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Glaxo's Not Gambling

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From the headlines touting GlaxoSmithKline's (NYSE: GSK  ) $1.5 billion deal with Cellzome, you'd think that Glaxo had made another major gamble. Fortunately for Glaxo investors, the deal is a little more moderate than the headlines portray.

Glaxo is only giving the private drug developer about $25 million up front -- some of which will be in the form of equity. Cellzome will use its kinase inhibitor technology to develop drugs against seven different kinase targets.

Kinases are proteins involved in a range of cellular processes. By finding appropriate targets to inhibit, drug companies can design drugs to treat a wide array of diseases, from cancer to rheumatoid arthritis to multiple sclerosis. It seems that almost every company, including Pfizer (NYSE: PFE  ) , Bristol-Myers Squibb (NYSE: BMY  ) , Abbott Labs (NYSE: ABT  ) , and Genentech (NYSE: DNA  ) , has a kinase inhibitor program. Fortunately, with likely substantially more kinases than there are companies working on them, there are plenty to go around.

Like its deal with Exelixis (Nasdaq: EXEL  ) , Glaxo has stacked the payments so that it doesn't have to pay up until the drug candidates show promise. Cellzome will pay for development through proof of concept, after which Glaxo will take over. Cellzome is entitled to a little more than $200 million per program if the drugs are successful, and it'll get royalties on any drug that gets to the market.

It seems like we're seeing large pharmaceutical companies hand out more of these pay-as-you-go deals, rather than paying a large amount for compounds farther along in the clinic. Locking up drugs early in development certainly benefits these companies, although grabbing them before they even get into the clinic, like Glaxo just did, seems almost too premature.

At least this deal should help Glaxo get ahead of its peers in the R&D spending contest.

Further Foolishness:

Glaxo and Pfizer are both Income Investor recommendations. To see how dividend-paying stocks can offer both secure income and the opportunity for growth, try Income Investor free for 30 days.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Pfizer is an Inside Value selection. Exelixis is a Rule Breakers pick, and The Fool owns shares of it. The Fool has a disclosure policy.

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