Novo Nordisk (NVO 0.69%) recently announced that it's buying Prothena's (PRTA 9.26%) transthetyrin amyloidosis (ATTR) cardiomyopathy program for up to $1.2 billion. In this Motley Fool Live video recorded on July 14, 2021, Motley Fool contributors Keith Speights and Brian Orelli discuss why Novo, which is best known for its diabetes franchise, is buying a rare-disease drug candidate.

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Keith Speights: Let's switch gears now. There is a company, I don't know that we've talked about much, if at all in the past, Brian, Novo Nordisk. The company's primarily known for its diabetes drugs. However, Novo Nordisk announced this week that it's buying Prothena's ATTR cardiomyopathy program for up to $1.2 billion.

What should investors know about this deal and why's the company jumping into this rare-disease market?

Brian Orelli: The drug, code name is PRX004, is ready to enter phase 2 clinical trials. The phase 1 seemed to only look at safety. I don't think they have much in terms of efficacy data to know whether this drug is working.

ATTR is caused by the buildup of TTR protein in the nervous system or the cardiovascular system. Novo Nordisk is planning on focusing on cardiomyopathy version. The deal is valued up to $1.2 billion, but Novo is only paying $100 million in up front and near-term clinical milestone payments. It's not that much money Novo Nordisk is taking, the risk they are taking financially is not really that big.

In terms of rare diseases, Novo Nordisk, you're right, they're largely focused on diabetes, but they do have some experience in rare disease. They sell hemophilia treatments and they sell some growth hormone treatments that I don't think are used by that many patients. I think a continued move into rare diseases is probably good. But I wonder if there's too much competition here in the ATTR space.

Pfizer has a drug, it's called Vyndaqel, Vyndamax, depending on the dosage that's used for the cardiomyopathy version. Alnylam and Ionis Pharmaceuticals both have treatments for the neurological version that they are both trying to expand into the cardiomyopathy version.

I think there's a few other drugs in development that are ahead of PRX004 as well. I'd like to see Novo Nordisk get a definitive answer on whether the drug is competitive quickly. If it's going to fail, it needs to fail fast, and then it won't waste money both on the large phase 3 clinical trials, as well as having to pay Prothena money for the drug if they can accept quickly if it's not going to work.

Speights: Brian, you mentioned something that's important for investors to always focus on with deals like this. While you'll see the headline number, Novo Nordisk planning to acquire this company for $1.2 billion, it's actually up to $1.2 billion. As you said, Novo is only paying $100 million up front.

Orelli: Yeah. It's a pretty small amount. The biggest problem is that most of the time, those milestone payments aren't broken out. So investors have a hard time, especially when you're on the receiving end or both, I guess.

When you're on the receiving end and when you own the company that's licensing or acquiring a drug, you don't know exactly where payments are going to come. Are they mostly tied to sales? Are they mostly tied to early development? That can change whether it's a good deal or not for both sides.

Speights: Generally speaking, though, I do like to see when a big drugmaker is making a deal, if they can structure it in a way that it's less up front and more contingent upon success. I like those deals.

Orelli: Yeah. That's good deals for large drugmakers, is not necessarily good deals [laughs] for the biotechs. The biotechs would generally like more up front. Although, if they're well capitalized, sometimes you'll see drug makers take small amounts up front for bigger amount.

If you want $500 million up front and you drop that down to $100 million, you can ask for a lot more than $400 million based on success because it's risk-adjusted. You can take less up front and actually end up getting more total in the deal if the drug is a success.