The Genzyme Contingent Value Right (GCVRZ) is a bet on the approval and subsequent sales of a drug against MS, alemtuzumab or Lemtrada. See for details my first SA article and Chris DeMuth's GCVRZ forum. The drug is sold by Sanofi (SNY) and has been approved in the EU, Canada and Australia. Unfortunately the FDA disputes the efficacy based on concerns with respect to the trial design. See also my previous article.
Recently the FDA sent Genzyme a Complete Response Letter (CRL) in which they stated that the FDA needs to see the results of an additional trial before approving alemtuzumab. As a result I think it is unlikely that the drug will ever be approved by the FDA. This means that it is less likely that the sales milestones will be met. The question is, of course, how much less likely. With a proper assessment one can earn a lot of money since the CVR costs about $0.37 and pays out $2 if the first sales milestone will be achieved.
Consequences of the FDA CRL
Sadly for the MS patients in the US, the FDA opinion on alemtuzumab is internationally an exception. The FDA implicitly says in its CRL that the results of the phase III trials could be attributed to the placebo effect. It also denies the significance of more objectively measured data from MRI scans. As I pointed out in a comment on my previous article, MRI data from the phase III trials shows statistically significant differences with the control group and is thus contradicting the FDA opinion. So the arguments for not approving alemtuzumab are very weak. But, when the FDA does not approve a medicine this usually gives a blow to the sales outside the US as well. That may be the case here, which is one of the risks of this investment. However, I think it is more likely that alemtuzumab will largely be exempt from this phenomenon. But probably it doesn't matter at all; as I will show below, the chances that the sales milestone will be achieved are high even with low market shares.
The first sales milestone
I will focus on the first milestone paying $2 per CVR for a total of $400 million in annual sales:
- Sales in the major markets Italy, Spain, France, Germany, UK, and the US during 4 consecutive quarters after the quarter in which alemtuzumab is first sold in each country. These quarters are probably the 4 quarters starting from April 2014.
- Sales in other countries during 4 consecutive quarters starting from April 2015.
So, in order to get an idea of the chances of achieving the first sales milestone I will be counting the patients in each of the relevant countries. After multiplying the number of patients with the costs of the drug we arrive at an estimate of the sales contributing to the milestone. I will use $60,000 for the first year of each treatment and $30,000 for the second year of the treatment. Based on various sources this seems a conservative estimate of the price of alemtuzumab. As I pointed out in my other articles on GCVRZ the treatment is extremely competitive. In the first year it costs about the same as Tecfidera and Tysabri. In the second year it costs about half of that. And after the second year the only costs are the costs of regular medical checkups.
Besides the major markets the other countries are Norway, Denmark, Sweden, the Irish Republic, Finland, Belgium, the Netherlands, Switzerland, Austria, Canada and Australia. The drug has been approved in each of these countries except for Switzerland where the decision is still pending. Note that I will not consider over 60,000 patients in Russia and Japan. To my knowledge these countries have not approved alemtuzumab yet. Countries such as Portugal, the Czech Republic, Poland and Greece have not been included either, since I suppose that not many inhabitants of these countries can afford this new treatment.
In the scenario that the sales milestone is achieved 2 cases are worth considering:
- $2 will be paid based on just the sales in the major markets no later than Q2, 2015.
- If sales in the major markets contributing to the milestone are below $400 million, then $2 will be paid based on the sales in the major markets plus the sales in the other countries. In that case the CVR pays out no later than Q2, 2016.
In the second scenario the current price of the CVR of around $0.37 translates to an annualized return of over 90%. In the first scenario the annualized return is about 210%.
Number of patients in the major markets
For the sales in the major markets I depend on Chris' analysis, see here. He estimates about 400,000 patients in the remaining 5 major markets, excluding the US. I suspect this number is too high. In particular the number of patients in France and Spain seems to be too high by about 25,000 patients. So, let's be conservative and reduce his estimate to 350,000 patients in the major markets. His calculation also assumes that only 25% of the patients are on any medication. I think this second assumption is way too conservative. Based on information from certain patient organizations I think that about 50% of the patients are currently using medication. This is a key assumption in my analysis. Any feedback on this assumption is highly appreciated.
Therefore less than 6700 out of 175,000 patients are sufficient to reach the first sales milestone. This translates to a market share of less than 4%. My impression is that this is much smaller than the current market share of the competing drug Tysabri, which is less efficacious and has more problematic side effects. Moreover, given the large numbers of untreated patients it could be that each new medicine will attract its own patients instead of directly competing with existing drugs.
Number of patients in the other countries
I have estimated the number of patients in the other European countries based on data presented here. See the table below. The results in this scientific paper are based on research from the nineties. It's almost certain that these results severely underestimate the number of patients today for two reasons. First, the number of patients has increased as a consequence of improved diagnosis techniques. Second, aging of the population in Europe has led to a higher MS prevalence. In addition I have other reasons to believe that the real numbers of patients could be a third higher than the estimates below.
Country | Population (millions) | MS Prevalence (per 100,000) | MS Patients (thousands) |
Norway | 5 | 120 | 6 |
Denmark | 5.6 | 112 | 6.3 |
Sweden | 9.6 | 150 | 14.4 |
Irish Republic | 4.6 | 140 | 6.5 |
Finland | 5.4 | 110 | 6 |
Belgium | 11.1 | 80 | 8.9 |
The Netherlands | 16.8 | 76 | 12.8 |
Switzerland | 8 | 112 | 9 |
Austria | 8.4 | 98 | 8.2 |
Canada | 35.1 | 142(est) | 50 |
Australia | 23.3 | 107 | 25 |
The numbers of patients in Australia and Canada were taken from the announcements after approval in these countries. In one of these announcements Genzyme claims that Canada has 100,000 patients. Therefore the prevalence would be 284 patients per 100,000. This is clearly inconsistent with the other data. So I have simply halved the prevalence and the total number of patients in Canada. This new estimate is consistent with the prevalence of MS in countries with similar genetics situated at comparable geographic latitudes such as the Irish Republic and the UK.
Estimating the sales for sales milestone 1
So there are at least 153,100 patients in the non-major markets. If only half of the patients are using medication we have about 75,000 patients left. This number resembles the total market in terms of patients in the other countries. To use this number for estimating the sales for sales milestone 1 note that from April 2015 to April 2016 there are 2 groups of patients:
- Patients that had their first treatment in the 12 months before April 2015. Their second-year treatments each contribute $30,000 to sales milestone 1.
- Patients having their first treatment. These treatments each contribute $60,000 to sales milestone 1.
Therefore, the total sales in the other countries for sales milestone 1 depends on the market share of alemtuzumab in the first and the second year. It is not unreasonable to estimate a higher market share in the second year. So, let's assume a market share of 3% in the first year and 6% in the second year in the non-major markets. With these assumptions we arrive at $337.5 million contributing to sales milestone 1 from the non-major markets. Suppose that in the major markets 3% of the estimated 175,000 patients will go for alemtuzumab in the first year as well. That will result in $315 million of additional sales contributing to sales milestone 1. In that case the sales milestone will probably be achieved in the third quarter of 2015 resulting in an annualized return of about 165%.
I have computed the sales numbers for 3 different market shares in the second year. See the table below. In all 3 cases I assume a market share of 3% in both the major markets and the other countries in the first year. The second and the third column show the different contributions to the sales milestone. The fourth column shows the total sales for the first and the second year in each of these 3 cases. The amounts are in millions of dollars.
Market share in 2^{nd} year | Major markets | Other countries | Total sales after 2^{nd} year |
0% | 315 | 67.5 | 382.5 |
3% | 315 | 135 | 517.5 |
6% | 315 | 270 | 652.5 |
Only if there won't be any new patients during the second year in the other countries the sales milestone will not be met. However, extra sales from other parts of the world and the underestimation of the number of patients in the other countries might still trigger the $2 payout.
Conclusion
At a price of $0.37 per CVR the market severely underestimates the chances that the first sales milestone will be achieved. Using fairly conservative assumptions I have shown that the first sales milestone could already be achieved in the third quarter of 2015 giving an annualized return of about 165%. But even without any new patients in the second year the sales milestone will probably be achieved in 2016 resulting in an annualized return of over 90%. Given the risk of losing 100% of the investment I recommend allocating at most a few percent of one's portfolio though.
Of course the question is why this instrument got so undervalued. I suppose that most investors had a short term position in mind with a high chance on a nice profit. Because of the risk of losing the whole investment, most investors did not invest much money in the CVR. That made it easy for them to take a loss. So, when the FDA refused to approve alemtuzumab they sold en masse driving the price to irrationally low levels.
Additional disclosure: I am long GCVRZ.