GCVRZ: A Bet On A Decision Of A Politically Conscious Institution

| About: Sanofi (SNY)

After my previous article on the Genzyme Contingent Value Right (NASDAQ:GCVRZ) much has happened. This instrument backed by Sanofi (NYSE:SNY) is a bet on FDA approval of the MS drug Lemtrada, or alemtuzumab, and subsequent sales. See for details Chris DeMuth's second article, my previous article, Chris's third article and his GCVRZ forum. In particular the market seems to think that the chances Lemtrada/alemtuzumab will be approved have shrunk a lot. Therefore the price of GCVRZ has fallen from about $2 in October to $0.7 today. This article provides a summary of what happened and my opinion on the chances on FDA approval.

What happened?

After my previous article, the FDA published a review document for alemtuzumab. It contains three reviews: on side effects, efficacy and the quality of the statistical results of the phase III studies. Each of these reviews was extremely negative. Shortly after that the reviews were discussed during the FDA hearing on November 13. During the hearing, Genzyme commented on the reviews. See also their document. Furthermore patients argued there is no universal MS drug that works well for every patient. Therefore the FDA should allow patients and neurologists to choose among the treatments science currently offers them. At the end of the hearing, the advisory panel voted on 6 questions.

The panel voted that the phase III studies were not adequate and well controlled, but that the medicine was efficacious. According to the voters, it should not be applied to patients in the initial stages of MS. And finally the panel voted that the side-effects should not preclude approval. The outcome of the voting is probably a problem for the FDA. Ideally the FDA only wants to approve medicines that are proven to be efficacious. In their mindset this must be proven in a double blinded experiment. In such an experiment, the phase III study, one group of patients takes a placebo and the other group of patients takes the drug. Moreover, in the procedural world of the FDA phase III studies must be adequate and well controlled in order for the studied medicines to be considered as efficacious. Hence, in the FDA mindset the votes of the advisory panel on the trial design and the efficacy were contradicting each other.

Phase III trial set up

The problem with the alemtuzumab phase III studies was that the two phase III studies did not compare with a placebo but with another less efficacious drug, Rebif. Moreover the studies were not double blinded since the patients knew which drug they got. So their expectations could have influenced the results of the phase III studies. But in this case, one can argue that it would have been impossible to compare alemtuzumab with a placebo. First, it would be unethical to give MS patients a placebo since there is a better medicine, Rebif. Second, the side-effects would tell the neurologists and patients who got alemtuzumab and who got Rebif. Then, third, there is a practical problem. Rebif is administered using three injections per week. So, if the study had been adequate and well controlled, the patients on alemtuzumab would have had to inject themselves with a placebo three times a week for two years. Such a trial set up is without doubt good for science but not good at all for the trial subjects. Well, maybe for lab rats it's OK, but for humans it isn't. Since the patients know from the side-effects whether or not they got alemtuzumab, the patients on alemtuzumab would most likely skip these painful self-injections anyway.

Fortunately, the FDA understands that sometimes they have to make exceptions when it comes to trial design. So, they have given themselves lots of flexibility, especially for lethal diseases such as MS. See also here.

Phase III efficacy

The FDA review also criticized the efficacy of alemtuzumab. The main problem is that one of the phase III studies does not show a statistically significant difference in the time to Sustained Accumulated Disability (SAD) between the two groups of patients. However, the difference was significant when looking at the difference in time to SAD during the second year of the study only.

So, what's the point that the time to SAD is better when measured during the second year only than when measured over the full two year trial period? This study involved patients with MS in an initial stadium. These patients were selected because the researchers thought and still think that in the long run they would get the most benefits from alemtuzumab. In these patients, the accumulated nerve damage was still relatively small. Since nerve damage translates to disability with a large delay, I think it is reasonable to allow for a delay when looking at the effects of a treatment. It might be that the current approved drugs only show a minimal delay but should that block innovative searches for more complex drugs? I don't think so. This reasoning is consistent with the statistical results and the results of the follow-ups of the phase III studies.

There is another more obvious reason why alemtuzumab did not improve the time to SAD in this study. In this study the patients on Rebif simply did remarkably well. They had much less lapses than in other phase III studies described in the medical literature. Probably, this is again a consequence of the selection of the patients which were in an initial stadium of MS. The advisory panel also ignored these shortcomings in the results. They voted that alemtuzumab is efficacious despite that they did not find the phase III trials adequate and well controlled.

Side effects

The FDA review tells us that alemtuzumab has lots of dangerous side effects. I would like to put this into perspective. Many of these side effects are other auto-immune diseases, such as Graves disease and an abnormal thyroid function. These diseases are much easier to bear than the alternative: disability and death. Moreover, many MS patients will suffer from other auto-immune diseases anyway and in particular from those diseases resulting in an abnormal thyroid function. The one side effect that concerns the most is thyroid cancer. Fortunately, this side effect is rare and can be treated successfully. Moreover, this side effect is of less a concern than the risk of developing the lethal disease PML when being treated with the approved MS drug Tysabri. Therefore the advisory panel voted that the side effects should not preclude the eventual approval of alemtuzumab.


According to a comment on Chris's recent article, in Germany the pricing of the therapy is about $60,000 in the first year and $30,000 in the second year. I think this won't be much different in the US. So the total costs for the treatment are probably around $90,000. Given its superior efficacy, this makes the treatment extremely competitive.

First sales milestone

As Chris explained in his previous article, it is likely that the first sales milestone will be met based on just the major markets in which alemtuzumab has been approved already. These countries have 400,000 patients together, which is roughly equal to the total number of patients in the US. But also sales in the non-major markets count towards the first sales milestone. In developed countries alone my conservative estimate is that this accounts for another 400,000 patients. Moreover the sales in these markets will start to contribute to the first sales milestone with a delay of one year. So only after the sales in the other markets are fully up to speed, the revenues will start to count for the first sales milestone. This makes it extremely likely that the first sales milestone of $2 per CVR will be met.


Above I have given the reasons why other countries have neglected phase III trial shortcomings and approved alemtuzumab. If the FDA does not approve alemtuzumab it will need to justify itself towards 400,000 patients and many neurologists. As I explained it will need to depend on extremely weak arguments to do that. So it will have a very hard time defending itself from severe criticism from all these people. A politically conscious institution such as the FDA will try to prevent such a situation. In this case, that's not difficult. It can do that by following the advisory panel and approve the drug.

So it is likely that the FDA will approve alemtuzumab. Therefore the CVR is likely to pay out much more than the market price of the CVR implies. But suppose the FDA does not approve alemtuzumab, then, given the high chances of meeting the first sales milestone with a payout of $2, I think GCVRZ is still a good investment at today's market price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long GCVRZ.