Seeking Alpha

Chris DeMuth Jr.'s  Instablog

Chris DeMuth Jr.
Send Message
"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
My blog:
Rangeley Capital on Harvest
My book:
Rangeley Capital Best Investment Ideas
Back To Chris DeMuth Jr.'s Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (19)
Track new comments
  • This scare on GCVRZ is insane. The document put out by the FDA is simply making the committee aware of some of the risks of using this new MS drugs. It also recommends methods to assure the safest approach to monitoring the use of this drug. This document does not in any way state the this drug will not be approved. In fact, the chances of approval are very high
    8 Nov 2013, 11:38 AM Reply Like
  • Don, While I am long and hope you are right I don't see how you can get to "the chances of approval are very high". They may be far far away from 0%..but 'very high'?
    8 Nov 2013, 11:42 AM Reply Like
  • If you read the latest FDA doc. you will see that they are really only addressing the risk management of this drug. If approved, they are recommending a comprehensive risk management strategy. I believe the company will follow their recommendation in order to receive approval. Their clinical trials were very positive and the whole idea about drug approval is to make sure that the benefits out way the disadvantages. The benefits definitely outway the disadvantages as long as they follow the FDA recommended risk management.
    8 Nov 2013, 12:23 PM Reply Like
  • Don - I think you are very confused.


    The FDA put several documents on the website in preparation for the 11-13 meeting here:


    If you click on the bottom one for the 11-13 meeting "Briefing Information..." you'll see three documents - the "FDA Briefing Information...", the "Addendum to the FDA Briefing..." and the "Genzyme Briefing Information...".


    I'm guessing you only read the "Addendum to the FDA briefing..." in which case you are massively ill-informed. The document you should read is the "FDA Briefing Information...", where you'll see that the FDA believes that Lemtrada should not be approved because it isn't demonstrably better than far safer interferon drugs with 20 years of data.


    "A little knowledge is a dangerous thing"
    12 Nov 2013, 05:55 AM Reply Like
  • I think that you may be the one that is confused. Keep this in mind
    "A little knowledge is a dangerous thing"
    14 Nov 2013, 09:15 AM Reply Like
  • outweigh*
    14 Nov 2013, 02:22 PM Reply Like
  • Does anyone know the purpose of the FDA publicly issuing a statement like this prior to the panel?
    8 Nov 2013, 02:50 PM Reply Like
  • Author’s reply » It is for the advisory panel from the staff.
    8 Nov 2013, 02:55 PM Reply Like
  • it is common practice for the FDA staff to do this.
    8 Nov 2013, 03:08 PM Reply Like
  • AVEO, AVEO, people said the same thing about AVEO.
    8 Nov 2013, 04:35 PM Reply Like
  • I would be lying if I said that my initial reaction to the price movement was NOT soiling myself. lol However, after a closer inspection of the release I increased my position by 66%(I initially stated 40% on the forum, mistakenly). Obviously, this lowered my cost basis a great deal.


    This is now almost an arbitrage. Let me explain why. Assume that the FDA delays approval or worse yet rejects Lemtrada. Obviously the US approval milestone will not be met. The EU has already approved Lemtrada so all the sales milestones are still on the table. The global sales of Lemtrada without FDA approval, please correct me if I am wrong, need reach only $400 mil during a 4 quarter period before 2020 for a $2 payment to be made to holders of GCVRZ. When you consider the efficacy of Lemtrada compared to the alternatives, this is more likely to occur than not, just not as quickly as with US approval.


    Assume only the $2 global milestone payment is made. A cost basis of $2 per share would assure you of no loss. Any cost basis below $2 assures you of gains.( I am not muddying the waters with the time value concept or with the variable of opportunity costs.) Obviously the lower your basis is the better.
    8 Nov 2013, 05:58 PM Reply Like
  • Drew - the $400m sales milestone can only be met in the first 4 quarters after launch. You should read the actual CVR document. Also, your cost basis is irrelevant to the investment decision and "averaging down your cost basis" is a flawed way of thinking. The only two things that matter are what you think the security is worth and the price you can trade it for today. If you paid $3 for 100 shares of company X and the situation changes such that the price falls to $1 and you now think it's worth $2 but you can only buy 1 share of it would you do so? You can't bring down your average cost basis to below $2, but that 1 share is still a great deal and should be bought. My 2 cents.
    10 Nov 2013, 04:08 PM Reply Like
  • Dog - I read it previously and I have now re-read it. You are correct reference the 4 quarters after launch sales milestone. I had confused it with sales milestone #2[the 1.8 billion in sales through 4 consecutive quarters while no approval in US which would be a $3 payment(sales) + $1(non - US approval)]. Speaking of myself only, it is often better to keep your mouth shut and be thought a fool than open it and remove all doubt.
    10 Nov 2013, 09:41 PM Reply Like
  • Furthermore, with the benefit of hindsight, valuing this thing pre-FDA approval was an absolute crap shoot. Any DCF analysis hinged on the assumption of US approval for the most part. If we do not have access to all the information or, as it turns out, even most of the information, how can we even begin to have a starting value for our calculations? Right now it appears any calculations using a base value above zero are in reality based on hope and prayers.


    In my opinion we were all seduced by the security while ignoring the underlying concern. Much like Buffett was by the convertible bond offering of a certain airline several decades ago. We holders should be prepared for permanent loss. But hope for an outcome similar to the Oracle's which is to at least be made whole.


    I know this post is 180 degrees from what I have previously posted. I've had the chance to calm down and rationally, stoically, contemplate the situation without all the market noise. While this may not work out, I still appreciate Chris, rootbeer, and anyone else, who I am failing to mention, that put considerable time and research into this. Good luck to all!
    11 Nov 2013, 09:30 AM Reply Like
  • Just want to throw my thoughts out there as a suffering GCVRZ holder.


    First, assuming no FDA approval, my estimate of value is $1 (rounded up). This is assuming $2 payment for $400 million sales milestone is reached in 2 years; discounted by 20%; and assigning 70% probability of this happening. I am ignoring other milestones since they are too far out and the probability of being achieved appears low. Of course the results would be different if you have different odds.


    I think FDA approval before the 2014 deadline is only 10%. I don't pretend to have any special knowledge to come up with that number other than it's a conservative assumption that I can sleep at night. That would mean expected value of $0.1 plus extras to account for higher probability of achieving the other milestones. I would assign expected value for FDA milestone of $0.2. Total expected value would then be $1.2.


    I believe there should be a further discount for risk aversion. (eg. Most people would prefer having a sure $45 than to take a bet with equal chances of winning $100 or nothing). The market is saying that discount should be 36% ($0.77 vs $1.2).


    IMHO the market is probably undervaluing this thing but the margin of safety is not large enough. My bid (if I didn't own this) would be $0.3. The price in most optimistic case (50% chance FDA approval and zero discount for risk aversion) is ~$1.6. I think we're in no man's land and when I'm in no man's land I usually get out. But haven't make up my mind here.
    8 Nov 2013, 10:29 PM Reply Like
  • I think FDA approval still a 50/50 proposition. Anything below a $1 pps looks good since approval would make the 400 million in sales a 95%+ likelihood. At below 70 cents this thing had a 3 to 1 risk reward. Those who bought in low might be handsomely rewarded if robust sales come to pass. Even without FDA approval the 2 year time frame seems reasonable to get Europe up to speed. One gets that optionality for nearly free and current levels.
    9 Nov 2013, 06:49 AM Reply Like
  • Implied Value - My take on your valuation:


    It would be a lot clearer (and more accurate) to just probability-weight your outcomes and discount at the risk-free rate (treasuries, but for the sake of simplicity zero % since you're only considering milestone payments that must happen in the next few years). Using a larger discount rate also includes probabilities, so you are double-counting.


    Using your math, the CVR value should be 10% x $1 + 70% x $2 = $1.50.


    However, if the FDA doesn't approve (thus trashing Lemtrada's efficacy stats), is there really a 70% chance that Lemtrada reaches $400m of sales in the EU alone? That's a 10+% market share, higher than Gilenya achieved in it's first year as the first highly-effective oral drug with FDA approval. I don't think there's any hope for EU sales to beat $400m without FDA approval. So your valuation should be at best 10% x $1 + 10% x $2 = $0.30. My 2 cents.
    12 Nov 2013, 06:26 AM Reply Like
  • DoghouseReilly,


    I can understand the argument for double counting and I'm not going to disagree since it's inexact science anyways. If I am only using larger discount rate to compensate for uncertain probability then I would certainly discount it at higher than 20%.


    My broader point is, if offered PV of $50 (at risk-free), no one in their right mind would take a 50% bet of $100 or nothing a year from now. Hence larger discount rate.


    You're probably right on the odds if FDA approval fails. My understanding is the $400M milestone is aggregate of first 4 quarters of sales in each geography. So it could be satisfied in more than a year (remembering from my memory but I could be wrong). Anyways, I thought FDA approval was easy, which is obviously wrong.


    I'm out of this now as it's becoming too speculative. Funny how things always turn sour when I step out of my circle of competence.
    12 Nov 2013, 02:39 PM Reply Like
  • Probably over 600000 MS patients in Europe and Russia together. If only 1 in 60 patients gets the medicin in the first year for the european price of an expensive car ($50000) then the first sales milestone will be met.


    I found another recent link:


    Note that this American neurologist mentions that about 1/3 of the MS patients gets thyroid disease anyway even if they have not been treated with alemtuzumab.
    12 Nov 2013, 09:55 AM Reply Like
Full index of posts »
Latest Followers


More »

Latest Comments

Most Commented
  1. GCVRZ Forum (912 Comments)
  2. Event Driven Q&A Forum (218 Comments)
  3. GPT Forum (124 Comments)
  4. Shorts Forum (115 Comments)
  5. Gold (110 Comments)
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.