Almost exactly a year ago I wrote about the merger between Celgene and Bristol-Myers Squibb (NYSE:BMY). To make things interesting, the merger consideration included a contingent value right (NYSE:BMY-RT) that would payout $9/right if, and only if, three separate drugs would get approved by the FDA before their respective deadlines. I have not written about the CVR since, because I did not have much to add compared to all the information that was already out there.
Initially my position in the CVR was miniscule, since it was just a small part of the Celgene merger consideration. Over time I continued adding to my position, and earlier this month I hit the 5% mark, making this probably the highest amount of risk I have taken in a single name. I have frequently positions sized bigger, but most stocks don’t have (a realistic) potential to go to zero overnight on bad news. And because I don’t just want to share stories of success here, I felt obliged to post an update on this name since it is now probably my biggest loser.
Yesterday was the big day because liso-cel had it’s PDUFA date. Unfortunately, the news was bad. Because the FDA was unable to inspect a manufacturing facility in Texas due to corona travel restrictions it decided to defer action. The news did not came as a total surprise, since a week before Bristol-Myers Squibb already told the market that the FDA did not inspect the facility, and that it had told them previously that it would be required. Written like this you would probably question why I was still in the name, but the FDA did inspect the main facility in Bothell, Seattle. Maybe you should not try to ascribe too much logic to the actions of a bureaucratic organization, but I did not think it was far fetched to assume that the FDA had a plan to meet the PDUFA deadline.
Obviously that was not the case, and since the CVR has a deadline of 31 December 2020 for the approval of liso-cel I don’t see a realistic path forward for approval in time. The press release does contain a single line, that might have given people some hope:
The company is committed to working with the FDA to progress both applications to achieve the remaining regulatory milestones required by the CVR.
You could make a case that the company did not need to put this line in the press release, and if they would have thought that meeting the regulatory milestones would be completely impossible they would not have put it. At the same time, it is an empty statement. Bristol-Myers might be committed to do it, but the thing that matters: is the FDA committed? I think they would like to approve this as soon as possible, if they can, but they don’t give a s*ht about the CVR deadline. The biggest deadline they would care about would be the PDUFA deadline, and they missed it. The FDA also did not provide a new anticipated action date, which probably means that they don’t have a concrete plan with a clear timeline on how to do the final inspection.
Given that we are close to the end of the year with Thanksgiving and the Christmas holidays coming up as well I just don’t see how this remaining inspection can be done in time. The inspection would need to be scheduled, could take a few days to a week, the company would need a few weeks of time to be able to respond to the results of the inspection and then the FDA would need to make a decision. Theoretically it could be done, but it just seems very far fetched to me. Corona cases have been going up in Texas, so if they didn’t want to go in October, they certainly would not want to go now. If they would have thought a virtual inspection could be a viable option, they would probably have done that already so they could meet the PDUFA date. And with vaccines around the corner it seems that just waiting a few months could solve all issues.
Because of that I’m actually very surprised that the rights were yesterday still trading at $1. Assuming that the rights would trade between $5 and $7 if liso-cel gets approved (high-end might be a bit optimistic, since ide-cel approval is still pending) the market implied probability of approval before the end of the year is between ~15% and ~20%. I think that’s very optimistic, and would personally put it below 5%. I hope I’m wrong for the patients that need this treatment even though it would make me look double stupid for selling. But I am pretty happy with my decision to do so, and I am also still happy with my decision to buy as much as I did. Sometimes things just don’t work out, even if the odds are in your favour.
And yes, I know, if liso-cel does not get approved in time, there might still be some litigation value in the rights. But I highly doubt that is meaningful. Getting a decision to defer action from the FDA because they don’t inspect a facility because of corona is beyond any doubt not the fault of Bristol-Myers. And given the size of the CVR, with a potential $7 billion payout, Bristol-Myers can spend a lot of money on lawyers before a settlement would make financial sense.
No position in the rights anymore
Quite amazing how rational and honest with yourself you are! Hats off to you! (And thanks for sharing!)
I try! But I’m sure I’m still failing plenty often…
Sorry friend. That stinks. I thought there was some decent chance after I read in this year’s proxy they were given a CEO a bonusFor hidden milestones. there was just a lot of incentives working against it.
Sure, incentives are always a problem, although I think most people were exaggerating it a bit too much. But at least we can be absolutely 100% sure that yesterday’s decision from the FDA was not influenced by that. The FDA doesn’t care about the CVR, and not traveling to a facility due to corona isn’t something someone at BMY can subtly manipulate.
Good post. I’ve also been playing around with the numbers a bit. If you use these odds:
– ide-cell = 85%
– liso-cell before 12/31 = 10%
Litigation value = $0.25
You get an EV of roughly $1. So in order to make this bet you would want to get higher odds/price somewhere in these numbers. I wouldn’t be surprised if litigation value is higher because of shenanigans earlier this year, but that’s a lot of natte vingerwerk. I wouldn’t say it’s $0 though.
While I agree with your ide-cel probability, I doubt the market is going to agree with that. I would be extremely surprised to see this trading above $7.50 on liso-cel approval. If you adjust for that the picture will change.
And sure, there might be some value in litigation. Perhaps in discovery someone can find some dirt on Bristol-Myers that they caused the delay earlier this year. But I really really doubt there is much to find and think it’s mostly grasping at straws. Just because in the Sanofi case it happened, I don’t think it’s the new normal. Have there even been other cases?
Also, the fact that this CVR is so huge makes it less likely that they will settle for nuisance value. You can’t throw a couple of millions to rights holders to get them of your back, that would be nothing. And if you are starting to talk about hundreds of millions dollars, if not more, for that kind of money you can pay lawyers till the end of time. This will not be the kind of settlement where you think, sure, we think we are right, but if we fight this in court and win we will spend more money that settling directly.
Yeah, because the market seems hesitant to price this binary bet at it’s ‘intrinsic value’ it’s probably hard to fully capture this EV because everybody (myself included) would have to derisk a bit when this goes to $5+ even though EV is higher than ~$5.
Incentives for litigation aren’t great, but maybe there’s something to be said for BMY paying CVR holders a couple $100M to get this over with + keep their reputation intact for future CVR deals (admittedly, not a very strong argument). But the same line of thinking for the pricing of the upside goes for the downside. I have a hunch the market won’t price it at $0 and more likely towards >$0.25, so you’ll probably be able to sell it for something like that in a worst case scenario.
Yeah, you could be right the market might be more optimistic than me on litigation value.
But I wonder, is it really good for them for future CVR deals to settle? Wouldn’t that make CVRs very unattractive to issue if you end up paying out a meaningful amount of money, even after missing the milestones?
It was a scam from the start. They can buy a company a few months ago for 7 billion but screw their investors on the cvrs. I am done with bmy.
AV, thanks for sharing this. I think your analysis is correct.
You get the Tiger Woods nobility award. He shot a 10 on a par 3 Sunday at the Masters, but didn’t throw a tantrum, whine, or hide from the reporters.
After that hole, he just bore down and got a bunch of birdies. Which I am sure you will do also.
Thanks for the kind words 🙂
That line seems to just be asking for litigation — if I’m a shareholder and they miss the deadline then my question is “What actual plans did you have to navigate 2 major holidays and an increase in lockdowns to push the FDA to complete their activities before 12/31?” If the answer is “none, we’d just work hard” then its clearly a statement meant to mislead investors into believing the rights aren’t worthless
I think you can be pretty sure that there is absolutely nothing the company can do to push the FDA.
thanks for this honest post.
Is your portfolio updated? It looks like you bought the last stock in 2017…
Yeah, haven’t updated that page in a long time. Perhaps I should just delete it.