A major catalyst is potentially on the (very) near term horizon for The Medicines Company (Ticker: MDCO). I stumbled upon MDCO a few weeks back from my daily market scans for unusual option activity. I investigated MDCO to determine the rationale (if any) for said activity and quickly determined that it had to do with the Patent Term Extension for the Company’s lead product, Angiomax. I will not go into the legal minutiae here but basically: Back in 2001, MDCO filed to extend the patent on Angiomax but filed the application electronically shortly after the close of business on the date of the deadline. Because it was filed electronically after the close of business on the day of the deadline, it was deemed to be filed one day late. As such, and according to law, the Patent and Trademark Office (“PTO”) denied the extension. As a result, MDCO “lost almost 5 years of earned patent protection with a value of roughly $1 billion.”1
I mentioned that Angiomax is MDCO’s lead product – this is an understatement of epic proportions: Angiomax contributes over 99% of MDCO’s annual net revenue. The Company currently markets one other product and has several early and late stage product candidates in its pipeline. Loss of patent protection on Angiomax could thus be devastating to MDCO. As such, MDCO has been in a constant legal battle with the PTO, the FDA and U.S. Department of Health and Human Services for the past several years. The Company has also been aggressively lobbying Congress.
While MDCO’s court battles have been quite public (see all of the Company’s press releases), I discovered that the real catalyst event has been less public and completely under the radar. On May 26, Senator John Kerry introduced an amendment (S.Amd.4295)2 to H.R. 4213:American Workers, State, and Business Relief Act of 2010. The provision in the amendment
will simply allow for a patent application to be filed up to 30 days late, not just for this company [The Medicines Company] but for any company in similar situation, with a penalty to be paid by them to the Patent and Trademark Office.3
Conclusion: passage of HR4213 with inclusion of S.Amd.4295 extends the Angiomax patent. MDCO recaptures the nearly “$1 billion” in lost value.
This is potentially big news and could cause MDCO shares to skyrocket. How much? A very simplistic, back-of-the-envelope calculation may provide some rough indication (this is my personal estimate; please do your own due diligence). Here is my simple logic: based on a current share price of $7.50 and fully diluted shares outstanding of 53 million4, MDCO’s market capitalization is approximately $400 million. If we deduct total cash of $191.5 million4 and assume the value of all other products and pipeline candidates at zero, we get a net value of approximately $206 million. If we assume statements regarding the value of the extension is accurate (i.e. roughly $1 billion) and assume no further value beyond that extension, it would imply that the market is currently applying an 80% haircut to MDCO shares due to this uncertainty. If this is true, this implies that nearly $800 million of value is currently not reflected in the shares. This represents $15 of value per share (implying a post-announcement share price of $22.50 – it should be noted that the shares briefly traded as high as $27 back in 2008). This is obviously a very crude, over-the-top estimate but it demonstrates the potential value – applying a 75% cut to this estimate still results in a share price increase of nearly $4. On a failure to get this into legislation, of course, the shares could see substantial downside.
According to GovTrack.us, H.R.4213 has passed both the House and the Senate and, as of June 10,
The bill may now proceed to a conference committee of senators and representatives to work out differences in the versions of the bill each chamber approved. The bill then goes to the President before becoming law.5
I do not know how long this process could take. However, HR4213 is very high profile legislation as its major provision is the extension of (expiring) unemployment benefits – there will be, without a doubt, substantial pressure on Congress to act.
In the past few weeks, option activity has been extremely heavy in the July Series – obviously driven by recent events as described. One day this past week, over 5,000 contracts traded at the July 10 Strike Call alone (open interest increased to over 10,000 contracts). If options are our guide, an outcome is thus implied by July. Timing of legislative action, however, is tough to benchmark. Despite timing issues, it appears MDCO is about to face a huge catalyst event.
(1) Source: Senator John Kerry, Congressional Record – Senate. May 26, 2010.
(3) Source: Senator John Kerry, Congressional Record – Senate. May 26, 2010.
(4) Shares outstanding as of May 6, 2010 per 10-Q. Total cash as of March 31, 2010 per 10-Q.
Disclosure: Long Call spread of MDCO