What's Behind Celgene's Spending Spree

Celgene (NASDAQ: CELG  ) believes that having more irons in the fire is the key to developing blockbuster cancer drugs. That has Celgene acting more and more like a private equity firm: taking big ownership stakes, financing drug development, and providing market experience to usher along the most promising biotechnology pipelines. The company's latest investment is in stem cell research firm OncoMed Pharmaceuticals (NASDAQ: OMED  ) , a company with an intriguing pipeline of drug candidates targeting stem cells associated with cancer.

Banking on billions
For OncoMed, the deal could eventually be worth billions of dollars, given that Celgene has agreed to a healthy $155 million up-front payment and a generous 50/50 split on any future U.S. profits. Across all the potential payments tied to the deal, Celgene could eventually be on the hook for as much as $3.15 billion in milestone payments alone.

Celgene will also be paying two-thirds of the development costs associated with the five early stage drugs covered by the arrangement, including OncoMed's promising Demcizumab.

OncoMed moved Demcizumab into phase 1b/2 trials as a treatment for ovarian cancer in September. That marks the fourth phase 1b/2 trial OncoMed has initiated for Demcizumab. Previously announced trials are studying the drug in pancreatic cancer, where it's paired up as a combo therapy with Celgene's Abraxane; colorectal cancer; and non-small cell lung cancer.

Celgene thinks Demcizumab could eventually be a big seller, agreeing to pay as much as $790 million in milestones if it's ever commercialized. That's more than the $440 million Celgene agreed to pay in milestones for the other four compounds.

In addition to Celgene's up-front payment, development-cost sharing, milestones, and royalties, Celgene is also buying $22.25 million worth of OncoMed stock for $15.13 per share, or approximately 1.5 million shares.

Orchestrating multiple deals
The OncoMed deal continues Celgene's push to lock up intriguing early stage treatments.

In 2010, Celgene paid Agios $130 million in order to partner on drugs designed to starve cancer cells of the enzymes they need to survive. Celgene added another $20 million in 2011 to extend the the partnership another year.  That gives Celgene the rights to Agios cancer metabolism research, a form of epigenetics -- altering how genes work, rather than altering their DNA -- for four years in a deal that dovetails nicely with Celgene's existing epigenetic drug Vidaza.

In 2012, Celgene made another epigenetics investment, paying $90 million upfront to Epizyme (NASDAQ: EPZM  )  and agreeing to an additional $160 million in milestone payments. In exchange, Celgene gets non-U.S. rights to a class of drugs Epizyme is developing for the treatment of a rare form of blood cancer known as mixed lineage leukemia.

In a third deal, Celgene linked up with blubird bio in March to develop gene-altering cancer therapies. In these therapies, a form of white blood cell known as T-cells is removed from patients, reengineered to destroy cancer, and reintroduced back into the patient. If successful, Celgene has agreed to pay blubird up to $225 million in milestones. Additionally, Celgene gave blubird an option to participate in a 50/50 profit split on U.S. sales in lieu of milestones.

And in July, Celgene gave Acetylon $100 million in a deal that could eventually result in Celgene acquiring Acetylon for as much as $1.7 billion when milestones are included. That deal gives Celgene access to Acetylon's ACY-1215, a drug in Phase 1b for myeloma.

All those deals follow Celgene's $340 million acquisition of epigenetics biotech firm Gloucester Pharmaceuticals back in 2009. In that deal, completed in 2010, Celgene got Istodax, a treatment for cutaneous T-cell lymphoma, which complements Celgene's existing focus on blood cancers. So far, Istodax's success has been muted, with sales of $50 million last year and $40 million in the first 9 months of this year.

Partnerships abound for OncoMed
Celgene's deal doesn't mark new territory for OncoMed, either. The company already has high-profile partnerships with GlaxoSmithKline (NYSE: GSK  ) and Bayer (NASDAQOTH: BAYRY  ) .

Glaxo signed on with OncoMed back in 2007, agreeing to pay the company as much as $1.4 billion and, like Celgene, agreeing to take an equity stake. The deal gave Glaxo the right to license four drugs targeting metastatic cancer. One of the drugs covered by the deal with Glaxo, OMP-59R5, was moved into Phase 1b/2 earlier this year.

Bayer jumped on the bandwagon in 2010, paying OncoMed $40 million up front for the rights to buy up to five OncoMed programs targeting cancer stem cells. Bayer also agreed to pay up to $387.5 million in milestones for each biologic and $112 million for each small molecule drug covered by the programs.

Foolishly creative strategy
Celgene is spreading its research budget across various innovators to reduce the risks of relying solely on in-house drug development. That not only fosters greater innovation, but also helps protect Celgene's existing blockbusters from future competition.

The company's private equity mentality suggests that future deals throughout the industry will increasingly include outright buy options or equity stakes. If these deals don't pan out, Celgene loses its up-front payments. But given success in these highly profitable indications could mean new blockbuster drugs, that appears to be a risk worth taking.


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