Contingent value rights key to PE financing of pharmaceuticals

A contingent value right (CVR) is a value right linked to a certain important event, e.g. if expectations are not achieved or fall below par, the relevant value or rights and interests can be cancelled or reduced. CVRs play a relatively major role in the private equity (PE) financing of pharmaceutical enterprises.

A key step in PE financing is valuation of the target enterprise. However, reaching a consensus on the value of a product currently undergoing research and development or a pending invention patent is difficult, as is valuation of the same. These factors may ultimately result in failure of the transaction.

The research and manufacture of a new pharmaceutical product must undergo pre-clinical research of the process, quality standards, pharmacological effectiveness, toxicology, stability, etc., then proceed to clinical research after the securing of the clinical approval document, then proceed to application for approval for production after completion of the clinical research, only at which point can production then commence and the opportunity for entering the market be chosen. The foregoing procedures are time consuming and involve complicated and numerous approval stages.

Wang Zhijian is a senior partner at Zhonglun W&D Law Firm and is the chairman of the healthcare practice and head of the Chengdu office; Zhang Di, a legal assistant at the Chengdu office, contributed to this article.

Co-writer Kang Qi is a teacher at Sichuan College of Traditional Chinese Medicine