Pfizer's Hedge Pays Off

You almost want to say that Pfizer (NYSE:PFE) saw this coming.

When the drug giant licensed Protalix BioTherapeutics' (NYSE:PLX) Gaucher disease treatment, taliglucerase alfa, two months ago, I characterized the license as a steal. Turns out Pfizer's low cost might have been justified due to higher risk. Protalix announced yesterday that the Food and Drug Administration has asked for additional data on the manufacturing process for the drug, which the company has tentatively named Uplyso. It won't have the data available to submit to the FDA until next quarter, potentially delaying an approval until the end of the year.

At least Pfizer was smart enough to hedge its bet by only paying $60 million up front and tying the other $55 million to regulatory milestones.

Protalix uses a plant-cell system to produce the drugs instead of the mammalian cells used to produce most biotech drugs. Examples of the latter include Amgen's (NASDAQ:AMGN) Aranesp, Abbott Labs' (NYSE:ABT) Humira, and Biogen Idec's (NASDAQ:BIIB) Avonex. The novel system is what makes Protalix so sexy to investors and a potential buyout target, but it also adds a layer of risk. After all, the FDA could take an additional delay before signing off on the new system. Gee, guess what?

The clear beneficiary of the delay is Genzyme (NASDAQ:GENZ), which has its own Gaucher drug, Cerezyme, already on the market. Genzyme has had its own manufacturing issues with Cerezyme, which, ironically, allowed Protalix to begin selling the drug in the U.S. under an Expanded Access protocol last year. Genzyme's problems could be part of what sparked the FDA's request for additional information.

Shire (NASDAQ:SHPGY) is also developing a Gaucher treatment called velaglucerase that's under review at the FDA, with a PDUFA date at the end of the month. Protalix's delay is clearly an advantage for Shire if the FDA signs off on that approval on time. On the other hand, you could also argue that the request for more data makes it more likely that the FDA will be a stickler on the details of Shire's application, too.

It's almost a given that Pfizer and Protalix will eventually gain FDA approval because, unlike efficacy or safety issues, manufacturing issues can usually be fixed. The only questions are how long it'll take and at what cost.