Bristol-Myers Squibb (BMY-RT) – CVR – 159% Upside

Current Price: $3.48

Expected Payout: $9.00

Upside: 159%

Expiration Date: end of '21

 

This idea was initially posted on Alpha Vulture blog. Currently the CVR is trading much higher, however now that the merger has closed, you need much less capital to participate in the play and I think it is still trading at an attractive enough price.

 

Background

In a $74bn pharma merger Bristol-Myers has acquired Celgene. In addition to stock and cash consideration each Celgene shareholder also received CVR that might pay out $9. The CVR is conditioned on FDA approving three drug candidates that were under CELG development:

  • Ozanimod (inflammation/immunology) - needs to be approved by December 31, 2020. The drug is currently under review and the approval is expected by the 25th of March '20.
  • Liso-cel (oncology) - needs to be approved by December 31, 2020. Its BLA (biological licensing application - NDA's equivalent to biological products) was submitted in December '19 with approval to be expected mid-2020.
  • Ide-cel (oncology) - needs to be approved by March 31, 2021. Currently the drug is in the Phase 3. Company expects to file BLA in H1 '20.

In order to receive the $9 payout all of the three approvals must be obtained within indicated timelines. In case at least one of them misses the date or gets rejected, investors won't get a dime.

In May '19 BMY estimated that the fair value of the CVR (calculated by using probability weighting) should be $3.83/share (9% higher than the current trading price). Given that since then there was further progress on two of the drugs (liso-cel BLA submitted ide-cel trials showing good results) the value should probably be higher now. The most recent update (9th Jan) from BMY, saying that the process for ide-cel filing is on track and that management is confident of approvals seems to imply that as well.

Overall, the timely submission of ide-cel or approval of Ozanimod/Liso-cel by FDA will serve as a catalyst to propel shares upwards or break the case.

 

Two main risks

FDA rejection

I am definitely not competent enough to comment on the likelihood of this, however the statistics (Alacrita Consulting) suggests that there is a decent chance of all three candidates passing through. The combined probability is around 73% vs 39% that the current trading price implies.

bmy

 

All drugs get approved as expected, but the deadlines are missed, intentionally or unintentionally.

With two out of three drugs already submitted for FDA approval, only the timing of Ido-cel submission manipulated by BMY. It is important to note, that BMY has a conflict of interest here as CVR payment will cost the company $6.4bn and a slight delay in the filing might help to avoid that.

It wouldn't be the first time such a scenario plays out. One of the examples is Sanofi GCVRZ, although in Sanofi case investors have won back their payout through a lawsuit arguing that the company has deliberately slowed down its operations. Hopefully,Sanofi example will serve as a warning for large pharma to  treat CVR investors fairly.

Worth adding that the merger has received a lot of attention from certain activist funds that were very dissatisfied with this merger and tried to stop it, but were shut down by proxy firms' recommendations. So in case something goes South, the reaction from the shareholders should be significant, especially given that this merger is more than 3x larger than Sanofi/Genzyme.

Another argument for timely Ido-cel submission is that the drug is being developed in collaboration with Bluebird (biotech) so doing something fishy should be harder given involvement of impartial third-party which should be interested in good performance.

 

Keep in mind that this situation is not some undiscovered mispricing. The large cap merger itself was widely followed and CVR liquidity is sufficient as well. There are about 711m CVRs out there and the daily trading volume is about 2m CVRs.

 

53 COMMENTS

    1. jwestern

      It shows up in the suggestions on my brokerage website when I type in BMY in the trade search bar.

  1. Platitudes

    Ilja, how do you arrive at a combined probability of “around 73%”?

  2. Writser

    Good question. Given his source I’d say it should be 88% * 88% * 88.8% or about 69%. Which is slightly lower but doesn’t really affect the thesis. Also, BB2121 has been granted ‘breakthrough therapy designation’ (https://ir.celgene.com/press-releases-archive/press-release-details/2017/Celgene-Corporation-and-bluebird-bio-Announce-bb2121-Anti-BCMA-CAR-T-Cell-Therapy-Has-Been-Granted-Breakthrough-Therapy-Designation-from-FDA-and-Prime-Eligibility-from-EMA-for-Relapsed-and-Refractory-Multiple-Myeloma/default.aspx) by the FDA which should be a positive.

    I have a ~2% position. Sizing is tricky with something like this.

      1. Writser

        That’s interesting, but pretty much a useless blanket statement if you don’t bother to explain your reasoning. Which I’m hoping you will do 🙂 .

  3. dt

    CVR is up 30% pre-market on news that Ide-cel BLA was submitted to FDA

    https://www.businesswire.com/news/home/20200331005194/en/Bristol-Myers-Squibb-bluebird-bio-Announce-Submission

    Now the risk that BMY somehow cheats-out CVR owners is gone – everything is in FDA’s hands. CVR trades at $4/share vs potential payout of $9/share. If average submission-to-approval success stands at 88%, then fair value of the CVR at the moment should be 0.88*0.88* $9=$6.98.

    However, this is still a binary situation and probabilistic valuation is probably not the correct way to look at this (i.e. outcome for a single case vs average outcome from a large population).

    1. Writser

      Still, I cannot help but think it is very cheap if you can stomach the risks. Rights are trading around the same level as two months ago and some very good things have happened since. The FDA studying a BLA seems like something that can be done mostly remotely even when the country is partially in lockdown due to Covid-19 (and it is an important task – these are actual medicines that can save or improve lives). Also there is now also quite a bit of leeway in terms of allowance for delays.

  4. dt

    Another buying opportunity?

    BMY-RT down 20% after company announced that FDA has extended the review of lico-cel. Now decision is expected by the 16th of November (might happen earlier), which still fits the timeline to trigger the CVR payout (approval required by the end of the year). So in a way nothing has changed from before.

    Two reasons why investors got scared:
    – If there is another extension like this, and drug gets approved only in 2021, then CVR is worth 0;
    – delay by FDA is perceived as increased approval risk.

    Explanation provided for the extension – additional time was necessary to review additional information submitted to FDA by the company, which in itself does not suggest higher approval risk or potential for further extensions. Also on a positive side FDA has not rejected the drug after 5 months of review.

    Can anyone opine:
    – How often are there repeated extensions of PDUFA action dates?
    – How often are the drugs rejected after extended review?

    https://news.bms.com/press-release/corporatefinancial-news/bristol-myers-squibb-provides-update-biologics-license-applica

  5. Writser

    https://www.fda.gov/media/101907/download , page 46:

    Within the Program, applications with a goal extension also exhibited a higher first-cycle approval rate than applications without a goal extension (89.7% [n=39], 76.5% [n=132], p = 0.072).

    And for drug applications with Breakthrough Therapy Designation. A sample of 128 applications, 11 received a PDUFA date extension. All of the extensions were 3 month extensions and all were approved.

    The latter is from a research note that I cannot share, so feel free to ignore. Also, small sample size. Not sure I buy it but you could argue that the delay is actually a net positive!

    “This is in accordance with the Commitment Letter expectation that, except for rare cases, goal extensions are to be used when the amendment can be expected to resolve the deficiencies in the current cycle.”

  6. dt

    Positive development followed by a negative one – ide-cel BLA will need to be resubmitted and BMY will aim to do that before the end Jul’20.
    This will leave only 8 months till approval deadline, so clearly very tight. There is a conference call today where more information might be provided.

    Looking at liso-cel – BLA was submitted on the 18th of Dec 2019, with priority review announced on 13th of Feb 2020 and approval deadline by 17th of Aug 2020. So a total of 8 months from submission till approval deadline. Assuming ide-cel also receives priority review and schedule is approximately the same, it seems this could still make the cut for the CVR payout (approval required by 31st of Mar 2021). Any news that BLA was resubmitted earlier than the end of July will be very positive.

    I know too little about these BLA submission, but it to my uneducated eye seems that this type of info deficiency in the original submission could be easily gamed to delay the eventual approval.

    “FDA determined that the Chemistry, Manufacturing and Control (CMC) module of the BLA requires further detail to complete the review. No additional clinical or non-clinical data have been requested or are required.”

    https://news.bms.com/press-release/corporatefinancial-news/bristol-myers-squibb-and-bluebird-bio-provide-regulatory-updat

    1. nmeile87

      If you’d like to see the positive in this: No additional clinical/non-clinical data required. So purely additional data on manufacturing.
      Whilst the time line becomes tighter, this would still play out positive if it was granted priority review – which is likely based on clinical data presented.
      This has been the view of March comments at value investors club as well, so this may actually present a buying opportunity. With submission before end of July, there should be a positive push closer to the 3.50-3.90 range again.
      The news yesterday reconfirmed belief in the clinical data, hence there may be an opportunity to yield some gains even after next milestone.
      But of course this remains a risky one due to the all or nothing payment structure.

      1. dt

        Agreed on:
        – ‘reconfirmed belief in clinical data’ – however neither BMY nor bluebird are on any schedule to get this approved.
        – this still look positive if submission is by the end of July and priority review is granted.

        I am not adding to the position (and have not closed it either) simply because now I am unable to exclude the possibility that BMY is deliberately trying to screw CVR holders and I do not feel comfortable in increasing the exposure here. Maybe that’s too much of a conspiracy theory, but hey, we are talking about almost $7bn in cash.

        1. Writser

          Yeah, agreed. Though premarket < $2 seemed attractive enough to add I'm not so sure what fair value is now ..

  7. Jamal.Sydney

    Anyone have thoughts on the idecel refiling? We’re getting pretty close to the (company self-imposed) end of July deadline. I keep fluctuating btwn two thoughts: On one hand, it seems strange to me that when they said in May they would refile by end of July, that they would be planning for the last couple days of July. It makes me think something has to have gone wrong if it has taken this long (unless they have it done but are purposely just sitting on it for some reason). On the other hand, if something has gone wrong and they knew they would miss that deadline, that would presumably be material and they would have already disclosed that. So because nothing has been disclosed, therefore we should still be on track for end of July filing.

    I understand some CAR-Ts are getting approved ahead of their pdufas, so a refile of idecel by end of July isn’t necessarily a deal breaker for ultimate cvr payout (plus the upside risk that fda potentially accepts the refile faster than 60 days also providing some more cushion) – but I wonder if anyone has thoughts on the above and sitting here on July 28 why it might not have been filed yet.

    Also, strange jump in the last half hour of trading yesterday. Any theories on that one?

    1. dt

      ide-cel refiled on time – although they seem to have waited almost for the very last moment. As per my comment on May 13, the timeline for ide-cel to get approved before the end of March 2021 is quite tight – priority review is required and there cannot be any extension.

      The conspiracy theorist in me thinks BMY/Bluebird waited on purpose till the very last days of July to file this, as from their language it seemed it was a rather easy task that could have been done earlier.

      1. Jamal.Sydney

        I agree their language implied this was easy, which makes it all the more puzzling. Even if I were a conspiracy theorist, I don’t see why they would purposely wait until the last days of July. Whether the pdufa is 3/31/21 or would have been 2/28/21 had they filed a month ago, they would still both be at same positive risk of approval. And if there is a 3 month extension, they will miss the cvr deadline either way.

        Anyway, what a relief! All in FDA hands now.

  8. nmeile87

    Don’t forget we are dealing with a large slow pharmaceutical corporation…
    Summer holidays, approval committees, a clear deadline – I think it’s a surprise they didn’t file on Friday only!

  9. nmeile87

    Mention in a citi Webcast that FDA had not yet scheduled the inspection.
    Is assume scheduling would not be made public longer than a week prior to the inspection, so I was very surprised to see that kind of a move following this. Makes me wonder wheter there is anything else going on in the background.

  10. Vincent

    Does anyone have an opinion on the potential payout through lawsuit if CVR expires without payment? A recent example is Sanofi had to pay $315m to settle claim from Genzyme CVR holders that they intentionally delayed Lemtrada trial progress to avoid CVR payment. The settlement amount is about 10% of maximum payout the Genzyme CVR holder entitled.

    From my limited understanding about both cases, I think BMY CVR holders have a much stronger case here. What chance will you assign to this potential litigation payout? I personally think 30% is not unreasonable here. Thoughts?

      1. Vincent

        Only because that we are a litigation prone society:) On a serious note, it’s hard to convince people BMS used diligence efforts if they had to refile ide-cel. This is extremely rare for big pharma like BMS.

      1. MarkB

        They both seemed bullish on it and seemed to indicate that the inspection for Liso-cel was the holdup (though I think that was speculation). Interested in your thoughts too dt.

  11. mike_h

    there was a fireside chat today, not much was said other than they are working with the fda but covid 19 travel issues are a very real threat to inspections occuring on time

  12. dt

    CVR is up on the rumors that site inspection is happening. Apparently, some guy had setup a stakeout for two months near BMY parking lot and waited for FDA guys to arrive. Eventually one did (recognized from the license plate). Thus so far the rumor seems to be based on one blurred photo (which has since been removed from Twitter) and assurances from the guy to organized the stake-out.

    https://twitter.com/Biohazard3737/status/1313913416155832323

      1. dt

        I have no opinion of whether this is legit or not. But the inspection was likely to happen. And the guy who organized the stakeout is Dan Scheeberger – from Andrew’s podcast on BMTRT in mid September (see link above). So it is not an anonymous Twitter pumper.

  13. Cerberus

    You might find below link useful in accessing the approval rate for oncology therapies. A couple of years old but 2nd source for probability confirmation never hurts:
    https://www.bio.org/sites/default/files/legacy/bioorg/docs/Clinical%20Development%20Success%20Rates%202006-2015%20-%20BIO,%20Biomedtracker,%20Amplion%202016.pdf

    So the simple math for fair value is currently: 90% approval chance x 90% approval chance x 9 USD = USD 7.3. The current value of the CVR at USD 3.3 implies there is roughly a 55% chance that a delay will occur and the CVR payout timeline is missed. I’m not a expert but I would argue that this is quiet pessimistic given that both therapies have received “priority review” status from the FDA. See below link on the definition of “priority review”:
    https://www.fda.gov/patients/fast-track-breakthrough-therapy-accelerated-approval-priority-review/priority-review

    “A Priority Review designation will direct overall attention and resources (of the FDA) to the evaluation of applications for drugs that, if approved, would be significant improvements in the safety or effectiveness of the treatment, diagnosis, or prevention of serious conditions when compared to standard applications.”

    In addition COVID is a virus therapies and we are talking about oncology therapies, so I guess that the FDA has dedicated departments for both issues.

    Somehow I still have the feeling that I am missing something.

    Ideas for research:
    What about checking on the history and progress of other oncology “priority reviews” this year conducted by the FDA?
    How long is the review already ongoing for therapy with the March 31, 2021 deadline? Is there potentially relevant extension risk for this approval?

  14. g4734g

    BMY announced earnings this AM, BMY down 20% pre market, trying to locate specific news from this AM driving this move?

  15. W51W52

    Language in the press release for this quarter (3Q’20) that wasn’t there in the 2Q’20 press release. Specifically:

    “…including the increased possibility that the COVID-19 pandemic could delay the timing of the FDA’s approval decisions for liso-cel and ide-cel, the expiration of patents or data protection on certain products, including assumptions about the company’s ability to retain patent exclusivity of certain products, and the result of governmental investigations.”

    Note that this language is very similar to what was previously disclosed in 2Q’20 10-Q.

    1. jwestern

      If it’s similar language, is the price movement today an overreaction?

      1. mcg

        price action is due to conference call comments. TX facility inspection required, not scheduled yet.

      2. nostradamus

        The initial price movement was because of the risk factors in the PR. The second much more serious price movement was because BMY said on a conference call the second facility for lisocel had not yet been inspected, and nothing planned. This makes it very unlikely the 16 Nov PDUFA date will be met.

        The scenario in this tweet is basically the CVR’s last hope: https://twitter.com/semodough/status/1324368791170654209/photo/1.

      3. Writser

        From the conference call:

        “For liso-cel as we mentioned earlier, as we disclosed in the past, FDA has informed the company that both our plants in Washington as well as the one in Texas need to be inspected. They’ve been able to inspect our plants in Washington at the time but has not scheduled any inspection of the second plant.”

        An inspection for Texas hasn’t even been _planned_ yet. It seems to me like it is basically impossible to A) plan the site visit (could take a few weeks – also note that Corona cases are on the rise again in Texas), B) do the actual site visit (took over a week for Washington), C) allow for time for BMY to respond to issues and D) interpret the responses and possibly approve liso-cel before year-end.

        So this seems like extremely bad news. Either there is a ridiculously tight schedule towards timely approval or we are left hoping that the FDA miraculously approves a medicine without doing an inspection that was required according to that same FDA.

  16. dt

    Liso- cel approval deferred by FDA, citing covid travel restrictions. The chances of liso-cell getting approved by the end of the year (milestone fo CVR payout) are now quite close to zero.

    There might still be some potential litigation value in the CVR as well as tiny chances of liso-cell approval by the end of the year. But chances are very slim.

    It is hard to tell if this would have played out well in the absence of covid – BMY was clearly incentivized to avoid paying out the CVRs and potentially would have found other ways to derail timely approvals (do not ask how).

    Closing this idea with 75% loss.

      1. charlies_almanac

        Thanks very much, seems very positive, even from here I would think.

        1. R

          What did he say? I couldn’t find anything but maybe it was deleted.

Leave a Reply