On Monday, Income Investor pick GlaxoSmithKline (NYSE: GSK ) signed not one, but two deals -- one with a privately held U.S. biopharma and another with a European-based drugmaker.
These were discovery-stage deals under which Glaxo will get to take over a certain number of compounds from OncoMed Pharmaceuticals or Galapagos (which isn't publicly traded in the U.S.) if they make it all the way through discovery and proof of concept (usually phase 2a testing).
Under the Galapagos deal, Glaxo has the right to choose up to six small-molecule drugs to attack infectious diseases. Under the OncoMed collaboration, it has the option to pick up to four monoclonal antibodies designed to attack cancer stem cells.
Neither deal will cost Glaxo much cash up front. The up-front payment to OncoMed was not announced, meaning it was likely immaterial, and Glaxo had to give Galapagos a payment of only 3.5 million euros (which converts to a little more than $5 million).
If, in the best case, Glaxo takes all four of its options from OncoMed and they get approved and hit certain sales milestones, that deal would cost Glaxo $1.4 billion. The Galapagos deal is worth up to about $175 million per drug if the drugs reach undisclosed sales milestones.
Because both of the deals were for discovery-stage assets, it will take many years for them to pay off. Any resulting compounds will have to make it through preclinical testing, human clinical trials, and then regulatory approval from often-strict regulatory agencies.
Glaxo has been fond of these discovery-stage deals, under which it gets to potentially cherry-pick from a drugmaker's pipeline compounds. In 2002, it signed a similar deal with Rule Breakers pick Exelixis (Nasdaq: EXEL ) ; it's starting to produce assets only this year, with phase 2 data for Glaxo's choosing.
These discovery deals are a cheap way to get access to different drugmakers' discovery technologies and expertise. Indeed, Galapagos already had a similar deal with Johnson & Johnson (NYSE: JNJ ) for rheumatoid arthritis compounds, and another deal with Glaxo for osteoarthritis drug candidates. Considering that, by some estimates, only one out of 5,000 compounds to enter preclinical testing eventually gets Food and Drug Administration approval, it's no wonder that Glaxo is signing so many of these deals.
The main downside to these deals is their longer development timelines, compared with acquiring later-stage compounds. It takes the average drug that gets approved 12 years to go through the development process.
Compared with acquiring a specific drug candidate in later-stage testing or buying out a development-stage pharma, these deals are a much safer use of Glaxo's cash. Because most of the milestone payments depend upon a drug hitting certain development points, the discovery partner takes on most of the development risk. Not a bad way to go about drug development.
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