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When Celgene (CELG) acquired Abraxis back in June 2010 for around $2.9 billion, they tied contingent value rights [CVRs] to Abraxane, Abraxis' lead drug. These CVRs trade under the ticker (CELGZ). These CVRs have the potential to deliver some pretty substantial gains if any of the potential payments are delivered. There are roughly 43M outstanding, with ex-CEO of Abraxis, Patrick Soon-Shiong, owning roughly 80% of them. We believe there is a reasonably high likelihood for distribution of one of the largest payouts sometime next year. [Note, the CVR is essentially trading like a call option on these future cash payments.]

Now, the value of the CVR will depend on the following cash payments assuming certain regulatory milestones are met:

Milestone Payment #1. Celgene will be obligated to pay $250 million upon the achievement of U.S. regulatory approval of Abraxane®[nab-paclitaxel] for use in the treatment of non-small cell lung cancer, which permits Celgene to market such Product under a label that includes a progression free survival claim, but only if the foregoing milestone is achieved no later than the 5th anniversary of the execution of the CVR Agreement. [Roughly $5.78 per CVR]

Milestone Payment #2. Celgene will be obligated to pay $400 million [if achieved no later than April 1, 2013] or $300 million [if achieved after April 1, 2013 and before the fifth anniversary of the CVR Agreement] upon the achievement of U.S. regulatory approval of Abraxane® for use in the treatment of pancreatic cancer, which permits Celgene to market such Product under a label that includes an overall survival claim. [Roughly $6.93 or $9.24 per CVR]

Net Sales Payments. For each full one-year period ending December 31 during the term of the CVR Agreement [a "Net Sales Measuring Period ending on December 31, 2025], Celgene will be obligated to pay to the CVR holders:

  • 2.5% of that portion of Net Sales of Abraxane® and the other Products [as each such term is defined in the CVR Agreement] that exceeds $1 billion but is less than or equal to $2 billion for such period, plus
  • an additional amount equal to 5.0% of that portion of Net Sales of Abraxane® and the other Products that exceeds $2 billion but is less than or equal to $3 billion for such period, plus
  • an additional amount equal to 10.0% of that portion of Net Sales of Abraxane® and the other Products that exceeds $3 billion for such period

The following events will be driving the underlying price of the CVR:

- Phase III data in metastatic melanoma which are expected in 2H'12 [NCT00864253 shows trial completion in July 2012, completed enrollment in 2Q-2011]
- Submitted filing in NSCLC for the EU - expected 1H'12
- Potential FDA approval in non-small cell lung cancer[NSCLC], PDUFA date Oct. 12, 2012
- Results from the Phase 3 study in metastatic pancreatic cancer with a primary endpoint of overall survival are expected during the second half of 2012[NCT00844649 shows trial primary completion in December 2012]

With this information in hand, we want to examine which of the possible milestone payments appear likely to pay out.

Milestone Payment #1

This milestone is unlikely to happen and the value of the CVRs reflects that. Following their ASCO 2011 presentation, the value of the CVR's plummeted 60% since the study showed "in the ITT population, improvement was seen in PFS and OS endpoints favouring ABRAXANE, although this did not reach statistical significance." With this data in mind, it seems unlike that they would obtain a PFS labeling claim of benefit over standard paclitaxel. We do note that there was an overall survival[OS] advantage for patients 70 years and older[median OS of 19.9 months vs 10.4 months, HR 0.583]. However, we do not believe that if this were put on the label, it would allow for a milestone payment. We do believe the drug will be approved for this indication which should help slightly raise the possibility of achieving net sales payments in the future.

Milestone Payment #2

We believe the most important binary event will be the readout of the Phase 3 trial in pancreatic cancer. This trials compares Gemzar [Gemcitabine] vs. Abraxane + Gemzar. We believe this study completed enrollment somewhere in April-May timeframe based on the changes in their information. Celgene recently noted that this trial should read out in the second half of this year[estimate December or early 2013].

There does appear to be considerable rationale and supporting evidence that this trial will be successful. In particular, there is evidence to suggest Abraxane helps break down the tumor stroma and allow more drug to reach the tumor. Their single-arm Phase 2 study also showed very encouraging activity in combination with Gemzar: almost half of the patients responded [overall response rate ~ 48% (21/44)] and two-thirds experienced disease control [disease control rate ~ 68% (30/44)]. The median progression-free survival was 7.9 months and the median overall survival [OS] was 12.2 months. The one-year survival rate for patients was 48%. All of these numbers compare quite well to historical control data, with the caveat there is no control arm.

As a reference point for OS, a recent trial comparing FOLFIRINOX versus Gemzar in metastatic pancreatic cancer showed median overall survival was 11.1 months in the FOLFIRINOX group vs 6.8 months in the gemcitabine group [HR. 0.57, p. 0.001]

Net Sales Payments

These do not appear like they will be reached for quite sometime without additional indications[pancreatic, melanoma and NSCLC[. 2011 global ABRAXANE net product sales were approximately $386 million. ABRAXANE sales for the first quarter of 2012 were $104 million, with U.S. sales of $81 million and international sales of $23 million. The drug is currently only approved in metastatic breast cancer, although, their sales here will likely decline. For any of these net sales payments to be made, Celgene will need positive data in their pancreatic and melanoma trials. We don't view Abraxane in NSCLC as a large opportunity currently.

The melanoma data seems more of a toss up, but they also had promising single-arm Phase II data. This Phase 3 study is comparing Dacarbazine [DTIC] vs Abraxane in first-line metastatic malignant melanoma. Historically, DTIC has performed quite badly in this setting, so we actually wouldn't be surprised if Abraxane reported positive data.[Median OS with DTIC typically ranges from 6-9 months with low response rates.] However, it's unclear what impact this will have on the value of CVRs given the rapidly changing treatment paradigm in melanoma. They did recently report that they are "incorporating correlative analyses into its ongoing study to include BRaF mutational status."

Admittedly, their future sales impact in pancreatic cancer are difficult to model because the treatment paradigm could look very different in the next few years. There is pending Phase 3 data from Newlink Genetics (NLNK) HyperAcute® Pancreas immunotherapy[algenpantucel-L] in the adjuvant treatment of pancreatic cancer and a lipid-conjugated version of Gemcitabine in CO-101 by Clovis Oncology (CLVS) for first-line metastatic pancreatic cancer. Outcomes from all 3 trials will likely have a profound impact on the treatment of the disease.


We believe CELGZ represents a good opportunity to capitalize on the unique structure of the CVR. If the Phase 3 data in pancreatic trial is positive, we expect to see $5-6+ on this news. FDA approval of NSCLC and positive data in melanoma will also bring incremental gains. Current prices seem very attractive going into these upcoming events.

Source: An Analysis Of Celgene's CVR For Abraxis