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It is often the case that opportunity is to be found where uncertainty, ambiguity and risk exist. One of the greatest current examples of such a situation exists in the form of the Sanofi/Genzyme Contingent Value Right (GCVRZ). As part of Sanofi's (SNY) 2011 acquisition of Genzyme, shareholders received a contingent value right ("CVR") for each Genzyme share.

These CVRs can most simply be described as a complex warrant or set of wagers on the approval and revenue earning success of alemtuzumab, or Lemtrada, for the treatment of multiple sclerosis ("MS"). See the pending milestones here:

Source: SEC Edgar CVR Q&A filing

The drug is a monoclonal antibody that was being used in the treatment of certain types of leukemia, as well as in bone marrow and kidney transplants, but which Genzyme had studied and submitted for the treatment of MS. Sanofi's acquisition of Genzyme was delayed because the companies disagreed as to the value of the drug, largely due to the potential if approved for MS. The dispute was eventually settled by the issuance of the CVRs.

At the end of 2013, Sanofi reported that the FDA issued a complete response letter stating that Lemtrada's application was not ready for approval, due to the FDA's conclusion that the design of the Phase 3 active comparator studies of Lemtrada in relapsing-remitting MS patients was inadequate, and that one or more clinical trials of different design and execution are needed.

The European Union did not find this to be an issue, and instead relied upon Lemtrada trial efficacy and safety results, as well as the added safety data from alemtuzumab's existing use in treating leukemia, when the E.U. approved Lemtrada for MS in September of 2013. In December, the United Kingdom's health cost regulator, the National Institute for Health and Care Excellence, requested supplemental information. This may indicate that the U.K. also questions Lemtrada's clinical data, but it is more likely, given the agency, that they are interested in cost-value analysis. The drug is not cheap. Sanofi is charging 8,645 euros (currently $11,822) per vial for Lemtrada in Germany.

For the purposes of GCVRZ analysis, it must be acknowledged that though Lemtrada may eventually get FDA approval, it is extremely unlikely to occur before March 31 of this year. Holders of GCVRZ would have received a $1 dividend if the FDA approved Lemtrada before March 31, but now this payment is almost certainly not going to happen.

The market was already well aware of the reduced probability of a near-term Lemtrada approval several weeks prior to the FDA letter, as the FDA disclosed safety concerns in advance of its November 13, 2013 advisory panel. The two-tiered effect this had on the price of GCVRZ was considerable. See a 3-month chart, below: (click to enlarge)

Source: Yahoo! Finance

Beyond essentially eliminating the potential for a $1 FDA approval payment, the delay also makes it more difficult for Lemtrada to achieve its sales milestones. This is because it calls into question whether the United States is to be included at all. Moreover, the decision by the United States to not now approve Lemtrada may cause other nations to delay their approvals, or for some doctors in nations that have approval to refrain from prescribing the treatment. Neither such outcome is a certainty, but the potential for reduced sales in approved nations does exist and uncertainty is greater than it would otherwise be.

The first milestone payment is for $2, and it is paid if Lemtrada revenue is at least $400 million during the four-quarter period following its product launch. The product launch, for the purposes of the CVR accounting, was recently defined by Sanofi to occur on April 1, 2014, and was triggered by the first paid commercial disposition of Lemtrada in Germany, which occurred in October of 2013, shortly after the E.U. approved it.

Further, in order for any sales within the other five major markets, which include France, Italy, Spain, the United Kingdom and the United States, to be counted towards this $400 million milestone, each must have a respective first commercial sale by December 31, 2015. Sanofi also stated that, as a result, the latest possible measurement period for product sales from any of the six major markets to count towards the milestone is December 31, 2016.

It is likely that sales in the other relevant E.U. nations have already begun. The company is yet to provide data on such sales, but is expected to provide quarterly accountings like this one for Q3 of 2013, which is absent any data but indicative of the form in which future data will be provided. Once some of this data is released, it will become much easier to extrapolate the potential for the milestone to be reached without the U.S. contributing to sales.

In addition to these six major markets, Lemtrada sales in other nations that occur between April 1, 2015 and March 31, 2016 will also be included in the calculation to determine whether or not this first milestone is achieved. On December 13, 2013, Sanofi announced that Canada approved Lemtrada, and on December 19 the drug received Australian approval. Therefore, it is already evident that a great many nations should contribute revenue towards a potential reaching of this initial milestone, and the corresponding $2 payment holders would then receive.

Lemtrada has the potential to take market share from already existing MS therapies. The drug is an infusion that is given one week out of the year, in a series of five doses over five days. The submitted studies indicated that over 70 percent of patients with early stage MS had no relapses or progression of their condition for four years, compared with 35 percent of those given Merck's (MRK) Rebif.

This is not to say that Lemtrada is the best or only new alternative treatment. The market for MS therapies is vast, competitive and rapidly expanding. For example, Gilenya is an MS drug by Novartis (NVS) that has been successful in gaining market share because it was the first approved treatment in pill form. Biogen Idec (BIIB) also has an oral treatment for MS, Tecfidera, which was approved by the FDA in March of 2013, and Sanofi also has a recently approved oral MS treatment (Aubagio). Other competing MS treatments include Avonex and Tysabri, both of which are owned by Biogen, and Copaxone by Teva Pharmaceutical Industries (TEVA).

Teva's Copaxone is the market leader for MS treatment, with roughly 29 percent of the global market (about 36% of the US market) and annual sales of more than $4 billion. Nonetheless, the drug's share has been declining at least partially because it is only approved by the FDA for reducing the frequency of relapses, and not for reducing MS's debilitating progression.

Biogen has the most horses in the race and a substantial market share. Its two primary MS treatments, Avonex and Tysabri, accounted for about 30% of global MS treatments, and its newest Tecfidera treatment will likely increase the company's market share. Novartis's Gilenya had about 8.5 of the market and worldwide sales of $1.2 billion in 2013, but the drug does have some heart safety concerns that could cause its market share to stop growing or even drop in the face of new competition. Similarly, Aubagio adoption could be hurt by concerns over liver damage and birth defects. Data for 2013 market share and revenue should be forthcoming.

Lemtrada may end up being used as a secondary treatment or even last line of therapy. This is because its side effects are relatively harsh, its cost is high and many patients and doctors may prefer an alternative first, including generic options. Traditionally, interferons like Rebif or Avonex are the first line, which is why Lemtrada was compared to Rebif in its trials. Relapses or flare-ups can aggravate neurological function to the point where some alternative treatment will be considered essential. Regulatory agencies, including the FDA, acknowledge that Lemtrada does effectively prevent flare-ups.

As relapse rates are high for MS patients, and some patients quickly develop antibodies to MS medications, Lemtrada should end up taking a growing market share over time, and especially as already treating patients relapse. Further, Cambridge University tests indicated that Lemtrada might be useful in not only treating MS, but in reversing the effects. Also, it is likely that combination trials with alternative treatments will occur, and some may find synergistic benefits to including Lemtrada. Since the drug is relatively easy to administer due to its one week per year of dosing, it could be an ideal companion drug to other therapies. A probable combination therapy trial for Lemtrada would be Copaxone, though others may also occur.

The current global MS drug market is valued at around $12-13 billion and growing, with about a 50/50 split between U.S. and international revenues. The new line of medications, which will include Lemtrada (at least internationally), is expected to take an increasing stake of this market, both because of increased efficacy profiles and easier administration. The old regime, which still dominates the market, is administered through constant injection, while the newer line is either in pill form or a brief series of injections, for one week out of the year. One advantage Lemtrada may have is that once administered, there is no issue regarding non-compliance throughout the year, while it is always possible that a patient will forget or otherwise be unable to take a pill or self-injection.

In addition to reasons of ease in application and improved performance, the new line of medications should benefit from the fact that many MS patients are yet to try any medication. The market for all MS treatments should grow as more individuals with MS begin any treatment, and more are likely to treat now that there are more effective medications that are also easier to take.

On a dollar basis, this all means that the MS market should substantially increase in the coming years, both because more patients will begin to medicate and many of them will end up medicating with a newer treatment that will cost more than the average price of the older line. This may be countered by the arrival of generic competition. Further, as individuals live longer and more try any sort of medication, there will be a larger subset of MS patients who have already tried a treatment that failed or ceased to be effective, and it is that group that is most likely to try Lemtrada.

As to whether Lemtrada will achieve the $400 million milestone, it is no certainty. The two main obstacles appear to be that the U.S. will likely not contribute any revenue to the calculation and also that there are many new competing medications that are more likely to be the first option selected, with Lemtrada being the backup plan. Because of this, it is entirely possible that even if Lemtrada does eventually gain a good share of the market, its growth may be delayed while individuals first try an alternative.

Currently, GCVRZ shares are really an option that solely relates to Lemtrada, with a significant amount of potential time decay to occur in the next several months if the initial sales numbers are poor. If adoption rates are positive, GCVRZ will quickly increase in value. Shares presently trade for about $0.40. If the drug does not meet its sales milestones, GCVRZ will soon decay to near worthlessness, but meeting the milestone will guarantee holders a $2 payment. Moreover, there are the further milestones that could potentially be met, though they would require a now seemingly difficult minimum of $1.8 billion in sales within four consecutive quarters. If we do not consider the further milestones, we are left with a $0.40 bet that will either pay $2 or lose all of its value.

In the coming weeks, Sanofi will begin to provide its first data on Lemtrada usage. This data, which will be for Q4 of 2013, will not count towards the CVR, but it will provide some indication of the rate of Lemtrada adoption in Europe. Similarly, Q1 of 2014 data will indicate initial adoption in Australia and Canada, as well as possible traction in Europe. This will be the first real information upon which the market can truly extrapolate potential usage for the first milestone.

As a result, the CVR will be re-evaluated upon the release of this data it would appear reasonable to anticipate that the price of GCVRZ could either halve or double in the first half of 2014, depending upon the quality of sales information. Further, if it becomes probable that the milestone will be reached, it is possible that Sanofi will seek to purchase some or all of the outstanding CVRs. In 2012, Sanofi purchased some of the CVRs though a modified Dutch auction. The rights agreement requires Sanofi to provide notice in advance of any CVR buying.

If the forthcoming sales data is not positive, the rights will likely lose value, but not become entirely worthless. Nonetheless, it is probably fair to look at any allocation into GCVRZ as a speculative all or nothing wager on the near-term success of Lemtrada. Further, if the drug ends up becoming a major blockbuster, there is the potential for the rights to pay additional, larger payments to holders. This analysis does not consider that possibility, but it does exist and the rights do not terminate until December 31, 2020. This longevity and that potential will preserve at least some value in GCVRZ, even if the $400 million sales milestone becomes unreachable.

While certainly a speculative bet, GCVRZ offers one of the more interesting risk/reward profiles in the market. In the near term, these rights could significantly increase in value upon the release of a promising sales statement, and have the potential, if the first milestone is met, to appreciate by about 400% within the next two to three years, if not sooner.

Source: An Option On Adoption Of A New Multiple Sclerosis Treatment