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Recently, I've been closely following biotech companies that are developing novel technologies focused on early detection/screening. Here's why: Healthcare costs have been growing at an alarming rate, of which progressive diseases (such as cancer and heart disease) that have progressed to their late stages account for a large portion. Consequently, novel technologies that allow for early detection not only result in substantial savings in healthcare costs, but more importantly lead to a greatly improved patient survival rate. As such, I believe that the early detection/screening market is set to grow enormously, setting the stage for great returns for both patients and investors.

Of these companies I have been following, I'd like to discuss Trovagene (TROV), particularly within the context of its recent 8-K filing with the SEC. The filing, which states the terms of the collaboration between Trovagene and PerkinElmer (PKI) for the research and development of "an assay, based on [Trovagene's] TrNA (TransRenal Nucleic Acid) technology, to determine the risk for developing hepatocellular carcinoma," has several implications that foreshadow an exceptional rally for Trovagene shareholders.

The Significance Of Partnerships in Biotech

In order to understand the importance of a partnership in the biotech sector, it's essential to address the nature of the development stage biotech company. To begin with the obvious: they're incredibly speculative, and for good reason: The road to profitability is notoriously rocky. The journey which takes place over three "legs" (Development, Approval, and Commercialization) is an arduously lengthy and cash intensive process that is prone to minor and major setbacks. Fortunately, a partnership with an established company can do wonders both in terms of reaching profitability and the outlook/valuation for a biotech startup. The benefits are clearly demonstrated in companies that have entered key partnerships in the past year. Notable examples include Organovo (ONVO), Endocyte (ECYT), and Qiagen (QGEN).

Trovagene's novel intellectual property revolves around TrNA (TransRenal Nucleic Acid) assays. TrNAs are genetic material that is small enough to pass through the kidneys can be isolated from easily obtainable urine samples. As a rising pioneer within this space, Trovagene has developed an impressive patent portfolio consisting of ~sixty issued patents in addition to ~forty more pending, essentially guaranteeing exclusivity in the TrNA diagnosis space with its extensive IP protection.

The terms of the filing calls for milestone payments by PerkinElmer. Although the 8-K fails to elaborate on the conditions behind each milestone, the benefit is clear. By entering into a partnership with a substantially larger company (PerkinElmer has $171 million in cash in comparison to Trovagene's $92.5 million market cap), Trovagene stands to benefit from a significant reduction in financing risk as long as progress can be demonstrated. The milestone structure discussed in the filing is reminiscent of the Endocyte - Merck (MRK) partnership announced in April of last year.

The Power Of The Milestone-Structured Partnership- Endocyte-Merck

Endocyte was then a late development stage company that had a cancer drug candidate (Vintafolide) in a Phase 3 clinical trial for platinum-resistant ovarian cancer. Merck, upon noticing the drug's potential to treat other types of cancer, entered into a milestone based partnership with Endocyte. The collaboration's structure was as follows: Endocyte received an upfront payment of $120 million (ECYT's market cap before the announcement of the deal was $136 million) with an additional $880 million up for grabs as milestone payments, in return for "an equal share of the profit in the United States as well as a double digit percentage royalty on sales of the product in the rest of the world." As a result of the collaboration, Endocyte's market capitalization has since almost quadrupled to just over $500 million, demonstrating the incredible impact of a partnership.

The PKI-TROV collaboration similarly calls for an "exclusive royalty-bearing" licensing agreement upon the end of proof of principle work on the HCC assay. Moreover, PerkinElmer has been granted an exclusive option to obtain an exclusive royalty-bearing license to utilize Trovagene's technology in other fields.

  1. Because PerkinElmer will be licensing technology from Trovagene for a royalty, we should presume that PerkinElmer will conduct and finance the marketing for the developed HCC assay upon completion. This minimizes another significant cost (for Trovagene) in the path to profitability: commercialization. The arrangement seems to be maximizing, in the sense that PerkinElmer will be able to leverage its global presence especially within Africa and Asia. As aptly stated by the Mars Report's article: "Primary liver cancers account for less than 1% of all cancers in North America whereas in Africa, Southeast Asia, and China, they may account for up to 50% of cancers."
  2. Given the filing's explicit statement of PerkinElmer's exclusive option to obtain an exclusive royalty-bearing license to use Trovagene's technology (presumably TrNA) in other fields, it seems logical to assume PerkinElmer fully intends to explore the usage of TrNA technology for other indications. This is remarkably similar to the aforementioned Endocyte-Merck collaboration that stated the intention to test the ovarian cancer drug's efficacy against other types of cancer. As such, it seems fair to assume that by extension, Trovagene will gain access to novel revenue streams from other potential indications.

Qiagen-Eli Lilly: The Scalability Of Partnerships

One of the greatest problems in life are diminishing returns. So the question remains: Sure, a micro-cap/small-cap biotech company can benefit greatly from a partnership, but can it scale? An examination of the Qiagen-Eli Lilly (LLY) 2011 partnership yields the answer.

Qiagen, a diagnostic company (similar to Trovagene), was in the midst of a massive sell-off that drove its shares from $21/share to $13/share within the span of a few months.

(click to enlarge)

The QGEN-LLY partnership was announced in the tail-end of the fall, and the terms of the partnership were synergistic: Qiagen would develop a diagnostic that would detect if patients could benefit from a Janus Kinase 2 (JAK2) inhibitor drug that Eli Lilly was developing. Despite the straight forward nature of the partnership, the chart speaks for itself. Moreover, Qiagen recently re-entered into a similar co-development agreement with Eli Lilly, demonstrating how a simple collaborative development agreement can strengthen the outlook of a company with a multi-billion dollar valuation.

How Royalty-Based Partnerships Reduce Risk While Increasing Upside

While discussing the TROV-PKI partnership agreement, special focus should be drawn to the possibility of royalty-bearing licenses. These licenses represent exciting opportunities for new revenue streams while simultaneously limiting a company's financial risk. By entering partnerships with provisions for royalty-bearing licensing, companies are able to shift the massive costs associated with marketing the product to the other party, while taking a lion's share of the profits. Within the biotech space, Organovo stands out as a prime example of a company that has embraced this strategy whole-heartedly.

Organovo, after uplisting to the OTC market following a reverse merger, quickly became a recent sweetheart of the biotech sector. The company's 3D bioprinting technology quickly garnered interest amongst both investors and other entities, resulting in a series of high-profile partnerships with entities such as Pfizer (PFE), United Therapeutics (UTHR), Autodesk, Inc. (ADSK), and the Knight Cancer Institute at Oregon Health & Science University. With the exception of the completed Pfizer collaboration, Organovo's commitment to strategic alliances has established opportunities that promise to offer significant royalty-based revenue streams upon the completion of successful products currently being co-developed with its partners.

Trovagene also demonstrates the potential for multiple royalty-bearing partnerships. The terms of the TROV-PKI partnership fails to preclude Trovagene from entering similar collaborations with other companies for the development of TrNA technology for indications other than HCC. As such, provided the efficacious potential of Trovagene's TrNA technology can be demonstrated, the door remains wide open for the possibility of additional synergistic partnerships.


With favorable terms and implications from the partnership with PerkinElmer, Trovagene demonstrates a similar opportunity to the aforementioned companies. That being said, the typical risks remain at play for Trovagene. The primary risks present in development stage biotech companies are financing and clinical trial risks, however these should be contextualized through the milestone-based structure of the new TROV-PKI partnership. The typical development stage company faces the three "legs" stated earlier: development, approval and commercialization. Typically, a company runs the risk of running out of money as they race to the finish line, at which point another round of financing must be conducted. These subsequent rounds of financing can be incredibly dilutive to current shareholders, in addition to the possibility of non-materialization. However, given the milestone structure of the partnership, both financing and clinical trial risks are collapsed to a single risk: the efficacy of the technology. I believe this singular underlying risk has been de-risked considerably given that PerkinElmer has essentially validated Trovagene's technology by forming a partnership with them.

Given the size of the HCC market (700,000 diagnosed every year), in addition to TROV's extensive patent portfolio in the TrNA space, I believe Trovagene remains undervalued in light of the partnership announcement and potential market opportunities. In the following months, I expect a significant revaluation of TROV shares, especially as trends in healthcare costs necessitate a simple and cost-effective standard of screening.

Source: Why Royalty And Milestone Partnership Dynamics Imply Trovagene Could Triple