December’s US complete response letter for Sanofi’s multiple sclerosis drug Lemtrada wiped 61% off the value of the group’s Genzyme-related contingent value rights, but the real question is whether this security is now worth anything at all.
The contingent value right (CVR) had been issued to mitigate the risk of Sanofi’s acquisition of Genzyme back in 2011, in what now looks like an extremely smart move by the French firm. The wording of the security’s terms is complex, but closer analysis makes it clear that there is now a snowball in hell’s chance of any milestone payouts.
True, this does not necessarily mean zero value, but purchasers must now rely on class action litigation alleging misrepresentation of Lemtrada’s safety and efficacy and failure to disclose clinical trial design flaws.
The CVR is effectively an obligation to pay holders cash on Lemtrada achieving five separate milestones. If it trades above zero – it is currently changing hands at 37 cents – this assumes that the chance of a payout, however slim, still exists (Sanofi finally snags Genzyme with clever CVRs, February 16, 2011).
It is hard to see how this can be true. To all intents and purposes only two milestones need to be considered: $1 per CVR in the event of US approval before April 1, 2014, and a further $2 in the event of Lemtrada sales hitting at least $400m over four consecutive quarters.
Obviously the first can now safely be disregarded. The FDA's complete response letter means US approval might now never happen, since it is doubtful whether it is even worth Sanofi bothering to run the extra studies required, and the group’s plan to appeal against the FDA’s decision is a shot in the dark.
And careful reading of the SEC document reveals that the $400m revenue milestone needs to be hit “in the four calendar quarters immediately following the quarter in which Lemtrada is first sold”. One can just about make out annual sales of $400m at some point before the CVR’s expiry in 2020, but without the US it would be entirely unrealistic to assume this in the first year after launch.
A Sanofi spokesman further told EP Vantage that the clock was now running in the countries in which Lemtrada was already available, first launch having occurred in the fourth quarter of 2013. Lemtrada is approved in the EU, and so far has been launched in Germany, Finland, Sweden, Norway, Austria and Denmark, the company said.
EvaluatePharma consensus estimates – from before the US complete response letter – had put 2018 Lemtrada sales at just under $600m; for 2014 they were just $155m.
The theoretical payouts under each CVR range from $0 to $13, but is the security trading at anything above zero a sign of unrealistic expectations?
Well, those who recall the wrangling over price between Sanofi and Genzyme will note that the argument centred precisely on Sanofi’s refusal to buy into the junior party’s bullish view of Lemtrada’s value; obviously this then split investors into two rival camps, with the bulls piling into the CVR.
It must also have helped sentiment when in late 2012 Sanofi started buying up CVRs in the market at $1.50-1.75 each, implying that the security was undervalued. But anyone buying into the CVR now must reckon on Lemtrada selling $400m or more in the coming year or so – in markets excluding the US.
The only remaining value is to those who had bought the CVR earlier, and lies not in any payout from Sanofi but in the outcome of litigation.