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shamapant (80.67)

Forgotten Gold-Ikkyu2 Challenge

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November 15, 2011 – Comments (1) | RELATED TICKERS: GCVRZ

To uphold my part in the Ikkyu 2 challenge this month(i think it would be a great idea to make it a monthly thing), I wanted to highlight a special situation investment that was brought up as a huge value possibility back in April by Charly Travers, in this article: 

http://www.fool.com/investing/general/2011/04/20/are-these-the-rights-youre-looking-for.aspx

(This was also brought up by Jim Royal, a Fool special situation expert, but I found Mr. Travers's article to be the most enlightening)

The investment is in Genzyme Gontingent value rights, which currently trade on the NASDAQ with the ticker GCVRZ. 

Some background that is mentioned in Mr. Travers'(TMF CandyMountain) Article: 

These rights were made available in the acquisition of Genzyme for $74 per share by Sanofi-Aventis. Due to a difference in opinion between Sanofi and Genzyme management regarding the potential for Genzyme's drug, Lemtrada, Sanofi added CVR's to the merger, which would reward shareholders if Genzyme's drug performed well as Genzyme had promised.

Here are the details to the CVR as the Sanofi Q&A reveals:

Total Potential for payment: $14

Production Milestone: Cerezyme and Fabrazyme production levels must be met-$1 payout

Approval Milestone:Upon Lemtrada approval prior to March 2014-$1 payout

Sales Milestone: 400million in sales following release of lemtrada-$2 payout

Sales Milestone: 1.8 billion in sales-$3 payout

Sales Milestone: 2.3 billion in sales-$4 payout

Sales Milestone: 2.8 billion in sales-$3 payout

At the time the article was written, there was a lot less information available than there is now, and the Contingent Value Rights sold for around $2.50. Even so, give TMF CandyMountain his credit where credit is due: "I estimate a fair value for the CVR at $3.62, which offers approximately 40% upside from the current market value. While that looks like an attractive return, I'm not a buyer right now. The chance that these CVRs could turn out to be worthless is just too high. If the manufacturing target is missed this year and next year, the FDA asks for additional clinical data, which it is known to do, the CVR will plunge in value quite dramatically. The CVRs have to trade below $2 for me to consider taking a bite."

Ultimately, he was correct in that the manufacturing target was missed(or *most likely will be* missed-http://www.masshightech.com/stories/2011/07/25/daily41-Sanofi-Genzyme-likely-to-miss-milestone-payment.html), and the CVRs plunged in value. He also says that the CVR's will have to trade below $2 for his consideration. Well consider now. The CVR's are trading at prices from .95 to 1.15 in the last 5 days, 50% below his preferred entry level, and ultimately the value is too great to miss, even without the Production Milestone.

At the time of the merger agreement, analysts and Sanofi valued the drug, Lemtrada(already sold as a cancer treatment under the name "Campath") as having conservative potential sales of 700million. In contrast, Genzyme projected potential sales of over 3.5 BILLION by 2017(which would hit every milestone and give us more than a 200% annualized return on this investment. I believe it is absolutely unreasonable to invest on the speculation that we might recieve 3.5 BILLION in sales from Lemtrada. However, based on recent results, I believe that it is very conservative to invest solely on the basis of  the Approval Milestone.

-http://en.sanofi.com/press/press_releases/2011/news_List_2011.aspx(Check out for yourself the successful Phase 3 results for Lemtrada).

-results were statistically significant w/ a 42% reduction in risk of sustained disability from Multiple Sclerosis.

-”Alemtuzumab has been granted Fast Track designation by the U.S. Food and Drug Administration (FDA).  The FDA's Fast Track program is designed to expedite the review of new drugs that are intended to treat serious or life-threatening conditions and demonstrate the potential to address unmet medical needs. Under Fast Track designation, alemtuzumab for MS is eligible for Priority Review.”

 

Ultimately it is the Fast Track Designation that makes me believe that the Approval Milestone will somehow or other be met within at the soonest, Q1 2012, or at the latest before the end of 2013. Once the drug is released, it is not unreasonable for speculation regarding its sales to drive up the value of the CVRs, and in any case I believe that once the drug is released the value of the CVRs will not diminish on the market. This prospective 100% dividend yield should provide an ample risk/reward situation for investors and I believe this is an unmissable opportunity. Due to the seemingly win-win situation that I pose here, I am 100% sure that I have missed something or other...no such thing as a free lunch. I would love your input on this prospective investment to see if I am completely missing some part of the process.

 Thanks,

Shamapant 

1 Comments – Post Your Own

#1) On November 15, 2011 at 11:37 PM, shamapant (80.67) wrote:

FDA website-"Once a drug receives Fast Track designation, early and frequent communication between the FDA and a drug company is encouraged throughout the entire drug development and review process.  The frequency of communication assures that questions and issues are resolved quickly, often leading to earlier drug approval and access by patients."

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