Great Deal. Now What?

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On the surface, it looks like Cell Therapeutics (Nasdaq: CTIC  ) got a great deal licensing myelofibrosis treatment pacritinib from S*BIO. The biotech paid just $30 million upfront, and only half of the payment was in cash, with the other $15 million in convertible stock. That's a pretty good price for a phase 3-ready drug, especially in a decent sized market like myelofibrosis.

Cell Therapeutics is also on the hook for up to $132 million in regulatory and sales milestones, but that's a minor concern. If the drug passes clinical trials and is approved by regulatory authorities, Cell Therapeutics stock will rise and it'll be able to raise capital by selling shares.

Let's ignore the fact that there's a likely reason Cell Therapeutics got pacritinib so cheaply. Onyx Pharmaceuticals (Nasdaq: ONXX  ) didn't exercise its option from S*BIO to develop the drug further, perhaps because the side-effect profile didn't look too hot. Maybe pacritinib can find a niche in patients with low platelet counts and compete with Incyte (Nasdaq: INCY  ) and Novartis' (NYSE: NVS  ) Jakafi, which is already on the market, and YM Biosciences' (AMEX: YMI  ) CYT387 that's coming up behind.

The big question is why Cell Therapeutics is licensing a drug at this point. As far as I can tell, Cell Therapeutics' plan goes something like this:

  1. License drug.
  2. Make gobs of money.

It's Step Two I'm concerned with. Or, more specifically, the cost of Step Two.

Cell Therapeutics had only $27.4 million at the end of the first quarter, and that's before the $15 million it just spent. If the biotech was cash flow-positive, perhaps living on $12 million in the bank for a bit would be OK, but the company burned through nearly $20 million in the first quarter.

And now it wants to run a pair of phase 3 trials for 200 to 250 patients in addition to the phase 3 trial it's running on Pixuvri. Where exactly is this cash going to come from?

Not from drug sales. Pixuvri is essentially approved in the EU, but it might take until October to launch the drug there. And then there's no guarantee that the marketing expenses won't exceed revenue; that's actually pretty standard in the beginning of a launch. In the U.S., it doesn't look as if it'll get another FDA decision until next year.

The cash will have to come from selling shares at these pitiful prices. With the company at a market cap around $220 million, we're looking at a dilution of nearly 30% just to stay afloat this year, assuming the current burn rate continues. That's 30% less of the profits shareholders will retain -- assuming, of course, that Cell Therapeutics ever actually gets into the black.

Having ridden the shares down twice, I'm the score leader in Motley Fool CAPS for Cell Therapeutics and have no intention of ending my underperform CAPScall after these shenanigans. Investors are well advised to stay away from the shares and may perhaps want to look instead at this high-growth health-care company that's already profitable. Fool analysts see more growth in its future.

Fool contributor Brian Orelli holds no position in any company mentioned. Check out his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Novartis. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On April 23, 2012, at 5:09 PM, oracleatdelphi66 wrote:

    Dear author,

    Here's another look at the deal from BioWorld. Of course your readers can also go to the website and read the transcript from the conference call to hear the company's positions. Thank you for the opportunity to respond.

    D. Eramian, CTI

    FRIDAY APRIL 20, 2012 VOLUME 23, NO. 77

    $30M Up Front to S*Bio

    Cell Therapeutics Lands Sweet Deal for JAK Drug

    By Jennifer Boggs

    Managing Editor

    Seattle-based Cell Therapeutics Inc. nabbed worldwide rights to Phase III-ready JAK2 inhibitor pacritinib from S*Bio Pte. Ltd., of Singapore, for a relatively modest up-front payment of $30 million – half of that in convertible preferred stock – and up to $132.5 million in regulatory and sales milestones if the drug lives up to its full potential.

    Cell Therapeutics’ CEO, James Bianco, called the deal “a really smart pick-up,” and investors might be hard pressed to disagree.

    After all, the JAK inhibitor space has generated substantial buzz in the past few years, with big pharma players such as Novartis AG and Sanofi SA getting into the game. Novartis-partnered Jakafi (ruxolitinib), developed by Wilmington, Del.-based Incyte Corp., became the first JAK inhibitor to gain approval, with late last year’s FDA nod in myelofibrosis. (See BioWorld Today, Nov. 17, 2011.)

    And pacritinib has demonstrated some pretty promising data in its own right. At the American Society of Hematology meeting in December 2011 , S*Bio reported Phase II results showing the drug reduced splenomegaly in myelofi brosis patients, while having a minimal impact on existing cytopenia, a risk that has been associated with other JAK candidates, including Jakafi.

    In 2009, S*Bio’s JAK program caught the attention of Onyx Pharmaceuticals Inc., which inked an option deal that could have translated into as much as $550 million for S*Bio. But the South San Francisco-based biotech, which has been putting much of its resources into multiple myeloma candidate carfilzomib, let the program go last year following a pipeline reprioritization. (See BioWorld Today, May 5, 2011.)

    Bianco declined to speculate on the conference call why Onyx passed on the program, though he did point out that Jakafi was heading toward FDA approval at that time, and Onyx executives could have been worried about competition. But, he pointed out, Onyx’s participation in pacritinib’s early development means that drug has had “essentially big pharma investment” behind it.

    More than $100 million has been invested to bring pacritinib to Phase III, Bianco added.

    That makes the terms of the latest S*Bio deal sound even more favorable for Cell Therapeutics. By comparison, Onyx had shelled out $25 million in cash just for an option to license the JAK program. Basel, Switzerland-based Novartis paid a whopping $150 million up front in 2009 in an ex-U.S. agreement for Jakafi – the entire deal could be worth up to $1 billion – while Paris-based Sanofi SA acquired TargeGen Inc. in 2010 for $75 million up front and up to $485 million tied to development of JAK2 inhibitor SAR302503, now in Phase III development. (See BioWorld Today, Nov. 30, 2009, and July 1, 2010.)

    The S*Bio deal for pacritinib, however, does raise questions on the prospective partnering terms for an earlier-stage JAK1/JAK2 inhibitor, CYT387, in development by small Canadian biotech YM Biosciences Inc. So far, YM has developed the drug on its own, recently taking advantage of stock increases to pad its coffers with a $70 million public offering. (See BioWorld Today, Feb. 27, 2012.)

    Bianco said there were other firms vying for S*Bio’s pacritinib. “I don’t know how many,” he said. “It certainly wasn’t [that] we were the only ones that came to the party.”

    But Cell Therapeutics isn’t worried about competition for JAK inhibitors in myelofibrosis. Bianco pointed out that myeloproliferative neoplasms, which include myelofibrosis, polycythemia and thrombocythemia, comprise a $7 billion per-year market in the U.S alone, with the majority of those diseases involving JAK mutations. “So clearly we saw this as a market that will support multiple JAK2 inhibitors,” he said, though differentiation will be key.

    YM, for instance, highlighted CYT387’s positive effects on cytopenia – specifically anemia – when reporting positive Phase I/II data late last year. That could set it apart from Jakafi, which has shown a negative effect on anemia in clinical studies to date.

    For pacritinib, the advantage could come from its selectivity. Jakafi and CYT387 inhibit both JAK1 and JAK2, but Sanofi’s SAR302503 and pacritinib both are designed to be selective to JAK2. Pacritinib also hits both wild-type mutation and clonal mutation V617F, and it has dual activity against FLT3 mutation, which could extend its potential into other blood cancers such as acute myeloid leukemia and certain lymphomas, Bianco said.

    Initially, Cell Therapeutics plans to position the drug in myelofi brosis patients with thrombocytopenia, or low platelet counts. About 37 percent of the estimated 25,000 to 30,000 myelofi brosis patients have low platelet counts,the company said.

    So far, data have shown no hematopoietic suppression with pacritinib, Bianco explained. Treatment with most of the JAK inhibitors in development is limited to patients with platelet counts of 50,000 or higher. Jakafi treatment

    is limited to a 100,000-or-higher platelet count. But, for pacritinib, “there’s no platelet cut-off,” he added.

    Plans for two 250-patient Phase III trials are in the works – one testing pacritinib against placebo and one testing the drug against low-dose Jakafi – and could get under way as early as the fourth quarter. There’s currently no special protocol assessment (SPA) in place, but Bianco said S*Bio went through the SPA process with the FDA, “so we clearly know the direction.”

    He estimated a two-year time frame, once the studies were up and running.

    Cell Therapeutics is hoping that potential revenue from sales of Pixuvri (pixantrone) could offset some the pacritinib trial costs.

    The drug received a positive opinion from the European Committee for Medicinal Products for Human Use in February and full European Commission approval is expected shortly.

    Elsewhere in its pipeline, the company has another Phase III-stage asset, tosedostat, which it picked up through a co-development deal with Oxford, UK-based Chroma Therapeutics Ltd. last year. (See BioWorld Today, March 15, 2011.)

    Under the terms of its deal with S*Bio, Cell Therapeutics has 18 months to either partner or start a trial on its own in Asia, or see Asian rights revert to S*Bio. In addition to the up-front and milestone payments, S*Bio also would be entitled to a sliding-scale, low-single-digit royalties on any sales of pacritinib. ■

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