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GCVRZ - Sanofi Contingent Value Right


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Disclaimer: I am not typically a healthcare investor. I like investing in unique and attractively price securities, such as CVRs, which is how I came across this one.

 

For background into why Sanofi has a listed CVR right now

http://www.bostonbar.org/pub/bbj/bbj_online/bbj1011/summer2011/Haggerty.pdf

[Cliff notes: in their merger with Genzyme, Sanofi gave this CVR to Genzyme shareholders to essentially side-pocket the future profits from the drug Lemtrada. This would allow Genzyme to capture more of the upside from this drug, which Sanofi wasn't willing to give Genzyme "full" value for at the time.]

 

SEC filing describing the CVR's future payments

http://www.sec.gov/Archives/edgar/data/732485/000095012311017162/b85162exv99waw43.htm

[Cliff notes: Owners of the CVR will receive $1 per CVR if FDA approves the drug before March 31,2014]

 

Reason I think it's a good buy right now

http://www.cnbc.com/id/101196382

[Cliff notes: "A federal advisory panel recommended approval of Sanofi SA's experimental multiple sclerosis drug Lemtrada on Wednesday, but said the drug should be reserved for patients who have failed other therapies. In a surprise decision, an advisory panel to the Food and Drug Administration voted 14 to 0, with one abstention, that the drug should be approved despite its potential to cause cancer and other serious conditions."]

 

in conclusion...

As I said, I do not normally invest in healthcare, so more than anything else, it would be great to get feedback from others who have looked into this. Last week, this news came out [http://www.reuters.com/article/2013/11/08/us-sanofi-lemtrada-idUSBRE9A70NJ20131108] which basically says that the FDA was warning of "multiple serious and potentially fatal safety issues" with the drug, and the CVR sold off. Last night's news, though, makes it seem quite likely that the drug will indeed get FDA approval.

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The earlier FDA report was pretty scathing.

 

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.

 

and:

 

    [...] 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.

 

and:

 

    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.

 

----------------------------------------------------

 

In other words, will a narrow approval fail to trigger the milestone?

If the approval comes too late then the $1 milestone payment will not pay out.

 

The FDA's views towards the drug may affect its commercial sales.

 

I am not typically a healthcare investor.

I'm glad I stayed away from these contingent value rights because they looked interesting back when they were trading around $2.50.

 

VIC writeup (not mine):  http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/53388

My blog post on the contingent value rights:  http://wp.me/p1mOGr-xw

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Just out of curiosity, why do you think the CVR fell <50% on the news?

 

Do you think there is anything in the way "approval" is defined that would negate the payout under the CVR?  In other words, will a narrow approval fail to trigger the milestone?

 

it did not fall 50% on the news yesterday. It fell 50% a few days before on the 8th? Basically on the 8th they pointed out all the negatives. On the 13th they reaffirmed the negatives, but said hey maybe it should be approved despite all these issues b/c of the disease we're dealing with here can be so brutal.  I think the CVR is basically priced as having a reasonable shot of the drug getting approved with 0 shot at hitting any of the other milestones.

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Do you think there is anything in the way "approval" is defined that would negate the payout under the CVR?  In other words, will a narrow approval fail to trigger the milestone?

 

Again, I am no expert on this area. I have been reading filings and articles last night and this morning, and from what I can tell, there does not seem to be any sort of "narrow approval" provision. That was actually what I thought may be going on here as well, but it doesn't seem to be the case. I think the pricing is related to: (a) fda approval continues to be uncertain, and (b) if approved, people are probably very afraid that it won't meet sales targets.  Can't argue with (a), but for (b) I think that if it's approved, the average MS patient is not going to dig through the FDA discussions on the matter. From what I can tell, it will be one of the only effective treatments on the market, and patients will likely take it. So I actually think approval is not necessarily super likely, but more so, if it is approved, I imagine it will be relatively well-adopted and might hit the targets. Most importantly, the price of the security means that upon approval, I would already be in the money, and everything else just free upside optionality.

 

This is a tiny part of my portfolio, and I'm by no means suggesting that the FDA will approve the drug. Just think it's an interesting situation, and thought other board members might be interested

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I generally like Bronte capital’s blog, but it really made a mess of this one. 

 

To borrow (and slightly alter) from Taleb, the parachute example given is to mistake a cat for a washing machine.  When dealing with basic Newtonian physics problems like jumping out of an airplane, and not organic complex adaptive systems, second order effects don’t come into play.  (The placebo effect in humans is just one of many of these.) This really even misses a deeper point, btw, in that in many / most cases, a placebo really isn’t the right hurdle to jump over, but instead a comparative effectiveness trial of the new drug over the incumbent(s) is what would be most appropriate. 

 

The bigger point here is probably that most trials these days are poorly designed.  For those interested, “Bad Pharma” by Ben Goldacre (a book of the year in The Economist this past year) gives a lot more details on games that are played in the life sciences industry.  Lemtrada seems to be suboptimally designed in a somewhat unique way though. 

 

As far as the actual investment goes:

The iatrogenics on this one is an interesting in that you have potentially really bad side effects, but the drug is treating a crippling disease, and hence the side effects may be acceptable.  The best bet here would be to talk to someone in the regulatory affairs department of a rival pharmaceutical company—at say Merck or Glaxo.  A very large portion of those people—in the states anyway-- used to work in at the FDA before switching sides, and are quite well placed to handicap approval outcomes.  My worry is that the arbitrage community has already done this.  The saving grace may be that this is a rather small issue.

 

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I generally like Bronte capital’s blog, but it really made a mess of this one. 

 

To borrow (and slightly alter) from Taleb, the parachute example given is to mistake a cat for a washing machine.  When dealing with basic Newtonian physics problems like jumping out of an airplane, and not organic complex adaptive systems, second order effects don’t come into play.  (The placebo effect in humans is just one of many of these.) This really even misses a deeper point, btw, in that in many / most cases, a placebo really isn’t the right hurdle to jump over, but instead a comparative effectiveness trial of the new drug over the incumbent(s) is what would be most appropriate.

 

I think you're misunderstanding the issue. The 'deeper issue' is epistemological and is far more fundamental than what hurdle to use for FDA testing. You're implying that second order effects make causality impossible to determine. That's simply not true. The root cause of the practical problems with FDA approval is that the government is determining what is or is not safe to use instead of doctors. Doctors need to be able to exercise their own judgement and make decisions based upon those judgements- NOT be forced to act a certain way at the point of a gun.

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Free conference trips, consulting fees, and other forms of subtle bribery have a weird way of influencing doctors' prescription choices.

 

Considering doctors still prescribe medicine in this country and there is no evidence of widespread 'influence' I think the initiation of physical force is a bizarre remedy to a non-existent problem.

 

Edit: Furthermore, your view has the same implications for every job where someone is offering advice. It's ridiculous.

 

Edit 2: Sorry, didn't mean to make this thread political. I'll keep the ole trap shut. :P

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Free conference trips, consulting fees, and other forms of subtle bribery have a weird way of influencing doctors' prescription choices.

 

Considering doctors still prescribe medicine in this country and there is no evidence of widespread 'influence' I think the initiation of physical force is a bizarre remedy to a non-existent problem.

 

Edit: Furthermore, your view has the same implications for every job where someone is offering advice. It's ridiculous.

 

Edit 2: Sorry, didn't mean to make this thread political. I'll keep the ole trap shut. :P

 

I think I'm the one who started making this thread political...  ;)

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I generally like Bronte capital’s blog, but it really made a mess of this one. 

 

To borrow (and slightly alter) from Taleb, the parachute example given is to mistake a cat for a washing machine.  When dealing with basic Newtonian physics problems like jumping out of an airplane, and not organic complex adaptive systems, second order effects don’t come into play.  (The placebo effect in humans is just one of many of these.) This really even misses a deeper point, btw, in that in many / most cases, a placebo really isn’t the right hurdle to jump over, but instead a comparative effectiveness trial of the new drug over the incumbent(s) is what would be most appropriate.

 

I think you're misunderstanding the issue. The 'deeper issue' is epistemological and is far more fundamental than what hurdle to use for FDA testing. You're implying that second order effects make causality impossible to determine. That's simply not true. The root cause of the practical problems with FDA approval is that the government is determining what is or is not safe to use instead of doctors. Doctors need to be able to exercise their own judgement and make decisions based upon those judgements- NOT be forced to act a certain way at the point of a gun.

 

 

The FDA is a mess and clearly has been largely captured by industry, but as much as I know about doctors, I cringe at the alternative.  (As the most basic starter, look at how many doctors prescribe antibiotics for people known to have colds, a practice that probably should be statutorily banned globally. ItsAValueTrap's point on pharma influencing doctors via non-scientific means, is the tip of the iceberg of a second point --- if people aren’t interested in Goldacre’s books, it’s worth noting that Robert Cialdini wrote an entire book called "Influence" documenting how compliance practitioners can manipulate / influence their targets and the book was so good that Munger cut him a ~$1MM check in appreciation – something Munger does extremely rarely.)

 

Complex adaptive systems are fundamentally different from simple linear ones.  This is an issue that academics in many fields, notably finance (e.g. Fama) have struggled to realize.  Investors do so at their own peril. 

 

I believe it reflects a fundamental lack of understanding to compare biology with parachutes or frankly most anything in Newtonian physics.  I'll close with a line that Goldacre looks on favorably in "Bad Medicine". 

 

"The art of medicine consists in amusing the patient while nature cures the disease."  - Voltaire

 

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  • 2 weeks later...

Thanks for the post gg.

 

I couldn't help but take a small position. The product is fascinating and almost seems like a cure. Did anyone buy this?

 

All the side effects seem curable and benefit outweighs the cost. The rootbeer comments in seeking alpha convinced me.

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Remember that the $1 payout will only trigger if the FDA approval happens on time:

Approval Milestone: CVR holders are entitled to receive $1 per CVR after U.S. FDA approval of Lemtrada for treatment of multiple sclerosis, if the approval occurs on or before March 31, 2014.

 

There is a good FAQ on the CVRs that is filed on SEC EDGAR:

http://www.sec.gov/Archives/edgar/data/732485/000095012311017162/b85162exv99waw43.htm

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I will be completely floored if we don't get the FDA Approval for Lemtrada.

 

But then again, this is the FDA we are talking about.  Anything is possible with those guys...  So, keep your fingers crossed, GCVRZ holders!  There might be a stocking stuffer coming your way from the FDA. :-) :-)

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No, you get one more chance in Product Sales Milestone #2:

 

Remember that the $1 payout will only trigger if the FDA approval happens on time:

Approval Milestone: CVR holders are entitled to receive $1 per CVR after U.S. FDA approval of Lemtrada for treatment of multiple sclerosis, if the approval occurs on or before March 31, 2014.

 

There is a good FAQ on the CVRs that is filed on SEC EDGAR:

http://www.sec.gov/Archives/edgar/data/732485/000095012311017162/b85162exv99waw43.htm

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  • 5 weeks later...

GCVRZ sales milestone #1 clarification:

http://en.sanofi.com/Images/35518_Status_CVR_Product-Sales_Milestone1_Web.pdf

 

2013 Q4 Sales Out:

http://en.sanofi.com/Images/35603_Product_Sales_Statement_2013_Q4.pdf

 

It's still too early to extrapolate the sales for any kind of meaningful analysis to handicap the GCVRZ payoff, but there's still a decent amount of time to hit 400mil sales as March 2016/Dec 2016 are the cutoff dates.  At a 2$ payout with a price of 40 cents today for the lowest milestone, but no margin of safety in the obvious worst case scenario, it's a nice alternative for those who need more excitement/upside in their lives as Fannie/Freddie preferreds have been creeping up. 

 

I think an E(X) of Milestone 1 is futile, but with approval in ~30 countries, recent FDA denial (obviously a huge issue) may not doom the rights. A couple of MS blogs that detail the life changing benefits:

1) http://www.davidscampathstory.org/experience.html

2) http://alemtuzumabmsandme.blogspot.com/

Patients were desperate enough to try the drug off label (it was previously approved for cancer), one doctor personally treated ~150 willing patients offlabel despite its dangerous side effects as many patients would take a 20% chance of curable cancer over permanent disability/brain damage.

http://www.independent.co.uk/life-style/health-and-families/health-news/exclusive-ms-drug-rebranded--at-up-to-20-times-the-price-8209885.html

The number of patients that needs to be treated within the set time frame in order to reach $400 mil needs to be ~6700 patients from the world:

(http://seekingalpha.com/article/1909261-best-ideas-for-2014-long-gcvrz)

Article above also sets out most of the arguments much better, although price is much lower today due to FDA denial.  The SA author is also getting personally involved in petitioning the FDA while connecting with patients within the MS community (he posted a couple times in MS forums) so there is some bias.

 

MS is such a crippling disease that MS patients may have bigger worries from not paying up for a drug that has a chance to seemingly permanently reverse an "incurable" disease that otherwise only progressively gets worse as time goes on. So playing the payout or a change in view due to sales#'s would hopefully be independent from all these macro worries plaguing the board.  I wouldn't bet the farm on it though.

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  • 2 months later...

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