French pharma sanofi-aventis' (NYSE: SNY) acquisition of biotech company Genzyme earlier this month came with a unique twist. Genzyme shareholders were paid $74 cash per share plus one contingent value right that provides for the potential for additional payouts to owners of the CVR in the future. The Genzyme contingent value rights (Nasdaq: GCVRZ) now trade on the Nasdaq exchange and were a mechanism for Sanofi and Genzyme to bridge a difference of opinion as to what Genzyme shares were worth in their merger discussions.

Like my Foolish colleague Jim Royal who added these CVRs to his Rising Star portfolio watchlist last week, I have an interest in special situations and hunt for investments that the market may have mispriced. These CVRs could be mispriced because of indiscriminate selling by former Genzyme shareholders who were content to own shares of a highly profitable drugmaker but don't want to take a flier on the risky and uncertain payouts that may, or may not, be coming to CVR owners.

Down and dirty details
The CVR entitles the owner to receive cash payments if certain performance milestones are met in the future. I've summarized these payments in this table:


Payout Amount

Payout Timing

2011 Cerezyme and Fabrazyme manufacturing $1 January 2012
Lemtrada FDA approval $1 2H 2012
$400 million Lemtrada sales $2 2014
$1.8 billion Lemtrada sales $3 2014-2020
$2.3 billion Lemtrada sales $4 2015-2020
$2.8 billion Lemtrada sales $3 2016-2020
Total $14  

Source: sanofi-aventis.

Any investor considering purchasing the CVR needs to read the details provided by Genzyme to fully understand each of the milestone criteria. Buying the CVR today gives you the right to receive the payouts referenced in the table if the performance milestones are accomplished. The vast majority of the payments are tied to the approval and sales performance of the multiple sclerosis drug Lemtrada, which is currently in phase clinical 3 trials. The structure of the CVR was carefully designed to allow Genzyme shareholders to participate in the future success of Lemtrada if it turns out to be a blockbuster while simultaneously protecting Sanofi shareholders from overpaying for Genzyme if Lemtrada turns out to be a dud. If Lemtrada is a home run, CVR owners will receive up to $14. If it's a bust, payments could be as low as $0.

With a payout range of $0 to $14, are the CVRs a good buy at their current market value near $2.60?

CVR valuation
The value of the CVR hinges on the likelihood of the payouts materializing and discounting the future cash flows back to the present to account for the time value of money.


Payout Amount

Payout Timing

Probability Estimate

Present Value

2011 Cerezyme and Fabrazyme manufacturing


January 2012



Lemtrada FDA approval


2H 2012



$400 million Lemtrada sales





$1.8 billion Lemtrada sales





$2.3 billion Lemtrada sales





$2.8 billion Lemtrada sales







Source: Analyst calculations.

After looking at the terms of the performance milestones, I believe Sanofi was shrewd in its negotiations. I consider these milestones to be challenging, but attainable, at least in part. I assign a 75% chance of success to both the manufacturing and FDA approval milestones with decreasing probabilities of success for the sales-based milestones. Those are big sales numbers to hit, and it is notoriously difficult for analysts to accurately forecast future drug sales.

It's important to see how those sales milestones stack up against the sales of some of the best-selling multiple sclerosis drugs to estimate how likely it is Lemtrada can hit those targets.



2010 Sales (millions; USD)

Biogen Idec (Nasdaq: BIIB) Avonex $2,500
Biogen Idec and Elan (NYSE: ELN) Tysabri $1,200
Novartis (NYSE: NVS) Gilenya $15
Merck KGaA Rebif $2,217
Teva Pharmaceutical (Nasdaq: TEVA) Copaxone $3,300

Even though Novartis' Gilenya only had sales of $15 million last year, the drug only received FDA approval in September. As the first oral treatment of relapsing forms of multiple sclerosis, it should eventually join these other drugs as a blockbuster.

This list of best-selling drugs, many of which have been on the market for a very long time, shows how difficult it will be for Lemtrada to reach the higher sales thresholds. I also have to factor in that it is likely that the multiple sclerosis field is only going to become even more crowded over time. I've weighted the top two payouts with low probabilities to reflect the magnitude of the challenge.

So are they a good buy?
I estimate a fair value for the CVR at $3.62, which offers approximately 40% upside from the current market value. While that looks like an attractive return, I'm not a buyer right now. The chance that these CVRs could turn out to be worthless is just too high. If the manufacturing target is missed this year and next year, the FDA asks for additional clinical data, which it is known to do, the CVR will plunge in value quite dramatically. The CVRs have to trade below $2 for me to consider taking a bite.