Late last year, Bristol-Myers Squibb made a last-minute revision of its offer to buy Celgene: Instead of paying $57 per share in cash and a one-to-one share trade, BMS offered $50, plus one BMS share and a contingent value right (CVR) per Celgene share.
The catch was that the CVR would only pay off if three of Celgene’s most promising pipeline projects made it to market. Till then, it would trade on the open market.
Celgene took the deal, which amounted to $74 billion total. It closed Wednesday, and investors seem to be optimistic the marriage is going to work out—and that those three products will make it out of the pipeline.
Trading in the CVRs opened Wednesday at $1.95 and closed at $2.26. That price held through the day Thursday. BMS shares have risen about 1% to $56.85 over the past two days.
Investor interest in the CVRs is notable, considering the risk. The three pipeline assets at the center of the deal are ozanimod to treat multiple sclerosis, plus two CAR-T treatments, liso-cel (formerly JCAR017) for lymphoma and bb2121 to treat multiple myeloma. The potential payoff is significant—$9 per CVR if all three drugs make it to market—but the return will be zero if any one of them fails.
It’s by no means a guaranteed path to market for any of the three pipeline hopefuls, either. Ozanimod, for one, was initially rejected by the FDA last year on the grounds that Celgene had provided inadequate pharmacology data. In June of this year, the FDA accepted Celgene’s revised application and vowed to act on it by March 25, 2020.
As for liso-cel, it only has until the end of 2020 to gain FDA approval under the terms of the CVR. Earlier this month, Celgene did post positive data from a pivotal trial showing liso-cel spurred a response rate competitive with the two CAR-T treatments already on the market for lymphoma, Gilead’s Yescarta and Novartis’ Kymriah, but with fewer treatment-related adverse events.
Jefferies analysts predicted that would be enough to win liso-cel a green light. Still, the tight deadline for approval could be a challenge.
BMS has just a few months longer—until March of 2021—to get multiple myeloma CAR-T bb2121 on the market, and its chances of success are hard to gauge. Celgene had to tweak a phase 2 trial in 2018, raising both the dose of cells that were given and the number of participants in the research.
And in May of this year, Celgene released interim data from the phase 1 trial of bb2121 that raised doubts about the durability of the treatment. The company said 15 patients in the trial had complete responses, but in six of those patients, the amount of time they lived without their disease progressing was only about a year.
Investors are betting each of the three acquired Celgene assets has a 75% chance of success, which would translate to a CVR value of $4, according to an analysis by Barron’s. One Wall Street analyst recently pegged the risk-adjusted value of the CVR at a more conservative $3, according to the paper. Either way, investors may consider the current price of the CVR to be a bargain, even after the recent runup.
There is a precedent for CVRs in pharma deals, though it’s not exactly a rosy one. When Sanofi bought Genzyme for $20 billion in 2011, the deal included a CVR with several milestones tied to the approval of Lemtrada for MS. Even though the drug was eventually approved in 2014, the value of the CVR fell dramatically, from $2.50 to pennies, prompting an investor lawsuit that Sanofi settled for 88 cents per CVR.