Two years ago (see my post), I traded in and out of a weird security with the symbol GCVRZ (Genzyme contingent value rights). Today, the rights have fallen around 59% to $0.82 due to doubts over whether the FDA will approve Lemtrada, the drug whose commercial success will determine the payments on the contingent value rights (CVRs). The current price is below the price that I bought and sold these CVRs.
I think the first lesson here is that I should stick to my circle of competence. In the past, I thought that the FDA’s delay in approving the drug was merely administrative. An earlier press release in August 2012 suggested that there were problems with the presentation of the data (as opposed to the data itself):
After collaborative consultations with the FDA, the agency requested that the company modify
the presentation of the data sets to enable the agency to better navigate the application. The
FDA has not requested additional data or further studies. Genzyme will work with the FDA over
the coming weeks to resubmit the application as soon as possible.
The explanation seems innocent enough. However, now it seems that the FDA has serious concerns over the safety of Lemtrada. The FDA report states:
As these concerns [side effects] are serious and potentially fatal, Dr. Mentari does not recommend approval of alemtuzumab unless substantial clinical benefit exists.
[…] Dr. Marler finds that the applicant has not submitted evidence from adequate and well-controlled studies to support the effectiveness of alemtuzumab for treating multiple sclerosis.
Dr. Yan’s review discusses the statistical aspects of the data presented by the applicant in support of a demonstration of clinical benefit, and largely reinforces the concerns of Dr. Marler.
So it seems to me that Lemtrada likely will not be approved in the timeframe needed to trigger one of the CVR’s payouts. Looking back on the past, I didn’t know enough about pharma to realize that Sanofi may have been deceptive about the reason for the delays. I also honestly thought that there was a ~90%+ chance that Lemtrada would be approved.
The fake out
A year ago on September 4, 2012 Sanofi announced that it would be buying back the CVRs (PDF press release) at a price between $1.5 to $1.75. In theory, this demonstrates faith in the drug and its commercial viability.
In hindsight, the repurchases look questionable. Sanofi would have known all along that the drug had serious side effects and that a FDA approval would be uncertain. Even if the drug was approved, it seems that the side effects are so awful that Lemtrada would have very poor sales. The CVRs wouldn’t be worth much if Lemtrada sold poorly.
Fortunately for me, I did not hop onto the “there is a buyback so it must be undervalued” train of thought. I did not buy any CVRs when they dipped below $1.75. The CVRs currently trade around $0.82. I suppose the second lesson here is that buybacks are not a great signal and is sometimes erroneous.
Lesson #3- not all VIC writeups work out
GCVRZ was recommended at $2.41 (see VIC writeup). The first milestone payout for the CVRs was linked to the production of Cerezyme and Fabrazyme. The milestone was not met.
The next milestone is FDA approval of Lemtrada. It currently looks like this milestone will fail. There is a good chance that the CVR won’t pay out anything at all.
I think that the author of the writeup is pretty unlucky.
Is it a good short position?
I don’t know. If the best case scenario is a 50% chance of the FDA approval milestone paying out (and none of the other milestones will pay out), then the CVRs are worth almost $0.50. This compares poorly to the current market price of $0.82. My guess is that a FDA approval is less likely than 50%. However, I don’t really understand how all this stuff works. The drug has already been approved for use in the European Union (see this WSJ article).
*Disclosure: No position in GCVRZ currently.
EDIT (Nov 13, 2013): The drug was
approved recommended for approval today. Fortunately I did not short the CVRs.