Roche (RHHBY 2.75%) rarely does expensive early stage deals, relying instead upon its deep proprietary pipeline of oncology drug candidates. So when the company commits itself to $725 million upfront and $1 billion more in milestones (to say nothing of the hundreds of millions that will be required for clinical trials) for a new cancer drug approach, investors would do well to pay attention. When that new approach concerns breast cancer, an area where Roche is particularly strong, it's all the more interesting.
Enter Seragon
Roche announced Wednesday that it is acquiring Seragon, a privately held biotech recently spun off when Johnson & Johnson (JNJ 0.22%) acquired Aragon Pharmaceuticals. Like Aragon, Seragon's focus is in hormone-related cancers, but focused on breast cancer instead of prostate cancer.
Roche is agreeing to pay $725 million in upfront cash, with contingent milestone payments potentially totaling another $1 billion. By way of comparison, Medivation (MDVN +0.00%), which has Xtandi approved, on the market, and expected to generate over $500 million in revenue this year, carries an enterprise value of just under $6 billion while Pharmacyclics, Johnson & Johnson's partner on Imbruvica, has a nearly identical just-under-$6 billion enterprise value.
What Roche is getting
In acquiring Seragon, Roche is getting Seragon's portfolio and R&D expertise in selective estrogen receptor degraders (or SERDs) – a potentially new class of oral medications that can address the 60% to 70% of breast cancers that are hormone receptor-positive.
Targeting estrogen receptors is not a new approach, as selective estrogen receptor modulators (or SERMs) like tamoxifen have been around for a while, as have drugs that directly target estrogen (like aromatase inhibitors). Seragon's platform appears to take it up a notch. Not only do these molecules act like "glue in the lock" for breast cancer cells, they can actually modify the receptor in such a way that the cell eliminates it entirely.
That latter point could be key, as research has indicated that hormone receptor-positive cancers are so "addicted" to estrogen signaling that the receptor will mutate in such a way that it can be active even without estrogen to bind to it. SERDs, then offer the potential of a highly potent, highly selective (and therefore possibly safer) treatment for these breast cancer types, either as monotherapy or part of a combination.
Sergaon's lead compound ARN-810 is now in Phase I testing.
There *will* be others
No good idea goes uncopied in Big Pharma and I cannot imagine that the industry will look at Roche shelling out so much money for an early stage company and not take a look at the SERD space themselves. Look no further than immuno-oncology and drugs like PD-1/PDL-1 antibodies – at least a half-dozen companies are under way with competing versions (including Roche), so there's no way Roche will have this all to itself.
I'm aware of one other company actively look at SERDs (Radius), but this is definitely a case where absence of proof should not be read as proof of absence. Large pharmaceutical companies in particular are known to be cagey about talking about the mechanism of action for drugs in Phase I or preclinical testing.
I'd also note that Medivation is looking to try Xtandi in breast cancer – both in androgen receptor-positive types and estrogen receptor-positive or progesterone receptor-positive types as well. My understanding of Xtandi is that it does not destroy the receptor as Seragon's compounds seem to, and that could be an important differentiating factor in long-term efficacy. Either way, it's far too soon to say.
The bottom line
It strikes me as interesting that Johnson & Johnson did not choose to buy all of Aragon's assets when it could; perhaps J&J was uncomfortable paying what management wanted for those assets at the time, or perhaps J&J doesn't have ambitions to take on the breast cancer space. Either way, if Seragon's compounds/technology go on to do great things, I expect Johnson & Johnson investors might want an explanation.
As for Roche, any time a company goes against its long-demonstrated operating philosophy it is a reason for pause. I think Roche is making a risky bet here, but I also believe that Roche deserves the benefit of the doubt when it comes to understanding the breast cancer space and recognizing a game-changing therapy approach when they see it. While I don't want to dismiss the risk with a glib "it's only money, and Roche can afford it", the reality is just that – this is a risky move, but it is one that Roche can easily afford and one that could extend Roche's leadership in breast cancer for more than a decade to come.
