Too Many Drugs, Too Little Cash

It's nice to have a backup plan -- especially in biotech.

In the short term, AVEO Pharmaceuticals (Nasdaq: AVEO) is mightily dependent on its cancer drug tivozanib, which it recently licensed to Astellas Pharma. The results of a phase 3 trial testing tivozanib against Bayer and Onyx Pharmaceuticals' (Nasdaq: ONXX) Nexavar in kidney cancer patients will determine whether the drug can get on the market and how it'll fare against Nexavar and Pfizer's (NYSE: PFE) Sutent.

But there's more to AVEO than just tivozanib. The company has a phase 2 drug, ficlatuzumab, that's being tested in lung cancer in combination with AstraZeneca's (NYSE: AZN) Iressa. There's also an anti-ErbB3 antibody that's in preclinical development with Biogen Idec (Nasdaq: BIIB).

Further back, in the discovery phase, AVEO has been working on developing drugs that target the recepteur d'origine nantais, or RON receptor for short. The company announced today that it had licensed the RON program to Johnson & Johnson (NYSE: JNJ).

AVEO gets $15 million up front -- half in cash and half as an equity investment -- and potentially up to $540 million in milestone payments. By making it to market, AVEO will receive tiered, double-digit royalties on sales. Johnson & Johnson is responsible for all the costs associated with developing the drugs from here on out.

AVEO could certainly have gotten more upfront cash if it had pushed through proof of concept phase 2 trials, but licensing early is still the best move for AVEO. This way, the company can reserve its cash for the tivozanib and ficlatuzumab programs. And AVEO is built on a drug discovery platform that should produce additional drug targets. Once tivozanib is approved and bringing in revenue, AVEO will be in a better place to develop drugs on its own.

Of course, at that point, we won't be calling it a backup plan.

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