The Genzyme Contingent Value Right (GCVRZ) is a contingent value right trading on Nasdaq. I have published articles on this CVR many times before. The last one was published on May 23, 2017. That article is still free on Seeking Alpha. I recommend reading it and looking into the links in the beginning of that article for background.
For now remember the CVR was created during the acquisition of Genzyme by Sanofi (SNY). Furthermore the conditions for the different milestones of the CVR either failed or will never be met. These milestones are the following:
A production milestone of $1 per right for producing certain quantities of certain medicines before a certain date years ago.
An approval milestone of $1 per right for US approval of Lemtrada (alemtuzumab) before March 31, 2013.
A first sales milestone of $2 per right for $400 million of Lemtrada sales in certain countries before a certain past date.
Several subsequent sales milestones for Lemtrada for in total $10 per right.
Each right gets slightly more than 70% of any awards from the lawsuit. The rest is for the lawyers and for the investors funding the lawsuit. In case the Trustee wins any awards I believe Sanofi has to pay 7% interest on top of the damages. Investors in GCVRZ get again slightly more than 7% of the interest. Therefore if Sanofi pays out $4 per right plus interest (from the first 3 items above) each holder gets about $3.93 per right after interest and costs. If Sanofi pays out another $3 per right of extra damage payment for also missing a subsequent sales milestone each holder gets about $6.7 per right.
Now, why did all these milestones fail, and why the CVR is still trading around $0.55, for a total market cap of more than $100 million?
The answers to these 2 questions are directly related to the lawsuit between the CVR administrator (the Trustee) and Sanofi. This is NOT a class action. Therefore past holders of the CVR will not benefit from any payouts, only current holders of the CVR will.
When this CVR was created in 2011 it seemed very likely the conditions for the first 3 milestones would be met and also for $3 of payments for the other milestones seemed likely. Yet this instrument always traded below $2.5 for many different reasons. For example most institutional investors do not have a mandate to invest in such instruments. Furthermore this instrument it is too risky for many investors because of its optional nature.
Now 7 years later we know more about why the CVR did not pay out despite it seemed so likely it would. Something similar happened to what often happens with many undervalued stocks. It seems value was not realized largely because of unfair play. That is my impression from the allegations of the Trustee in the court documents and Sanofi's mostly argument free responses. Contractually Sanofi should have done commercial reasonable or even diligent efforts to achieve the milestones but the Trustee says it did not.
See the second amended complaint (document 125 in Pacer). The Trustee claims Sanofi failed to do “diligent efforts” for the approval milestone and the first sales milestone. Furthermore the Trustee claims Sanofi failed to do “commercially reasonable efforts” for the production milestone. I do not doubt the Trustee will also sue Sanofi for not doing diligent efforts to achieve the other sales milestones for Lemtrada, unless the case is settled.
For a good understanding of the lawsuit let’s have a look into “diligent efforts”, what does it mean? This is also discussed in my previous article but for clarity I will repeat. Diligent efforts means doing a lot, more than commercially reasonable efforts. It also means doing at least the same as Sanofi did for its competing MS drug Aubagio and Roche did for MS drug ocrelizumab. Ocrelizumab is very similar to Lemtrada btw. The complaint suggests Sanofi did less than for Aubagio and less than Roche did for ocrelizumab.
When I published my previous article last year the Trustee had filed the following:
Documents suggesting Sanofi filed its first New Drug Application for Lemtrada to the FDA in the wrong format causing unnecessary delay.
Documents suggesting Sanofi did not adequately address the concerns of the FDA with the trial design. Unlike Roche with ocrelizumab Sanofi did not start a double-dummy double-blinded trial.
Documents suggesting Sanofi should have done more to mitigate side effects: Among others it should have had a Risk Evaluation and Mitigation Strategy in place much earlier.
Documents suggesting research into preventing side effects was stopped after Sanofi acquired Genzyme. Furthermore Sanofi might have refused to fund a small trial for preventing side effects at Cambridge University in the UK. This trial was not successful, btw.
Documents suggesting Sanofi was late promoting Lemtrada and only got the sales team ready several months after approval. The Trustee compares with sales efforts done for Sanofi’s unencumbered MS drug Aubagio.
But now there are a few more allegations:
Information in the second amended complaint suggests Sanofi fired key individuals with essential knowledge for achieving the production milestone. Sanofi says emails telling us more about the reasons for firing these people were deleted.
Information in the second amended complaint suggests Sanofi had a lot of technical knowledge for producing these 2 medicines for achieving the production milestone. Yet it did little or even nothing to use this knowledge for achieving the production milestone.
Documents filed by the Trustee suggest Sanofi should have started a Lemtrada trial into primary progressive MS, as Roche did with ocrelizumab, see further explanation below.
There was another version of Lemtrada: GM52. The Trustee want to see documents explaining why this other molecule was abandoned in favor of Lemtrada. See document 202. In the same letter from June 8, 2018 the Trustee says Sanofi still refuses to produce its communications with the FDA.
These are the main points. I do not think this list is complete. Let me know if you have links to other allegations so that I can add them to the list.
In the beginning of 2018 Sanofi said it is considering a Lemtrada trial for primary progressive MS, just as Roche did with ocrelizumab. This trial will come too late to trigger any sales milestones. In the mean time the ocrelizumab trial for primary progressive MS succeeded. Subsequently ocrelizumab has been approved for this MS variant.
Since ocrelizumab is very similar to Lemtrada it is weird Sanofi did not start this trial immediately after acquiring Genzyme. Satisfactory results from such a trial would have opened up a much bigger market for Lemtrada, at the time without any competing drugs. All sales milestones for Lemtrada would probably have been achieved. See also here.
When I published my previous article I expected serious work from Sanofi to refute these allegations. Unfortunately so far Sanofi’s strategy has just been slowing down the lawsuit. Sanofi did not really refute all these allegations with substantial arguments. Instead it sent plain denials to the judge. See for example document 132.
The Trustee asked many documents from Sanofi. Sanofi refused to provide many documents. In the end Sanofi had to provide most of them. The Trustee also asked documents from third parties. At the moment the Trustee is hearing witnesses from Sanofi. I would not be surprised if the Trustee finds much more than they already have found. For example I would not be surprised if this primary progressive MS trial was already fully approved and budgeted within Genzyme but was canceled by Sanofi just after it acquired Genzyme. I estimate such a finding could trigger an award of about $11.3 after interest and legal costs plus any awards for the production milestone (about $1 after interest and costs), so a total of $12.3 per right.
Initially the complaint did not include the production milestone. Moreover the investors wanted a speedy trial. If Sanofi had agreed to a speedy trial the Trustee would probably not have added the production milestone and would have probably found less facts supporting the allegations. Moreover at that time the Trustee might have agreed to a cheap settlement. Indeed the defense strategy of plain denial has harmed Sanofi much. Not explaining elementary matters has weakened Sanofi’s case. Moreover by delaying Sanofi’s lawyer (John Neuwirth) has given the Trustee extra time to amend the initial complaint and for doing more thorough research.
Of course there have been setbacks as well. There have been delays because Sanofi was slow in producing documents and also because it disputed production of certain documents. Initially it also refused to cooperate with a rule 30-b discovery. Furthermore the judge decided there will be no discovery on the deleted emails related to the production milestone.
The main setback is the Trustee was not able to enforce a contractually agreed upon right. The Trustee asked for an independent audit of all Lemtrada sales for the first sales milestone, as agreed upon in the CVR contract. The judge replied he will only grant this as part of a final verdict.
The reason for such an audit could be suspicions Sanofi did not account properly for the first sale in so-called major markets, in particular for the first sales in Germany, the UK and the US. At the moment the Trustee has to rely on spreadsheets with little details and explanation provided by Sanofi. See here (document 190). The Trustee says the first Lemtrada sale could be as late as 4 quarters after Sanofi announced the first Lemtrada sales in the fourth quarter of 2013. See also here (document 193). Such a delay would change total sales for the first Lemtrada sales milestone much.
See here (document 215) for information on the timeline. Depositons other than experts should be completed by November 12, 2018. The Trustee has to file expert depositions by December 21, 2018. Sanofi’s has to file expert depositions by February 19, 2019. Then there is another round of expert depositions for the Trustee on or before April 15, 2019. Motions for summary judgment have to be served on or before June 24, 2019. If no motions for summary judgment have been filed a joint pre-trial order must be filed on or before July 1, 2019.
Maybe the final verdict comes one year later: in July 2020. After the final verdict there will probably be an appeal, which will take another year, so July 2021. Most likely the Trustee will be entitled to audit Lemtrada sales then, which could delay things with another 6 months (December 2021). In addition a second lawsuit might start in 2020 to get damages for missing subsequent sales milestones for Lemtrada.
Reading the documents yourself
The documents are available in Pacer. The case number is 1:2015cv08725. This information does not cost much but it is not free. You can help making this information available for free. If you install the Recap plugin in your browser it uploads any document you buy from pacer to courtlistener.com. There others can read your paid download for free. See here for the docket list on courtlistener.com. This docket list may be outdated but not much if enough people use the Recap plugin.
At the moment not all documents are available for free in courtlistener.com. However all important documents are freely available. At the moment the most important documents are the following:
Document 207 on the scope of the rule 30-B-6 procedure. See appendix A with the list of subjects. See Sanofi’s initial uncooperative response. Page 3 of the main document 207 mentions there is “some testimony suggesting Genzyme and/or Sanofi employees were incentivized or motivated to take actions that avoided or made the CVR milestone payments less likely.”
Document 203 on scheduling.
Going through transcripts is interesting:
Document 106 for the conference held on March 16, 2017. In this meeting the lawyers and the judge discussed the production milestone in the lawsuit and the request for an independent audit of Lemtrada sales.
Document 158 for the conference held on November 16, 2017. In this meeting the lawyers and the judge discussed production of documents. Sanofi is trying to prevent disclosing certain documents.
Document 183 for the conference held on March 28, 2018. In this meeting the lawyers and the judge discussed production of documents. See also this letter from the Trustee (document 202) on the extra trial for primary progressive MS. Sanofi is trying to prevent disclosing certain documents and also is trying to prevent disclosing parts of documents by redacting them. On page 50 (on “discovery spoliation”) the judge decided Sanofi does not have to produce documents explaining why certain emails relevant for the production milestone have been deleted. The need to audit Lemtrada sales was discussed as well.
Document 193: seems to be a smoking gun suggesting something is wrong with Sanofi’s accounting for Lemtrada sales in Germany.
Certain other documents may also be interesting. If you find any I will add them above. Let me also know if certain pages in any documents need to be highlighted. I can directly link to specific pages in documents.
During the next 12 months new filings will reveal what the witnesses and experts say and what other information supports the complaint. In addition I expect better arguments from Sanofi. In other words the next 12 months will finally answer the question whether the CVR is worth anything or not.
During this period the Trustee might also file motions for summary judgment. If the Trustee wins one or more of these motions this will provide much support for the price of the CVR.
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Disclosure: I am/we are long GCVRZ.