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Long Investment Idea For 2014: Genzyme's Contingent Value Right

|Includes: Sanofi (SNY)

Genzyme contingent value rights for multiple

sclerosis drug Lemtrada are trading below any

possible payout, justifying an investment, writes

Chris DeMuth Jr. of Rangeley Capital. A

negative report issued by the FDA ahead of

an advisory committee meeting last month

caused the price to drop from $2 to $.50.

Based on an analysis of the global MS market,

the drug has a high likelihood of reaching

the first sales milestone regardless of the upcoming

FDA decision. This would result in a $2 payout.

Every year since 2009, we publish one

of our favorite long investment ideas for

the coming year. In 2014 our best long

idea is an investment in the contingent

value right (NASDAQ:GCVRZ) for the multiple sclerosis

(NYSE:MS) drug called Lemtrada.

GCVRZ costs less than 70 cents per

right today and will ultimately pay out

between $0 and $13, depending on

whether or not the FDA clears Lemtrada

($1) and whether the drug hits various

sales milestones (up to an additional

$12). Lemtrada is already approved in 30

countries including Europe and Canada.

Today the price trades below any payout

from the CVR, so one needs to be able to

conclude only one of two things in order

to justify an investment: that the drug will

be able to generate sufficient sales in the

countries where it is already approved

in order to reach the lowest of the sales

milestones or that the FDA will eventually

approve the drug.

In November, FDA staff issued a background

report on Lemtrada which outlined

their concerns regarding the structure

of the Phase III clinical trials and the

potential for bias in the data. Prior to that,

most analysts held that the likelihood of

FDA approval was a near certainty. This

unexpected report from the FDA caused

the price of the right to drop from $2 down

to $.50. On Dec. 27 we will find out if the

FDA approves, disapproves or delays the

sale of Lemtrada in the U.S. The market

tends to dislike binary events, despise

uncertainty, shy away from discomfort

and thus misprice securities with these


So let's assume for a moment that we

know the FDA will deny approval. In that

instance, what is GCVRZ worth? At least

$2, here's why.

There are over 2.3 million people in the

world diagnosed with MS, most of them

women between the ages of 20 and 50.

MS is a progressive disorder impacting

the central nervous system (NYSE:CNS)

without a known cure. It is an autoimmune

disease in which cells attack myelin, the

tissue protecting the nervous system's

axons. As the inflammatory cells attack

myelin, the ability of the nerves to conduct

electrical impulse is disrupted. This results

in mild to severe disabilities. Most experts

and most non-experts agree that new

therapies are needed to disrupt this process

and Lemtrada is the most promising

of the potential therapies.

The drug works by depleting the body's

disease fighting cells that become misdirected

and cause harm to one's own body.

These cells are believed to play a major

role in multiple sclerosis. Cambridge University

published a video to describe the

drug in detail, it can found here.

The global market for multiple sclerosis

drugs is approximately $15 billion

per year growing at a rate of 6 percent

annually as more people are diagnosed

and treatment options improve. The first

sales milestone for GCVRZ, worth $2, will

be paid if sales for Lemtrada reach $400

million in annual sales for the total of four

consecutive quarters, which is less than 3

percent of the global market share and 6

percent of market share in Europe. Based

on our country by country analysis of the

MS population in the five core European

countries alone (U.K., France, Germany,

Spain, and Italy), we believe the likelihood

of reaching the first sales milestone is

very high. So we expect to receive a payment

of $2 per contract in the foreseeable

future regardless of the FDA's decision. As

a result of near-term uncertainty around

the FDA's decision, we do not believe this

is being accurately priced into the market.

With full knowledge of the process at the

FDA, Sanofi has bought these securities

back in the open market for a price as

high as $1.75 per share as they ramp for

the launch of the drug and try to mitigate

their future liability in this CVR.

If the FDA approves Lemtrada for treatment

of multiple sclerosis by April 2014,

rights holders receive $1. If annual sales

for Lemtrada hit $400 million on a global

basis, then rights holders receive another

$2. Setting aside all other milestones, is

it worth risking $.70 to likely get $2 to $3

in the foreseeable future? We believe the

answer is yes, and this is our best long

investment idea for 2014.

- Chris DeMuth, Jr. is the founder and manager

of Rangeley Capital, which is invested in GCVRZ