FOOL PLATE SPECIAL
CuraGen, Bayer in Historic Biotech Drug Deal

With one deal, drug giant Bayer has called genomics-based drug discovery and development company CuraGen into the big leagues along with Human Genome Sciences and Millennium Pharmaceuticals. Topping its own $465 million in 1998 with Millennium, Bayer commits 56% of joint $1.34 billion 15-year drug discovery and development costs. Unlike Bayer's deal with Millennium, Bayer and CuraGen are joint development partners and will share 44% of future profits. CuraGen investors are dancing.

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By Tom Jacobs (TMF Tom9)
January 19, 2001

German big drug maker Bayer AG blew away the biotech world this week when it announced a $1.5 billion package with drug discovery and development company CuraGen (Nasdaq: CRGN). The pathbreaking deal has two key components: discovery and development of obesity and diabetes drugs, and gene expression and toxicity database development.

In one fell swoop, CuraGen joins the genomics big leagues currently inhabited by several other companies, including Rule Breaker portfolio holding Human Genome Sciences (Nasdaq: HGSI) and Millennium Pharmaceuticals (Nasdaq: MLNM), which hope to succeed as fully-integrated biotech drug makers. CuraGen stock, though well off its $128.28 52-week high, jumped 60% from last week's low of $20.13 to yesterday's $33.16 close.

Obesity and diabetes targets and drug candidates     
Focusing on the two fastest-growing drug markets, CuraGen will identify 80 gene and protein targets for obesity and adult onset diabetes drugs. Bayer will then apply its massive drug discovery efforts to finding small molecule compounds that work on those targets. The partners commit to clinical development of 12 drug candidates: They will split up to $1.34 billion in development costs over 15 years, with Bayer bearing 56% and CuraGen 44%. With $20 million in trailing-twelve-month revenues, CuraGen and its investors are popping champagne corks. But there's more.

Why the pact is special
The usual big pharma-biotech alliance has been similar to Bayer's 1998 $465 million record-setter with Millennium, through which Bayer earned the right of first refusal to develop candidates for Millennium-supplied drug targets, while Millennium gained royalties on any future drugs to treat the chosen targets. Bayer and CuraGen, however, will share any profits at the same 56%:44% ratio by which they contribute to development costs. CuraGen pays more of the clinical testing development costs than has been typical, but gains Bayer's drug candidate discovery expertise, marketing and sales staff, and a larger-than-usual share of future rewards.  

Pharmacogenomic and toxicogenomic database
Less flashy but still interesting to biotech stock watchers is the five-year, enlargeable deal in which Bayer buys $85 million in CuraGen equity and commits to $39 million in funding. Says the press release:

"The companies intend to compile a database of gene-based markers and information that will enable scientists to predict potential drug toxicities, understand how a particular drug works, and identify the new disease indications. CuraGen and Bayer both have exclusive rights to use the established database, and CuraGen has the right to market this database and pay Bayer royalties on the resulting revenues."

Toxicogenomic and pharmacogenomic data show how new and existing compounds affect different kinds of healthy and diseased tissue. They can help companies save money by showing toxicity and effectiveness of  different drug candidates before expensive and lengthy animal and human testing -- reducing drug development costs and time to market. (More information on this subject is available on our biotechnology and pharmaceuticals InDepth pages, and in both The Motley Fool's Industry Focus 2001 and our Guide to Biotech Investing.)

But right now, Bayer could subscribe to a toxicity database from Gene Logic (Nasdaq: GLGC), whose ToxExpress product has been available for over a year and already has eight biotech and big pharma subscribers (paying between $1.5 and $5 million per year for 3-year subscriptions, according to CEO Mark Gessler, whom we interviewed in November.) And Gene Logic's pharmacogenomic database should be available commercially sometime in 2001. 

Instead, Bayer -- one of many other drug makers in discussions with Gene Logic about subscriptions -- will pay CuraGen to build its own toxicogenomic and pharmacogenomic business. Bayer gains exclusive and presumably royalty-free use, as well as royalty payments from CuraGen's future sales. Investors may wonder whether Bayer just bought its own development-stage version of Gene Logic, with reduced exposure should it fail, and substantial gain should it hit big.   

CuraGen hits the big time
Other deals may provide more actual cash from a big drug maker to a biotech, such as last year's $800 million deal between Novartis (NYSE: NVS)and Vertex Pharmaceuticals (Nasdaq: VRTX). But CuraGen, with less than a third of Vertex's sales and market cap, benefits on a huger scale. It's virtually assured of all the money it needs -- even beyond its last quarter $244 million war chest -- to survive while it makes the transition to a genomics-based drug company like Human Genome Sciences or Millennium. 

Those companies may have retained more independence in the form of greater rights to develop their discoveries and independence: more potential profit, but more risk. But CuraGen doesn't have their product pipeline or cash, and the Bayer deal may be its only way to join the big leagues. CuraGen investors should be patient: It will likely take a minimum of 10 years -- even if genomics speeds drug development -- to determine the true long-term value of today's deal.    

[The author owns shares of Human Genome Sciences.]