Seeking Alpha
Long/short equity, deep value, special situations, book author
Profile| Send Message|
( followers)  

The Genzyme Contingent Value Right (NASDAQ: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 has been approved in the EU, Canada and Australia but unfortunately the FDA disputes the efficacy based on concerns with respect to the trial design. See also this article.

Recently the FDA sent Sanofi (NYSE:SNY) a Complete Response Letter (CRL) in which it stated that the FDA needs to see the results of an additional trial before approving alemtuzumab. As a result I think it is very 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 $0.38 and pays out $2 if the first sales milestone will be achieved.

In my previous article I have made the case that there are more than enough patients outside the US to achieve the first sales milestone. In this article I will discuss the influence of other recent MS drugs on the potential sales of alemtuzumab. I acknowledge that the risk with this security is high. However, please realize that most investment tips are given after the price of the security has gone up. So, I hope that you don't mind me writing about this security while the price is still low. By the way, I don't expect GCVRZ to surge any time soon. So this security is only suitable for the patient investor.

Consequences of FDA CRL

Sadly for the MS patients in the US the FDA opinion on alemtuzumab is internationally an exception. The FDA 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. Many experts think this is incorrect. See also here, here and here for their opinions. 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.

Sales and market shares of MS drugs ex-US

Based on financial reports of MS drug sellers I have made estimates of the annual sales of the existing MS drugs outside the US for 2013. To be more precise: these estimates are for the annual sales in the hypothetical case that each drug would have been approved everywhere outside the US. So, these estimates are not very accurate although they are conservative. See the table below.

MS Drug

Sales Estimate ex-US

(millions of USD)

Market Share

ex-US (%)

Tysabri

700

12.0

Tecfidera

500 (based on US sales)

8.5

Aubagio

150 (based on US sales)

2.6

Gilenya

1000

17.1

Copaxone

1200

20.5

Rebif

800

13.7

Avonex

1100

18.8

Betaseron

400

6.8

Total ex-US

5850

100

The table shows 8 competing MS drugs. The first 4 medicines in the table are relatively new MS drugs. The estimates of the future sales of Tecfidera and Aubagio are based on their US sales since there were not enough sales outside the US to make a realistic estimate. Unlike Lemtrada neither Tecfidera nor Aubagio have been launched in the EU yet. Note that Aubagio is also sold by Sanofi. The last row of the table shows the size of the total market for MS drugs outside the US, which is nearly $6 billion. The last 4 drugs in the table, Copaxone from TEVA (NYSE:TEVA), Rebif from Merck & Co (NYSE:MRK), Avonex from Biogen Idec (NASDAQ:BIIB) and Betaseron from Bayer (OTCPK:BAYRY), are injectable medicines that are considered to be less efficacious compared to the new MS drugs. Furthermore, these 4 older MS drugs are administered with frequent self-injections. So not only the older MS drugs are less efficacious but these medicines are also very inconvenient to administer.

MS drug market dynamics

Currently the older MS drugs have together a market share of about 60% in the world ex-US. For the reasons mentioned above I think that the number of users of these drugs will decrease rapidly. Furthermore I expect the market for MS drugs to increase. Currently at least 30% of the MS patients don't use any medication. See also page 13 of the MS Barometer of the European Multiple Sclerosis Platform. I expect this percentage to decrease as new, easier to administer and more efficacious medicines are being introduced. Furthermore I expect the average price per year of treatment to increase due to the higher pricing of the newer drugs. Note that this assumption is speculative. Several governments restrict the more expensive treatments to patients for which the cheaper treatments have failed. I don't think this practice has a good scientific basis though. All in all, it is reasonable to expect that the ex-US MS drug market will increase with about 20% in the next 2 years to $7 billion. Furthermore, it's likely that the newer MS drugs will take away revenues from the older drugs.

Where does Lemtrada fit in?

The question is how much market share Lemtrada will take in the ex-US market. The following lines from page 39 of the quarterly report of Q3 2013 of Biogen Idec give us a hint:

In the first two quarters subsequent to its commercial launch in the United States, approximately 75% of new patients taking TECFIDERA have switched from a different MS therapy, including our products AVONEX and TYSABRI. We believe that the previous therapies from which these patients switched to TECFIDERA is roughly proportionate to the current market share distribution of all products currently approved to treat relapsing remitting MS.

That 25% of the patients are not switching from any other MS drug supports my view that the MS drug market is expanding. On the other hand 75% of the patients that are prescribed with Tecfidera have taken other MS drugs before. According to Biogen Idec's remark about 20% of these patients were on Copaxone, 13% were on Rebif, 18% were on Avonex, 6% were on Betaseron and 12% were on Tysabri, also from Biogen Idec. The question is whether Lemtrada will do equally well as Tecfidera or not. That depends on the efficacy and the side effects. First, I don't think that we have any reason to believe that Lemtrada is less efficacious than Tecfidera or the other MS drugs, despite the refusal of the FDA to approve it. See the links above for more detailed information.

Comparison of the side effects

So second, let's consider the side effects. Apart from minor temporary infusion related side effects Lemtrada can cause auto-immune diseases such as thyroid disorders and Graves disease. Cases of thyroid cancer have been reported as well although these cases are very rare. These diseases are problematic but can be treated well.

Tysabri can cause the deadly disease PML in rare cases. These cases got a lot of publicity and therefore scared off many patients. Although cases of PML are rare the risk increases with the number of years patients are using Tysabri. Because of the PML risk I expect many patients to switch from Tysabri to one of the other new MS drugs.

One of the problems with Aubagio is that it can cause birth defects. Once a treatment is started the medicine stays in the body for a long time even after the patient has stopped using it. MS occurs more frequently among woman than men, so this limits the number of people who can use Aubagio. Moreover, this drug seems to be less efficacious than the other new MS drugs.

Tecfidera has been associated with PML and rare cancers as well, see here, and dr. Samuel Hunter's blog. Gilenya has been associated with various other severe side effects, see here. So far, these cases had much less impact than the PML related deaths of patients on Tysabri.

MS drugs have many minor but common side effects. Nevertheless, these can be problematic in daily life. For example, common side effects of Tecfidera are vomiting, abdominal pain, diarrhea, nausea and flushing. In other words, patients could feel sicker with Tecfidera. Unfortunately such subjective feelings can't be expressed in phase III trial results. Therefore these side effects don't seem to be an important factor in the decisions of institutions such as the FDA. Of course these common side effects are very important for patients. Dr. Hunter expresses this as follows when discussing Tecfidera: "However, all in all this is a good drug, and will likely continue to be used in MS in people who tolerate it." My impression is that Lemtrada does better on this subjective scale than the other MS drugs. This could be a big advantage for the sales of Lemtrada.

Annual sales of Lemtrada

So I think that about half of the market share of Tysabri, Rebif, Copaxone, Avonex and Betaseron will be divided among the drugs Lemtrada, Tecfidera, Gilenya and possibly Aubagio. If we assume that none of the latter 4 drugs is better than the others then this trend will give each of them extra annual sales of over $500 million. In addition I think the $1.2 billion expansion of the ex-US MS market will go entirely to these 4 new drugs as well. That would give each drug extra sales of $300 million. So this means that within about 2 years Lemtrada will have annual sales of about $800 million. This number is nothing more than an estimate of the average annual sales of any new MS drug. I am assuming that the Lemtrada sales will just reach this average, which is perfectly OK for the rest of this article. But note that there are two reasons for it to sell above average. Lemtrada has been launched last year in a number of European countries. Now recall that neither Tecfidera nor Aubagio have been launched in the EU yet, at least not until December last year. Furthermore Aubagio seems to be less efficacious than the other new MS drugs. Therefore Lemtrada might stay ahead of these 2 drugs and sell above average.

Estimate of the contribution to the first sales milestone

Does this mean that the first sales milestone of $400 million worldwide sales will be achieved? Well, it's not that simple. First, recall my previous article again. The first sales milestone pays out $2 for at least $400 million of sales in the following countries and during the following periods:

  1. Sales in the major markets Italy, Spain, France, Germany, UK, and the US during 4 consecutive quarters after the quarter in which Lemtrada is first sold in each country. These quarters are probably the 4 quarters starting from April 2014.
  2. Sales in other countries during 4 consecutive quarters starting in April 2015.

As was discussed in my previous article the first group of countries contains 350,000 patients excluding the patients in the US. The second group of countries contains about 150,000 patients. So the first group of patients represents 70% of the total number of patients and the second group represents 30% of the patients. Suppose furthermore Lemtrada's sales in the first year is only half of the sales in the second year. That means the sales in the first year is only $400 million. About 70% of that comes from the major markets, which is $280 million. The remaining sales are $120 million in the non-major markets in the first year. These other sales don't contribute to the sales milestone but in the second year these patients go for a second treatment. Therefore second treatments contribute $60 million to the first sales milestone in the second year. Furthermore in the second year the first treatments of patients in the non-major markets count towards the sales milestone. This is 30% of the estimated $600 million second year first treatment sales outside the US, which is $180 million. Adding these numbers results in $520 million contributing to the first sales milestone. See the table below for a more comprehensive step by step overview of the calculation.

Intermediate step of the calculation

Sales (millions of USD)

Total sales 1st year

400 (assumption)

Major markets 1st year

280 (70% of 400 total 1st year sales)

Non major markets 2nd treatments 2nd year

60 (½ of 400 - 280)

Total sales 2nd year

800 (assumption)

Total 2nd treatments 2nd year

200 (60 + ½ of 280)

Total 1st treatments 2nd year

600 (800 - 200)

Non major markets 1st treatments 2nd year

180 (30% of 600 total 2nd year sales)

Total

520 (280 + 60 + 180)

One may ask whether I have been too optimistic. Once again, I have estimated the market shares of the different MS drugs very conservatively. Furthermore, I have been realistic with my 2-years estimate for the ramp up time of the Lemtrada sales. But, I may have been too optimistic regarding the expansion of the MS drug market. So, suppose that the ex-US MS market doesn't expand to $7 billion but to $6.3 billion instead. Using the same reasoning as above the estimate for the annual Lemtrada sales in the second year is about $600 million. So the estimate for the first year is $300 million. This means that about $390 million will contribute to the first sales milestone, which is just short for the $2 payout. See the table below for a detailed step by step overview of the calculation.

Intermediate step of the calculation

Sales (millions of USD)

Total sales 1st year

300 (assumption)

Major markets 1st year

210 (70% of 300 total 1st year sales)

Non major markets 2nd treatments 2nd year

45 (½ of 300 - 210)

Total sales 2nd year

600 (assumption)

Total 2nd treatments 2nd year

150 (45 + ½ of 210)

Total 1st treatments 2nd year

450 (600 - 150)

Non major markets 1st treatments 2nd year

135 (30% of 450 total 2nd year sales)

Total

390 (210 + 45 + 135)

Conclusion

Note that my optimistic estimate is more optimistic than 2 of the 3 estimates in my previous article. My conservative estimate still beats the most conservative estimate in my previous article. In my previous article I used conservative assumptions for the number of patients, I assumed small percentages of market share and I used an assumption for the price of Lemtrada. The current approach treats the pricing of Lemtrada as an unknown and focuses on the MS drug market and the market shares of competitors. Therefore it may result in a more realistic estimate of Lemtrada's market share. From this market share I could have used an assumption for the price of Lemtrada treatments to compute the number of patients contributing to the first sales milestone.

Despite their differences the approaches in this and my previous article result in similar estimates for the first sales milestone. Looking at these two similar outcomes it seems very likely that the first sales milestone will be achieved. Therefore, again, I think GCVRZ is one of the most misplaced bets currently available.

Source: GCVRZ: Betting On The Sales Of Lemtrada In A Moving MS Drug Market