Abraxane Gives Contingent Value Approach A New Lease On Life

| About: Celgene Corporation (CELG)

Companies attempting acquisitions in the biotech bull market, where the meeting of lofty expectations often hinges on a binary outcome event, will take heart in the fact that contingent value rights can give as well as take away.

The case in point is Celgene’s (NASDAQ:CELG) Abraxane, whose U.S. approval for pancreatic cancer on Friday will trigger a $300m windfall to contingent value right (CVR) holders. This marks one of the few instances of a CVR paying off for an acquired company, as bankers pitching M&A transactions will be sure to take note.

The approval itself was hardly a surprise. Although in the Mpact trial Abraxane did not generate a knockout result, the fact that it extended median overall survival (OS) by 1.8 months meant that chances of it becoming the first new pancreatic cancer drug in nearly eight years were high (Event – Abraxane’s blockbuster potential in the lap of the FDA, August 28, 2013).

2010 takeover

More immediately interesting is the contingent element. Under Celgene’s 2010 acquisition of Abraxis BioScience the target company’s sellers got $2.9bn up front, plus 40.4m CVRs that meant holders would get $300m on Abraxane's U.S. approval for pancreatic cancer with an OS benefit on the label.

Another $100m would have been received had the approval come before April 1, 2013. At present Abraxane generates most of its sales in breast cancer, and while it did receive U.S. approval for non-small cell lung cancer last October the lack of a progression-free survival claim in this setting obviated the payment of a separate $250m to the CVR holders.

The Abraxis CVR closed up 17% at $8.80 on Friday. The $300m windfall is worth $7.43 per CVR, and the premium to this can be attributed to future payouts to which the holders can now look forward in the form of a small royalty on Abraxane sales.

This escalating royalty kicks in at 2.5% for annualised sales of between $1bn and $2bn. The figure is a crucial one: EvaluatePharma’s consensus data suggest that by 2018 Abraxane revenue will total $1.6bn, but it is specifically the pancreatic cancer indication, with forecast sales of $823m, that will take Abraxane over the blockbuster threshold.

Geared investment

Advisors structuring M&A transactions will note what a fantastic investment the Abraxis CVR has proved to be. 12 months ago this thinly traded security was changing hands at a mere $2.30, but a surge on November’s Mpact study results, followed by Friday’s spike, means holders are now sitting on a one-year return of 283%.

Not that Celgene itself has done badly, of course; Celgene equity is up 100% over the same time period. But for investors who want a return geared specifically to a single event, or handful of events, a CVR represents a more obvious investment than the equity of a company like Celgene, whose volatility is obviously a factor of more than just Abraxane’s regulatory status.

Expect CVRs to remain an important bargaining chip in future biotech takeover negotiations.