So Long, See You in Arbitration

After getting a second rejection of its antibiotic ceftobiprole in less than two months, Johnson & Johnson (NYSE: JNJ  ) is sending the drug candidate back to where it came from. Unfortunately, that may not be the end of this sob story.

At the end of December, the Food and Drug Administration turned down ceftobiprole after deciding there were problems with the clinical investigation sites. To get the drug approved, Johnson & Johnson would have to run two new trials.

On Friday, the EU's Committee for Medicinal Products for Human Use (CHMP) followed suit, rejecting the marketing application for ceftobiprole. In the same breath (press release) as the CHMP announcement, Johnson & Johnson said that it's ending its partnership with Basilea Pharmaceutical and returning the rights to ceftobiprole.

Johnson & Johnson and Basilea didn't disclose the terms of the handing back of the drug candidate, but I'd guess that it's going to cost Johnson & Johnson a few bucks. Except for partnerships with a defined conclusion, like GlaxoSmithKline's (NYSE: GSK  ) research and licensing deal with Exelixis (Nasdaq: EXEL  ) , most of the time the drug company giving back the drug has to pay for that privilege.

For instance, Pfizer (NYSE: PFE  ) had to pay $135 million to stop marketing Nektar Therapeutics' (Nasdaq: NKTR  ) Exubera. More recently, Wyeth paid $10 million to return Relistor to Progenics Pharmaceuticals (Nasdaq: PGNX  ) and agreed to pick up development costs associated with the expansion of the drug into an additional indication.

The pain for Johnson & Johnson might not stop with returning the drug to Basilea. The small Swiss biotech is understandably upset with the "data integrity issues." Unless the two companies can work out a settlement, it sounds like Basilea plans to follow through with arbitration initiated in February 2009 to recover damages. If the arbiter finds Johnson & Johnson at fault for the clinical trial misfortunes, the company might be on the hook for damages on a drug it doesn't even own.

Ceftobiprole could end up bugging Johnson & Johnson for a while; too bad there's not an antibiotic for that.