Good News For This Small-Cap Biotech: Eli Lilly Wants To Develop Its Diabetes Drug

By Jake King

Large-cap drug company Eli-Lilly (NYSE:LLY) must have liked what it saw in April when Transition Therapeutics (NASDAQ:TTHI) reported its Phase Ib proof-of-concept results for TT-401, a novel drug candidate being developed for diabetes and obesity. The companies revealed on Monday morning that Lilly would be taking over development of the GLP-1 agonist in an amended and lucrative deal for the smaller Canadian drug developer.

We reported on this small-cap name before and after the late April trial results were released, and investors following our write-ups profited by over 65% in the stock. Monday's news, with Lilly taking over full development of TT-401, represents more good news for Transition, as Lilly could have waited until after a Phase II trial before exercising its option on the compound. Transition licensed TT-401 and a number of other pre-clinical assets from Lilly in 2010 before initiating the first clinical trial of TT-401 at the end of 2011. Now, LLY is paying Transition $7 million for the successful Phase Ib data, and will fully fund the later development and commercialization of TT-401 per an amended agreement between the two companies. In order to retain strong economics on future sales of the drug (double-digit royalties according to this morning's press release), Transition has agreed to contribute $14 million to the Phase II development of TT-401, which it will make in three separate installments based on the new agreement.

Transition reported that it had $22.9 million in cash and equivalents on March 31, and with LLY's $7 million payment to take the drug candidate fully in-house, the $14 million in future payments should be well within Transition's grasp, particularly given that LLY will now pay for all other expenses related to the drug's development. Transition's other lead asset, ELND005, is also fully funded by partner Elan Corp. (NYSE:ELN), meaning that expenses for Transition will remain remarkably low. In related news, Elan shareholders rejected the divestiture of certain assets, thus ELN will continue to own and fund the advancement of ELND005 as opposed to spinning the asset out into the Speranza vehicle as originally planned. In our view, ELND005 remaining as part of the ELN product portfolio will keep the visibility of the asset at a higher level than if it went to Speranza, an incremental positive for TTHI.

Expect shares of TTHI to trade up on Monday's news, especially given that Lilly exercising its option on TT-401 at its first opportunity validates the drug candidate, and indicates that the full Phase Ib data set is robust. Transition has yet to present the full data set from the Phase Ib, but we expect Transition or Lilly will publish in a medical journal, or present publicly, the results in the second half.

In connection with TTHI, PropThink has taken a long position.

Disclosure: I am long TTHI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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