If Myriad Genetics
On Tuesday, the orphan-drug specialist announced that it licensed Riquent, La Jolla Pharmaceutical's phase 3 lupus nephritis treatment. The drug has a checkered past -- the Food and Drug Administration gave it an approvable letter in 2004 -- and La Jolla is kind of on the ropes -- it got caught up in the auction rate securities mess -- so BioMarin probably had the upper hand in the negotiations.
BioMarin basically back-ended the licensing payments so that the majority of payments are only made if the drug works. Its upfront payment is a measly $15 million broken into $7.5 million in cash and $7.5 million for purchasing preferred shares at the equivalent of a common stock purchase price of just under $0.74 a share. With the news causing La Jolla's shares to jump to around $1.50, BioMarin's equity stake in La Jolla is now worth around $15 million.
That's right, Fools: The Rule Breakers pick essentially has a free call option on Riquent. Of course, if the drug fails in phase 3 trials, those shares will be near worthless and BioMarin will be out the $7.5 million in cash, but it's a neat trick for now, don't you think?
Lupus is a debilitating disease, and a new drug specifically for treating it hasn't been developed in more than 45 years. But that doesn't mean that BioMarin and La Jolla will be without competition. Many companies, including Novartis
And that's the big question now. Fortunately, BioMarin investors should know by the end of the year if Riquent works. And the company hasn't bet the farm if it doesn't.
More Foolishness on options (for stocks):
Find out why The Motley Fool picked BioMarin for our high-growth Rule Breakers newsletter by grabbing a free 30-day trial subscription. You'll get access to all our back issues and the most recent picks.