Who Benefits From the OncoMed and Celgene Partnership?

OncoMed Pharmaceuticals (NASDAQ: OMED  ) is soaring higher after announcing a development partnership with Celgene (NASDAQ: CELG  ) . Unlike high-priced acquisitions in biotechnology, this was a win-win for both parties and might be a new way of doing business.

The deal
OncoMed will receive approximately $177.25 million upfront, including a $22.25 million equity investment, for the development and commercialization of up to six anti-cancer stem cell, or CSC, treatments.

OncoMed wins
OncoMed is an early-stage biotechnology company that discovers and develops monoclonal antibodies to target CSCs. As of now, OncoMed has five products in phase 1 trials with its most advanced product being demcizumab, a phase 1b product to treat lung cancer.

The company is also developing demcizumab to treat ovarian and pancreatic cancers in a phase 1b/2 trial that is set to begin in the immediate future.

OncoMed is a young company, and is one that still has many years of clinical development. Monoclonal antibodies have been successful in clinical trials and commercially in recent years, however, and with OncoMed having such a large pipeline many investors believe there is long-term upside potential.

Celgene's $177.25 million-plus milestones will give the company much needed cash for clinical development and will prevent excessive dilution throughout the clinical trial period. Moreover, OncoMed got a real good deal with the partnership, including a 50/50 revenue share in the U.S. while being responsible for just 1/3 of the costs – if Celgene exercises its option on demcizumab.

To put this in perspective, Pharmacyclics gets royalties of 50% and is responsible for 40% of the costs associated with it and Johnson & Johnson's blood cancer drug Imbruvica. This fact gives a fairly good visual on the strength of OncoMed's commercial deal.

Celgene wins
For 2013, Celgene is expected to produce revenue of $6.4 billion on growth of 17%. Celgene is still growing rapidly, but it does have to start planning for its future.

With that said, Celgene essentially purchased a 50% stake in a company now valued at $820 million for only $177.25 million. By any measure, that's a great deal.

Moreover, Celgene didn't have to make an $800 million bet with a 100% acquisition. Hopefully, OncoMed's products are successful. If they aren't, Celgene's $177.25 million investment is not excessive or detrimental to the company. In fact, it's only about half of the company's net income in its most recent quarter.

If OncoMed is successful in clinical trials, however, the revenue could be massive. Demcizumab has been compared to Avastin, the multibillion-dollar product from Roche, as both use the same biological approach to inhibit growth in multiple tumor models. What's encouraging is that this is just one of the many products that Celgene now shares. All that Celgene needs is one of these products to succeed in order for this to be called a good investment.

The new standard for big biotech
When Amgen (NASDAQ: AMGN  ) acquired Onyx Pharmaceuticals for $9 billion earlier this year, it was no longer seeing growth and its pipeline was somewhat young in development. Amgen essentially bought growth, a company with peak sales potential of $3 billion for Onyx's three marketed products combined.

If we apply a 20% operating margin to the $3 billion that can possibly be earned from Onyx's three drugs, then Amgen could profit $600 million annually once all three drugs reach peak levels. In other words, it could take 15 to 20 years from this point for the Onyx acquisition to return a profit to Amgen. With patent laws as they are, it is unlikely that Amgen will ever return a profit from its acquisition.

With that said, Amgen's acquisition highlights a norm of acquiring growth and pipelines in the biotechnology space. We saw this play out with the acquisition of Amylin Pharmaceuticals and Pharmasset in recent memory. Celgene's approach with OncoMed appears to be a much more logical and effective approach to buying future growth, however.

Rather than making a large speculative investment and hoping for the best, Celgene made a deal that benefits both it and OncoMed investors. This fact suggests that further gains will be created as a result of this deal. Who knows, maybe this will become the new standard in biotechnology.

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