Roche's Early Present to Halozyme

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For very small biopharma start-ups, sometimes all it takes is a commercialization deal to help validate the promise of its technology and send its stock through the roof. This is just what happend to drug developer Halozyme Therapeutics (Nasdaq: HTI) last week; shares were up 125% after Roche signed a partnership agreement to develop drugs using Halozyme's technology.

The deal with Roche involves Halozyme's "Enhanze" drug delivery technology, which is supposed to increase the absorption of some types of injectable drugs. Roche gave Halozyme $20 million up front -- as well as a milestone payment of up to $111 million and royalties -- in exchange for the rights to use Halozyme's Enhanze technology in three biologic targets. Additionally, Roche has an option to use the technology in up to 10 more targets, giving the deal a value of up to $612 million, plus royalties on any sales.

Halozyme doesn't expect any possible drug approvals from the deal to start bringing in royalties until about 2009 or 2010. And, consistent with other drug delivery deals, I expect Roche has agreed to a low- to mid-single-digit royalty rate for any sales of drugs using the Enhanze technology (they really need a better name for that).

Halozyme already has a stand-alone approved product named Hylenex, which is using this technology to enhance drug delivery. Unfortunately, it hasn't been a hit, bringing in less than $1 million in sales this year, as it competes against similar generic products. Also, because it has to be injected separately, it is somewhat inconvenient and testing on its effects has been limited (which is a big deterrent to its use). Any drugs coming out of the deal with Roche will get past some of these issues, though, by combining Halozyme's drug delivery technology with existing drugs.

Assuming it works, Enhanze may be a platform technology that could be applied across a wide range of injected products. Roche isn't exactly betting the farm on its success, though, with only $20 million of guaranteed up-front money. With any products coming out of this deal still years away from approval, it'll be a long time before we know if if Halozyme's drug delivery technology is a commercial success. Fortunately, with a cash burn rate less than $4 million a quarter, Halozyme shareholders now have a bigger cash cushion to stave off the need for any additional financing.

Seventy-six Motley Fool CAPS players pick Halozyme to outperform the market. Eleven say it will underperform. Where do you stand? Join more than 16,000 fellow investors in the Fool's new stock-rating service and let your voice be heard .

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.