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Investors are regenerating their interest in Regeneron Pharmaceuticals (Nasdaq: REGN ) after it extended its drug-discovery pact with sanofi-aventis (NYSE: SNY ) . The 19% overnight gain has certainly gotten my attention.
Under the new terms of the deal, Sanofi will increase its pre-clinical funding of the partnership from $100 million to $160 million per year starting next year and extend it for five more years. The two-year-old partnership has already produced four antibody-based drugs that are in clinical trials and a fifth that is awaiting clearance by the Food and Drug Administration. The companies are hoping to raise that number to four to five drugs per year, which is rather astounding. If they can hit that level through 2017 -- when the partnership ends -- there's a pretty good chance of a product making it to market, assuming the average failure rate in the clinic.
And once the drugs make it into the clinic, Regeneron has a pretty sweet deal. It retains 50% of the profits, but unlike Exelixis' (Nasdaq: EXEL ) deal with Bristol-Myers Squibb (NYSE: BMY ) , Regeneron doesn't have to pay for the clinical-trial expenses up front. Instead, it pays its share out of profits from sales of any approved drugs, so Sanofi is taking all the financial risk and Regeneron gets to keep its cash-burn rate down.
Sanofi owns a little more than 19% of Regeneron stock, but don't expect the French giant to buy its partner anytime soon. The companies have a standstill agreement that caps Sanofi's ownership at 25% through late 2011 and 30% after that.
While the deal is good for Regeneron and the stock certainly deserves a bump on the news, much of the value of the $1.5 billion company still resides in its late-stage pipeline. It has one drug, Arcalyst, for sale in an ultra-orphan indication that now has competition from Novartis (NYSE: NVS ) , but if Arcalyst proves successful in treating gout, sales will tower over the measly $20 million Regeneron expects to ship in the U.S. this year. It also has a separate partnership with Sanofi for a phase 3 cancer drug, Aflibercept.
The extended partnership is a good fallback plan, but, for better or worse, the value of Regeneron's stock is still tied to the results of clinical trials expected next year.