Despite Celgene's Abraxane Stock, Trading Earn-Outs Is The Exception Not The Rule

Though Abraxane (paclitaxel) is now part of Celgene Corp.'s growing oncology portfolio, you don't need Celgene stock to invest in its newest product, a reformulation of the generic chemotherapy that's approved to treat metastatic breast cancer. As part of Celgene's cash-and-stock $2.9 billion acquisition of Abraxis BioScience Inc. Celgene deferred at least $650 million in potential payments to Abraxis shareholders, plus royalty payments tied to Abraxane sales. [See Deal] Unlike most earn-out-laden deals, however, the contingency value rights, or CVRs, for the earn-outs have been securitized and now trade under the ticker CELGZ. Each CELGZ share entitles investors the rights to a long list of potential payouts from Celgene: $250 million upon FDA approval of Abraxane for non-small-cell lung cancer with a progression-free survival claim; $300 million upon FDA approval for pancreatic cancer with an overall survival claim; and $100 million if FDA approves the medicine to treat pancreatic cancer by April 1, 2013. Under the terms of the Celgene/Abraxis deal, the smaller company's shareholders received one CVR for every Abraxis share sold, as well as $58 in cash and 0.2617 shares of Celgene common stock.

Despite potential advantages – tradeable CVRs let shareholders bet on the success or failure of specific assets, for instance –...