Epizyme Acquisition By Ipsen: CVR Value (NASDAQ:EPZM)

Epizyme (NASDAQ:EPZM) graduated to being a commercial pharmaceutical company in 2020 when the FDA approved its cancer drug Tazverik. Sales never lived up to expectations, leaving Epizyme in a difficult situation in this time when raising capital for biotechnology research and development has largely dried up. Ipsen S. A. (OTCPK:IPSEY) has announced a plan to acquire Epizyme. The cash tender price is $1.45 per share. The stock closed on July 1 at $1.48 per share. The remaining question for Epizyme shareholders (including me), or for anyone wishing to speculate in the stock before the acquisition is completed, is the value of the CVRs (Contingent Value Rights). The focus of this article will be on possible outcomes for the CVRs. First, to inform that discussion, I will recap Epizyme history, particularly Tazverik sales figures.

History highlights for Epizyme and Tazverik

Epizyme was formed in 2007 to focus on epigenetic medicines. Epigenetics is a relatively new field that explores the turning on and off of genes by developmental processes, sometimes including across generations. Its lead therapy was Tazemetostat, an EZH2 inhibitor, and its first target was epithelioid sarcoma. Having been given both accelerated approval and orphan drug designation by the FDA, it reported positive Phase 2 results in October 2018. In January 2020 the FDA granted Tazverik accelerated approval for patients with epithelioid sarcoma, when it was metastatic or locally advanced and not eligible for complete resection. On January 22, 2020, the price of Epizyme stock hit $26.72 per share. That would be its all-time high. [Let that be a lesson to us all.]

In December 2019 Epizyme submitted a New Drug Application to the FDA for treating a more common indication, follicular lymphoma, with Tazverik. Meanwhile, sales for the sarcoma indication got off to a slow start, largely because not that many patients fell within the label. But in June 2020 the FDA approved Tazverik for relapsed/refractory follicular lymphoma. The label narrowed the window to those patients who had an EZH2 mutation and had already received two prior systemic therapies, and those who had no satisfactory alternative treatment options. While follicular lymphoma is a relatively common cancer, third and fourth line patients with an EZH2 mutation are relatively few in number. In addition, other therapies competed in the third line market.

Quarter after quarter revenue results were released, and they missed expectations that had been set by management. Here are revenue figures since Tazverik was approved:

Quarter	Revenue ($ millions)
Q1 2020	$1.4
Q2 2020	2.5
Q3 2020	3.6
Q4 2020	8.4
Q1 2021	7.6
Q2 2021	13.0
Q3 2021	5.2
Q4 2021	11.6
Q1 2022	8.7

Table compiled by author from Seeking Alpha EPZM financials

While there was an upward trend over time, we seem to be at about a $40 million annual revenue rate. Operating expenses were far larger, so cash balances kept declining. Meanwhile, at conferences, management continued to assert that Tazverik represents a multi-billion-dollar global market opportunity. In addition, there should be value in the platform and the rest of the pipeline. But with biotech out of favor this last year with investors, raising money to finance operations to get to this possible future apparently became too difficult. There was a common stock offering that raised $79.5 million in January 2022, but as the price of the stock continued to fall, the amount of dilution needed to raise funds looked like a bad proposition. At the end of Q1 2022 Epizyme still had $200 million in cash and believed its runway would last until Q3 2023. Meanwhile the stock hit a 52-week low of $0.41 per share.

CVR details

We know investors will get $1.45 per share. That is way better than the 52-week low of $0.41 per share, but also way below the 52-week high of $7.94 per share. That part of the offer values the company at $247 million. Each share will receive one CVR. If Tazverik achieves of $250 million in aggregate net sales (excluding in Japan and Greater China) in any period of four consecutive quarters, by 31 December 2026, the CVR will pay $0.30. While 2026 is a good time away, looking at the table above, $250 million per year seems unlikely even with successful label expansion.

Another possible $0.70 per CVR is payable upon receipt of FDA approval for the commercial marketing of Tazverik combined with R² (rituximab and lenalidomide) in second-line follicular lymphoma by 1 January 2028. This would be based on the results of the Symphony-1 Phase 3 study of 500 patients which just began enrolling patients. Whether the deadline could be met depends on the pace of enrollment. My guess is that enrollment would need to complete by the end of 2025 to get data and then go through the FDA vetting process. 500 patients over 5 years certainly seems doable but does not guarantee a positive outcome. Also, In Q1 2022 Epizyme discontinued enrollment in its Phase 2 study of tazemetostat in combination with rituximab, Symphony-2, as well as its Phase 1/1b basket study evaluating tazemetostat combinations in patients with solid tumors. The decision to discontinue enrollment in these studies was attributed to evolving market dynamics. That shows the fragility of the entire process. Ipsen would be within its rights to cancel or delay the trial.

Conclusion

I cannot currently assign a very high probability to there being any eventual value to the CVRs. I do think that Tazverik can do better if it gets approval for earlier line therapies, more types of cancers, or more combination therapies. But the gap between the current annual run rate and the CVR enabling run rate of $250 million per year (in any four consecutive quarters) strikes me as too large to bridge. I think the possible approval of Tazverik plus rituximab and lenalidomide in second-line FL by the end of 2027 is more likely, but any delays favor Ipsen not having to pay out a substantial amount of cash. In any case, even for long-term investors, it is hard to imagine having cash tied up in 2023, 2024, 2025, and 2026 in the hopes of getting a return on investment in 2027. If I had to assign a probability to a positive outcome, I would say 20%. Which would make the CVR worth $0.14. Not enough to encourage investors to buy EPZM before the deal goes into effect. Timing is uncertain due to the antitrust waiting period and other contingencies.

On the other hand, I like the Epizyme epigenetic platform for its long-term potential. I think Ipsen is worth looking at, but that is beyond the scope of this article.