing: 792.23 billion yuan |
| Year-over-year growth: 24% |
| Total IP ABS products: 150+ |
| Cumulative ABS issuance: >33 billion yuan |
Chinese IP securitization operates through several models. Financing lease structures involve sale-leaseback arrangements for intellectual property. Supply chain models use IP assignment accounts receivable as underlying assets. Patent licensing models create royalty-based structures. Portfolio formation reduces risk through diversification across multiple IP assets.
The beneficiary profile differs markedly from American royalty monetization. Approximately 93 percent of Chinese IP financing beneficiaries are private technology companies, with average financing of approximately 15 million yuan at an average cost of 3.85 percent. The system is designed to serve small and medium enterprises that would be too small for institutional royalty acquirers like Royalty Pharma.
The development of data intellectual property pledges and trading platforms (including the Shanghai Data Exchange) represents a further evolution beyond traditional patent-based financing. Chinese authorities are compiling patent licensing data to build valuation models that can systematize what remains a largely bespoke process in Western markets.
Japan's Contrasting Stagnation
If China represents ambitious expansion of IP financing, Japan illustrates the challenges of market development even in advanced economies with strong intellectual property traditions.
Japanese IP pledges dropped from over 1,300 in 2014 to just 121 in 2020. IP-backed financing remains "not widely used" despite government initiatives dating back to 1995, when the Development Bank of Japan extended its first IP-backed loan. Only 500 new IP cases are filed annually in Japanese courts, with awards often under 10 million yen—a litigation environment that fails to establish IP value through adversarial testing.
Several structural factors explain Japan's lag. The country lacks an established secondary market for intangible assets, unlike the American ecosystem of patent brokers, auction platforms, and specialized investors. Japanese law applies different collateral rules to different property types, contrasting with the unified UCC system that simplifies American secured transactions. Low-to-negative interest rates reduced bank profitability and risk appetite for novel collateral forms.
| Japan vs. US IP Financing Comparison |
|---|
| Japan IP pledges (2020): 121 |
| Japan IP pledges (2014): >1,300 |
| Decline rate: >90% |
| US pharmaceutical royalty market: $14B annually |
| Japan total IP-backed loans (through 2020): ¥7.83B |
Cultural factors may also play a role. Extensive cross-licensing agreements between Japanese companies reduce individual patent valuations by limiting exclusionary power. Many Japanese firms lack integration between overall business strategy and IP strategy. SME awareness of IP monetization opportunities appears lower than in comparable American companies.
Government initiatives have failed to move the needle. The JPO's IP Finance Promotion Project, launched in 2015, shifted focus from IP valuation to business evaluation—essentially admitting that standalone IP assessment was not gaining traction. A 2016 insurance scheme for overseas IP litigation saw limited uptake. Corporate Governance Code revisions in 2021 required IP investment disclosure but did not create financing mechanisms. Through 2020, only 7.83 billion yen in loans had been granted under official IP financing programs—a tiny fraction of Japan's economy.
Practical Guidance for CVR Agreements
Given the litigation history and structural challenges surrounding CVRs, what should shareholders and their advisors watch for when evaluating contingent consideration?
Milestone definitions require careful scrutiny. The Shire-SARcode experience demonstrates that specific endpoint definitions can cause CVRs to fail even when the underlying drug succeeds. Vague terms—"efficacy," "front-line," "major market," "successful conclusion"—invite disputes about what was actually required. The best milestone definitions use simple, objective, verifiable predicates: "FDA grants approval to market and sell [specific product] in the United States" is far more enforceable than "successful completion of Phase III development."
Efforts covenants show enormous variation across deals. Analysis by Cleary Gottlieb found that 30 percent of CVRs use subjective standards tied to what the acquirer does for its own programs, while 47 percent use objective standards referencing industry norms. The remaining 23 percent are either silent or explicitly disclaim any efforts requirement—leaving shareholders entirely dependent on the acquirer's goodwill.
| CVR Efforts Standard Types | Prevalence |
|---|---|
| Objective (industry norms) | 47% |
| Subjective (acquirer's own practices) | 30% |
| Silent or disclaimed | 23% |
Sellers should insist on outward-facing standards that prevent acquirers from subordinating milestone programs to internal priorities. Specific resource commitments—agreed budgets, minimum dollar spend, allocation of particular personnel—provide concrete benchmarks for evaluating compliance. Independent audit rights enable verification. Notification requirements ensure that problems become known before deadlines pass.
Information rights often receive insufficient attention. Without regular reporting on milestone progress, shareholders cannot monitor acquirer performance or identify potential issues early enough to seek remedies. Audit rights matter for sales-based milestones where the acquirer controls calculation of achieving thresholds. Access to regulatory correspondence can provide early warning of approval difficulties.
Dispute resolution mechanisms should address the reality that dispersed shareholders face coordination problems in enforcing their rights. Appointment of a trustee or rights agent to act on holders' behalf centralizes enforcement capability. Clear provisions specifying what percentage of holders can direct enforcement actions prevent paralysis. Some deals require acquirers to bear certain litigation expenses, reducing the burden on shareholders.
The Bristol-Myers litigation highlights additional concerns. Clear trustee appointment and removal procedures, specifying whether beneficial owners or registered owners control such decisions, can prevent the standing disputes that derailed years of litigation. Provisions addressing CVR delisting—which Bristol-Myers allegedly used to impede enforcement—should be considered.
What Royalty Sellers Should Negotiate
Academic institutions, biotech companies, and other royalty holders contemplating monetization face different concerns than CVR recipients, but careful negotiation remains equally important.
Representations and warranties protect buyers but also create seller liability. Sellers should negotiate appropriate qualifiers: knowledge limitations ("to Seller's Knowledge"), materiality thresholds, limited survival periods (typically 6 to 24 months), and carve-outs for matters disclosed during due diligence. Uncapped indemnification obligations can expose sellers to liability exceeding transaction proceeds.
Purchase price structures vary significantly. Pure upfront payments provide certainty but may undervalue assets with significant growth potential. Milestone-based structures share upside but reintroduce contingency risk. Caps on buyer returns (typically 1.5 to 4 times original investment) limit seller regret if the royalty dramatically outperforms expectations. Put and call rights allow repositioning if circumstances change.
| Royalty Transaction Structure Options |
|---|
| Pure upfront payment: Maximum certainty, potential undervaluation |
| Upfront + milestones: Shared upside, reintroduced contingency |
| Capped returns (1.5-4x): Limits seller regret on outperformance |
| Put/call rights: Flexibility for changing circumstances |
Audit rights merit attention even after sale. If the buyer depends on accurate reporting from the underlying licensee, sellers may want assurance that audit mechanisms remain in place and that audit results will be shared. Participation rights in audit disputes can protect against settlements that disadvantage sellers.
Reporting requirements enable monitoring and preserve optionality. Even after sale, sellers benefit from understanding how their former royalty streams perform. Quarterly reports, annual summaries by product and geography, and prompt notice of material developments should be standard.
Tax planning must begin early. The characterization of a royalty sale—as sale or loan, as capital gain or ordinary income—depends on deal terms that must be established before closing. The IRS's approach to pharmaceutical collaboration payments, articulated through its Coordination Issue Project guidance, creates planning opportunities that cannot be captured retroactively.
The Future of Pharmaceutical Payment Right Tradability
The market for pharmaceutical payment rights continues to evolve. CVR usage has increased substantially, with 27 completed or pending deals in 2025 representing a record year according to Harvard Law School Forum. CVRs now account for approximately 37 percent of total deal value in larger transactions and appear in 29 percent of life sciences acquisitions.
Several factors drive this growth. Difficult equity financing markets make CVRs attractive as a way to close valuation gaps that neither party can bridge with cash. The continued robustness of pharmaceutical M&A activity creates opportunities for CVR structures. And familiarity breeds comfort—companies like AstraZeneca, which has executed three CVR-bearing acquisitions in recent years, demonstrate increasing institutional acceptance.
| 2025 CVR Market Statistics |
|---|
| CVR deals completed/pending: 27 |
| CVR share of deal value (large transactions): 37% |
| Life sciences deals with CVRs: 29% |
| Average CVR value as % of total consideration: 26% |
The royalty monetization market shows similar strength. Despite challenging conditions, deal flow has remained robust, with synthetic royalties emerging as an increasingly important segment growing at approximately 33 percent annually. The shift toward secured structures following Mallinckrodt suggests market participants have absorbed the bankruptcy lesson.
For investors, the persistent pricing inefficiency in CVR markets—systematic undervaluation creating opportunities for those willing to accept illiquidity and binary outcomes—offers potential alpha. The Bristol-Myers litigation, if resolved favorably for CVR holders, would provide a massive validation of the strategy of acquiring distressed CVRs on litigation expectations.
For issuers and sellers, the key lesson from decades of CVR and royalty experience is the importance of detailed, carefully negotiated agreements. Generic provisions leave enormous value at risk. Specific milestone definitions, robust efforts standards, comprehensive information rights, and thoughtful dispute resolution mechanisms can mean the difference between receiving billions or receiving nothing.
The pharmaceutical industry will continue to generate uncertain future payment streams. Drugs will face unpredictable regulatory pathways. Sales will depend on competitive dynamics that cannot be forecast with confidence. Academic research will produce intellectual property whose ultimate value remains unknowable at the time of discovery. These uncertainties create valuation disputes that contingent consideration structures—CVRs, milestones, and royalty interests—are designed to resolve.
Whether these instruments can actually be bought and sold in practice depends not on any single legal rule but on an accumulation of factors: contractual terms, licensee cooperation, bankruptcy protections, market infrastructure, and investor sophistication. The instruments exist in a legal and commercial gray zone that creates both risk and opportunity.
For those willing to navigate this complexity—armed with careful legal structuring, thorough due diligence, and patience for resolution timelines measured in years—pharmaceutical payment rights offer exposure to pharmaceutical industry cash flows without the scientific risk of direct drug development. For those without such capabilities, these instruments may represent little more than illiquid promises whose ultimate value depends on factors beyond their knowledge or control.
The tradability of pharmaceutical payment rights, in the end, is less a legal question than a practical one. These instruments can be transferred—but only to buyers with the expertise to value them, the legal infrastructure to protect them, and the patience to hold them through the inevitable disputes and delays. That market exists and is growing, but it remains specialized, illiquid, and inaccessible to most holders of these complex contractual rights.
Conclusion
The tradability of CVRs, milestone payments, and pharmaceutical royalty interests represents one of the most fascinating intersections of corporate law, pharmaceutical economics, and financial innovation. What began as a solution to M&A valuation disputes has evolved into a multi-billion dollar market with specialized participants, sophisticated structures, and an increasingly developed body of case law.
The central findings bear emphasis. CVRs remain predominantly non-tradable due to securities law requirements and issuer preferences, with only about 3 percent of recent deals providing for transferability. Even tradable CVRs suffer from thin markets, wide bid-ask spreads, and persistent undervaluation that creates opportunities for specialized investors but leaves ordinary shareholders holding illiquid positions. Payout rates of approximately 33 percent for any recovery—and just 13 percent for full payment—make non-payment the default expectation.
Royalty monetization markets are more developed, with annual deal flow approaching $14 billion and sophisticated institutional buyers capable of executing transactions ranging from tens of millions to billions of dollars. But these markets serve primarily large, institutional royalty holders; smaller streams remain effectively untradable due to transaction costs and due diligence requirements.
Legal architecture matters enormously. The UCC's "empty security interest" problem limits enforcement of royalty transfers against non-consenting licensees. Bankruptcy poses existential risk to unsecured royalty structures, as Mallinckrodt demonstrated with devastating clarity. Anti-assignment clauses require navigation through negotiated consent or careful reliance on statutory overrides. And efforts standards—the obligations acquirers take on when they issue CVRs or assume milestone payment commitments—have proven difficult to enforce even when breached.
The Bristol-Myers litigation, now proceeding toward trial with claims exceeding $6.7 billion, will provide the next major test of these principles. Its resolution—whether through trial verdict or settlement—will shape how markets price CVRs and how acquirers approach milestone obligations for years to come.
For practitioners, the lesson is that careful drafting matters more than clever deal structure. Clear milestone definitions, robust efforts standards, comprehensive information rights, and thoughtful dispute resolution mechanisms provide the foundation for enforceable contingent consideration. Generic provisions—however standard in the market—leave billions of dollars at risk.
For investors, these markets offer inefficiency waiting to be exploited. The gap between CVR trading prices and actual payout values suggests systematic undervaluation that patient capital can capture. But the expertise required—in pharmaceutical development, litigation dynamics, and distressed investing—limits participation to specialized funds.
For sellers and royalty holders, the choice between monetization and retention depends on individual circumstances: risk tolerance, liquidity needs, and assessment of underlying asset prospects. The market infrastructure exists to execute these transactions, but at costs and on timelines that make monetization practical only above certain size thresholds.
The pharmaceutical industry's fundamental characteristic—uncertainty transformed into either breakthrough value or complete failure—ensures continued demand for structures that allocate development risk between parties. CVRs, milestone payments, and royalty interests serve this function. Their tradability, while limited, will continue to improve as markets mature, legal precedents accumulate, and institutional infrastructure develops. The gray zone these instruments occupy is slowly becoming more navigable—but it remains far from the transparent, liquid market that many holders would prefer.
This article is for informational purposes only and does not constitute legal or financial advice. The author is not a lawyer or financial adviser. Readers should consult qualified professionals before making any decisions regarding CVRs, royalty monetization, or related transactions.
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