11/25/19

Idiosyncratic, 100%+ in 4-month return opportunity – buy the BMY RT Contingent Value Rights (CVRs) for a likely double by end of March 2020 and potentially much more significant gains by March 2021

Capitalization of CVRs if they perform $6,825

This write-up is going to be short and to the point.

The smallest component of the consideration that Bristol-Myers paid for Celgene was the CVR component that just started trading (on 11/21/19) at ~$2.30 per share. And since traded down to <$2.10 per CVR in its third day of trading. There are clearly many former Celgene investors who are experiencing some combination of a) inability to own the CVRs b) disinterest in the CVRs or, in all likelihood, c) have not spent much time considering the opportunity that the CVRs represent. While I am a long-term oriented investor by nature, I believe that the short-term opportunity in BMY RT CVRs is sufficiently compelling that I’ve been adding meaningfully to the position. In effect, taking advantage of what I believe is primarily idiosyncratic selling that will have proved, in retrospect, a tremendous buying opportunity. For the sake of transparency and for those uninitiated in CVRs, CVRs are an option – but they are an option that is based not on the stock price but on some other event(s). In the case of the BMY RT CVRs, the $9 payout is based on the successful FDA approvals of three new drug applications within a prescribed period that ends March 31, 2021.
Ticker (depends on platform)
“BMY RT” or “BMY R”

What makes the CVR’s especially attractive is how quickly they, in theory, de-risk

Big picture, per the table above there are three primary milestones: the FDA approvals of one already submitted and two anticipated New Drug Applications (NDAs). All three NDAs must be approved by their provisioned dates (12/31/20 for two of the NDAs and 3/31/21 for the last of the NDAs) for the full $9 payout to be paid. High level, it is very straightforward to come up with a warranted value for the CVRs. One needs to probability weight the likelihood of each drug’s approval and discount the result back to now to come up with a current probability weighted warranted value for the CVRs. A very simplistic way to do this is as follows:

Not Discounted to Present Value Discounted at 10% to Present Value

FDA Approval Probability per Application

One can be more complicated about the analysis in a few different ways including ascribing a different probability to each drug or making it a six-factor analysis (what’s the probability of each drug gaining approval and what’s the probability of each drug gaining approval in its required period of time). But at a high level, the above table does an adequate job.

While many investors that have been focusing on the CVRs have been doing some version of the table above to arrive at a current warranted value of the CVRs, what I think is particularly worth focusing on is how the value of the CVR’s value is likely to progress over the next four months.

In March of 2019 Celgene filed Ozanimod for FDA approval and in June the FDA accepted the application and granted a March 25, 2020 PDUFA date. While Celgene and Bristol have been communicating that all three of the drugs underlying the CVRs value are “de-risked” drug approval candidates, Ozanimod would seem particularly so – from both a timing and likelihood of approval basis. Ozanimod was submitted to the FDA previously back in February of 2018 and the FDA gave Celgene a “refusal-to-file” letter. Not because the FDA had an issue with drug efficacy, the FDA just looked at the application as incomplete and needing additional data for both the nonclinical and clinical pharmacology sections of the application. Celgene did the requisite studies and the FDA accepted the application upon its second submission. The major concern in the sell-side community was whether or not the FDA would accept the application? With the application accepted, most believe that there’s a very high likelihood (80%+) that the application will be granted approval. Further, if approved on time it will be beating its necessary milestone date by nine months.

The other likely critical event for value accretion of the CVRs will be the NDA filing for JCCAR017 before the end of 2019 (and certainly no later than January of 2020). While there’s a question of when the market will learn about the filing of JCCAR017 (it was Celgene’s policy to announce NDA filings when made and Bristol’s policy has historically been to announce filings when they are accepted by the FDA (which comes 60-74 days after filing)), there’s some question given the materiality to the value of the CVRs of both the filing date and the FDA acceptance date as to whether Bristol might disclose differently (maybe announcing both the filing and FDA acceptance dates for JCCAR017 and bb2121). But regardless of how Bristol’s disclosures may change, at a minimum assuming that JCCAR017 is filed in December investors will know by mid- March whether or not JCCAR017 has been accepted by the FDA. That would provide JCCAR017 enough time to be approved by its December 31, 2020 required milestone date.

So by the end of March, it’s highly likely, in my and a number of others focused on this opportunity, opinion that the market will learn that both JCCAR017 is on track for a December PDUFA date and Ozanimod will have been approved. Given the high likelihood of those two events, the warranted value of the CVR’s increases materially.

FDA Approval Probability per Application

Focusing on the updated version of the right side of the two tables, an investor looks forward to four things four months from now: 1) instead of three approvals in front of the CVRs there should be only two remaining 2) the likelihood of the remaining two approvals should be going up (given the assumption that JCCAR017 is filed on time and accepted by the FDA) 3) the CVRs will be four months further along and being discounted that much less from their final potential payout and 4) by then any investors that had received CVRs as consideration for Celgene stock and couldn’t or didn’t want to hold them, well they should be long gone!

The progression in warranted values can be observed in the chart and table below.

Using a 75% probability of each approval (I believe the probability of Ozanimod approval is likely to be 90%+), the warranted value of the CVR’s climbs from a current $3.34 to $4.59. The CVR’s are currently trading at <$2.10.

Upshot is this, over the next four months I believe the discount to the CVR’s warranted value will collapse significantly (as the CVRs trade to better hands) and the theoretical warranted value will climb ~40%. Between those two accretive forces, I believe there’swww.fourtreeislandadvisory.com 3

Disclaimers: All information gathered from sources believed to be accurate, but the accuracy of the information cannot be guaranteed. Past performance is no indication of future results. A number of points made in this update are a matter of opinion and opinion is subject to change without notice.

There are some other interesting dynamics at play. If Bristol is particularly good about disclosing material information related to the NDA filings and FDA communications regarding those filings, then there’s the possibility that Bristol could repurchase the CVRs (which would help collapse the current trading discount to their warranted value and save Bristol considerable money in the event that the CVRs payout). For another point of reference, the two investment banks (Citi and Evercore) that provided fairness opinions on the consideration being offered for Celgene put an NPV value on the CVRs of anywhere between $3.39 and $7.88. And those values were discounted to an earlier than current date because the deal was originally anticipated to be closing in Q3. Bristol has stated on multiple occasions that it strongly desires for the CVRs to payout because that would mean all these drugs will be in the market by early 2021. Bristol has 2023 (Revlimid competition) risk to worry about and the sooner these drugs come to market the sooner they can build scale.

Risks

If any of the three drugs indicated fail to meet regulatory approval by the stated deadlines, the CVRs are worthless.

Summary

While holding out for the $9 potential payout on the BMY RT CVRs arguably appears risky at this juncture, these CVRs are going to de-risk very quickly over the next four months. By the end of March 2020, investors should know whether Ozanimod has gained approval and whether JCCAR017 is on track for potential FDA approval in time to meet its deadline. Should those seemingly high likelihood events transpire, the probability adjusted, discounted warranted value of the CVRs comes to ~$4.60 vs. the current <$2.10 trading price. If sized appropriately, that’s the kind of idiosyncratic opportunity that could make for a nice start to 2020!

For more on this opportunity, Mizuho’s Salim Syed deserves a shout-out. He’s done the best work I’ve seen from the sell-side on these BMY RT CVRs.

Disclaimers: All information gathered from sources believed to be accurate, but the accuracy of the information cannot be guaranteed. Past performance is no indication of future results. A number of points made in this update are a matter of opinion and opinion is subject to change without notice.