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Genzyme Contingent Value Rights – no value here

November 18, 2011

I’m amazed how many people visit my blog to look at the singularly uninteresting post I did about the Genzyme Contingent Value Rights (GCVRZ) back in May. In retrospect I’m sorry I ever made that post. What was I thinking? I feel like I led readers astray.  GCVRZ is not a value investment. It is pure speculation! That is, unless you 1) have inside information (in which case I don’t want to know about it) or 2) have some fantastic insights about pharmaceutical regulatory process and the potential commercial success of Lemtrada.

Myself, I don’t believe there is a good way to handicap the outcome. There is certainly no margin of safety; either the milestones are met or they aren’t. So this is pure speculation. You might include it in a very diversified portfolio of companies with drugs under development as a small (and I mean really small) position if you have some insight into the issues… but I strongly recommend against it.

So, once again folks, get over it! Leave GCVRZ to the speculators and get back to value investing!


From → Investment Ideas

  1. glennchan permalink

    It might be worthwhile at a high-IRR investment once Lemtrada gets approved. If it gets approved, the price should jump to $1 + the value of the longshot option on Lemtradas success (which is probably worth tens of cents). So when it gets approved, it might jump to $1.3/$1.4+. I bought a small stake when it was trading below a dollar so I guess now I am liquidating since it is hitting that $1.3/1.4 range.

    I am no expert in the pharmaceutical regulatory process. However, from looking at the trial study results, it seems that the efficacy and safety profile are similar to Tysabri. There is a small chance of dying with both Lemtrada and Tysabri (perhaps comparable to driving? though too early to tell for Lemtrada)… however, I see Lemtrada being approved because MS is a terrible disease. As long as the drug offers an improvement over the traditional CRABs (Rebif being one of the four), it has a place in the market as long as it improves quality of life, hopefully decreases the progress of disability, and the downsides aren’t overwhelming.

  2. frank permalink

    value investment no more. It looked good under $1 – all that was needed for $1 payout was approval to market (which seemed like a slam dunk). You got all the optionality (the other potential payouts) for free. Now it looks like Sanofi is buying these CVRs in the market – hence the jump (see yesterdays 8-k). Not sure what that means for other milestones, but it cant be negative…

    • glennchan permalink

      It seemed that the CVRs are slightly stacked against the CVR holders to begin with.

      1- Sanofi buying back CVRs could be predatory, though I guess you could also consider share buybacks to be predatory. But you know that if Sanofi is buying back the CVRs, it has nothing to do with boosting the value of insider’s short-term options and everything to do with making money.
      2- Some of the milestones are structured in a way that creates incentives for Sanofi to defer revenue (or give away free product) so that they don’t have to pay that milestone. The production milestone and the $2 launch milestone are like this.
      3- Sanofi can also buyout all the CVRs if they trade below a certain price after a certain time. If Mr. Market has one of his mood swings, this can be used against CVR holders.
      4- The $2 launch milestone is pretty misleading as it is hugely unlikely that it will payout (Tysabri never did that well after launch, even factoring in the fact that it was taken off the market briefly). The $3 milestone is more likely.

  3. Yeah I wasn’t interested then & nothing’s changed. Some people saw risk/reward & figured a small position was worth it but I don’t play that game…

    spot on!

  4. Sergio8000 permalink

    San, as an informed buyer of Genz, managed by a competent CEO, considered the potential of the drug at 700 millions, while Genz at 4 billion during the buyout process. You can make your calculations from there.
    The CVR is only here to solve this discrepancy in the estimates.
    For the sake of safety, we would not recomment putting more than 5% of the portfolio in case the drug is not approved. However, the likelyhood of such an event is very low (because San would then claim the potential of Lemtrada to be 0 !!!)

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