Current Price: $3.48
Expected Payout: $9.00
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.
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
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.
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.