3 Quick Conclusions on a Dropped Biosimilar at Momenta Pharmaceuticals

On December 19, Baxter International (BAX -0.25%) notified Momenta Pharmaceuticals (MNTA) that it was no longer interested in developing M511, a monoclonal antibody biosimilar for cancer, under a collaboration formed two years ago. The partnership sought to commercialize up to six biosimilar drugs, or generic biologic drugs, in global markets, and had already agreed upon three targets: M923, M834, and M511. The decision to drop M511 was made after an "internal portfolio review" at Baxter.

What exactly does that mean? Does the company think the market opportunity for the monoclonal antibody simply isn't worth the investment? While investors don't know what innovator drug M511 is modeled after, we do know that the competition for biosimilar development is fierce. Really fierce. Take a look at the race to capture market share from several successful monoclonal antibody drugs (all from Roche, ironically) that treat various cancers:

Source: Genetic Engineering & Biotechnology News, Biosimilars: 10 Drugs to Watch

The table above underscores the intense competition for biosimilar drug development for oncology indications -- and all indications, for that matter -- and is my best guess for Baxter's decision to leave M511 behind. However, investors may still be wondering what it means for Momenta. Here are three quick conclusions we can make.

1. Less potential revenue from future milestone payments.
The first conclusion is the easiest: Discontinue development of a drug with a partner, and you'll likely see lower milestone and royalty payments. Momenta was guiding for $26 million in product revenue in 2014 from the three biosimilars under development with Baxter, with $7 million coming from M511. The company is now targeting $19 million from M923 and M834. In total, the three biosimilars were expected to generate up to $80 million in potential technical and development milestones, with M511 contributing $14 million.

Similarly, each biosimilar developed with Baxter was expected to generate up to $50 million in potential regulatory milestones. So if the maximum of six biosimilars were pursued and commercialized Momenta would have captured $300 million. That number has now dropped to $250 million (for now, more on that below).

2. M511 won't be left for dead.
The silver lining in this whole thing is that Momenta will continue to develop M511 outside of its collaboration with Baxter. The company will forgo milestone payments totaling $64 million in pursuit of capturing 100% of sales if the drug is successfully commercialized. That could be good news in the future, but it comes with more risks in the short term. Consider that Momenta will take on increased development costs that will no longer be offset by milestone payments. That's not great news for a company that loses $25-$30 million per quarter.

3. New look for biosimilar portfolio with Baxter.
What does this mean for the Momenta and Baxter biosimilar partnership? Well, for now it appears the pair will only pursue up to five drugs instead of six. Baxter has until February 2015 to select the additional three biosimilar targets. However, Momenta can still decide to let its partner choose a sixth drug to replace M511 for the collaboration. Until that occurs, investors should assume the two will roll with a maximum of five biosimilar targets.

Foolish bottom line
Baxter's decision not to pursue the development of M511 certainly isn't good news for Momenta investors. While Momenta will continue on without its partner for the monoclonal antibody, it will come without collaboration revenue to offset development costs. The company is relatively strong financially -- it should end 2013 with $250 million in cash at a quarterly cash burn rate of $25 million -- but if it cannot launch its second commercial product in 2014 to climb back to profitability or breakeven, the added development costs will put added downward pressure on the balance sheet. I still like the overall potential of Momenta's pipeline, but this is something investors want to monitor going forward.