Good Deal? Bad Deal? Hard to Tell.

The problem with large pharmaceutical companies licensing drugs from privately held companies is that neither has the requirement to share details of the deal. For the large company, the details aren't material, and privately held companies aren't required to share information publicly with shareholders. That leaves investors in the dark.

Take Abbott Labs' (NYSE: ABT  ) license of Reata Pharmaceuticals' kidney failure drug bardoxolone yesterday for $450 million up front. That's an awful lot of money for the rights to one drug that hasn't even started phase 3 trials yet. (Abbott also gets rights to "certain other Reata compounds," but let's not hold out hope if they're not even named yet.) And Abbott is only getting the outside-the-U.S. rights to the drug, even excluding "certain Asian markets." The U.S. often makes up half or more of sales for a drug, so Abbott isn't getting that much in the deal.

By comparison, check out how much other companies have paid up-front recently:

Drug

Owner

Licenser

Upfront Payment

AGN-209323 and backup compounds

Allergan (NYSE: AGN  )

Bristol-Myers Squibb (NYSE: BMY  )

$40 million

KNS-760704

Knopp Neurosciences

Biogen Idec (Nasdaq: BIIB  )

$80 million*

Contrave

Orexigen Therapeutics (Nasdaq: OREX  )

Takeda

$50 million

Lorcaserin

Arena Pharmaceuticals (Nasdaq: ARNA  )

Eisai

$50 million

Source: Company releases. *Includes $60 million stock investment.

But the $450 million is destined for "licensing rights to bardoxolone and a minority equity investment in the company." The companies didn't break down the split, but clearly the equity investment portion has upside potential, while the up-front fee is just the cost of doing business.

The companies also said there are milestone and royalty payments associated with the drug, but didn't break them down. It's possible Abbott made a large payment up-front in exchange for getting out of payments later on. It wouldn't be the first time that Abbott has taken on a majority of the risk for developing a drug.

Finally, the press release doesn't say who will pay for the clinical trials required to get the drug approved. Typically when a company licenses a drug in certain territories, it's responsible for paying any costs associated with gaining approval in that area. But everything is up for negotiation in a licensing deal. Abbott may be banking on Reata performing international trials that are good enough to gain approval in the EU, as well as the U.S. where Reata has retained its rights.

Investors are in the dark on this one for sure.

Motley Fool Rule Breakers is always on the hunt for hot drug stocks and other cutting-edge picks. Click here to see all of our latest discoveries with a free 30-day trial subscription.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 27, 2010, at 10:11 AM, ArnaAnalysis wrote:

    Arna Update! Brokers just confirmed that a company will acquired Arna this week. Arna is a strong buy.

  • Report this Comment On September 28, 2010, at 3:36 PM, ArnaAnalysis wrote:

    Arena sign new collaboration agreements with Ortho-McNeil-Janssen Pharmaceuticals, Inc. Stock will go up to $6

Add your comment.

DocumentId: 1312107, ~/Articles/ArticleHandler.aspx, 4/19/2014 2:52:08 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement