When Bristol-Myers (BMY, Financial) acquired Celgene in 2019, part of the package Celgene shareholders received was a tradeable contingent value right that's listed as (BMY.R, Financial). It is currently trading around $2.23.
A contingent value right seems an unusual security if you've never encountered it before, but it is increasingly common in M&A deals. It is often used when the buyer and seller have quite different views on some of the growth assets a company owns. It is very common in biotech.
You can imagine an acquirer doesn't want to pay full price for a pipeline drug that it has a different view on than the seller. To bridge a gap like that, the contingent value right is excellent. The acquirer will get x amount of dollars for its stock, and in addition to that, a contingent value right that pays out x amount of dollars if the novel pipeline drug generates, say, $20 million in revenue. The contingent value right yields nothing if the drug doesn't hit the milestone.
The Bristol-Myers contingent value right serves exactly the above purpose. It will pay out either zero or nine dollars per right. The nine dollars are contingent on FDA approval of all three of the following drugs:
- ozanimod (by Dec 31, 2020)
- liso-cel (JCAR017) (by Dec. 31, 2020)
- bb2121 (by March 31, 2021)
All need to be approved for a specific indication. Ozanimod is checked off already, so there are two milestones remaining.
For a while, it looked like everything went smoothly and the rights traded up to $4.49 apiece. Then Bristol-Myers received a refusal to file letter from the FDA when it submitted its ide-cel application. On Sept. 8, the right's price got smacked down further when Bristol-Myers said at a Citigroup (C, Financial) call that the manufacturing plant for CAR-t therapies had not yet been inspected by the FDA. The transcript can be found here.
On the call, Samir Hirawat, Chief Medical Officer of Bristol-Myers, was asked about Liso-cell (emphasis by me):
"I think it is well understood also by the health authorities and thus far our discussions with the FDA, we are very encouraged by the way they have looked at it.So, that is all going in the good direction. As you very well mentioned in the 10-Q, we have certainly disclosed the site inspection of the cell therapy facilities has not been completed. And certainly with the evolution of the COVID-19 as well as the challenges it has posed both for us and for the FDA, it does pose a risk because the FDA staff, like many of us are operating under those significant constraints on travel because of COVID. Now with that said, while we typically don't provide any details on regulatory discussions, what I can say today is the FDA has informed us that they will require inspection of both our facilities in Washington state as well as the manufacturing organization for the vector, which is located in Texas. These inspections have not yet taken place. We are working very closely with the FDA to keep this application on track and as you know, the PDUFA date is in November. We still have some time to go...
But at the same time, we are aware that some of the people are the same people who are at the FDA who will be working are working right now and Liso-cel will also be pulled into the inspection related activities that might be coming along for the COVID related vaccines."
The market seemed to focus on the CMO's comments that inspectors could be pulled away to do Covid vaccine inspections and that the FDA has been operating under travel restrictions. These are disconcerting comments for sure, but he also said he was very encouraged and the fact that an inspection is required indicates the drug is still eligible for approval in the eyes of the FDA or why bother.
What makes this such an interesting time for this security is that its price declined sharply, but that none of these things is actually that surprising. The FDA has published its guidelines for inspections under Covid and of course, it will need people to do Covid inspections, but liso-cell is an important oncology drug with a fast track designation. It makes sense to me for the FDA to pull other inspectors first. In addition, there is still quite a lot of time to go until the PDUFA date for liso-cell or the deadline for approval at the end of 2020. It's a short time period of course but relative to the time required to do an inspection and inspect a number of vaccine plants there should be enough time.
I calculate the combined probabilities of success for both milestones at about 77% based on Alacrity consulting data. In my view, this security is going to be a zero 23% of the time or worth $9 per right 77% of the time by the end of the first quarter of 2021. On average, that comes to a fair value of $6.93. That's approximately a 68% discount to fair value. Admittedly, I do ignore the time value of money here. Keep in mind that over a fifth of the time (and I could be wrong about the odds) the security will be worth zero. Depending on how Bristol-Myers exactly fails to meet the milestones there could be further opportunities through litigation, but that's quite an undesirable path.
Disclosure: the author is long the Bristol-Myers Contingent Value Right.
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