Johnson & Johnson Acquires Another Likely Blockbuster

| About: Johnson & (JNJ)

Johnson & Johnson (NYSE:JNJ) is buying Aragon Pharmaceuticals, Inc., a San Diego-based, privately-held company to acquire its innovative prostate cancer drug, now in Phase 2 trials. ARN-509 is a second generation androgen receptor signaling inhibitor aimed at patients suffering from castration-resistant prostate cancer.

Johnson & Johnson will make an upfront cash payment of $650 million, plus milestone payments of up to $350 million. The transaction is expected to close in the third quarter of 2013. All of Aragon's assets other than the androgen antagonist program will be transferred to a spinoff company in which J&J has no interest.


Aragon's ARN-509 is expected to compete with Medivation (NASDAQ:MDVN) and Astellas' approved Xtandi. J&J's purchase of Aragon is a blow to Medivation, which is suing Aragon and the University of California over ownership rights to the new drug. Research done in the UCLA labs of Charles Sawyers and Michael Jung led to the development of both Medivation's Xtandi and ARN-509.

The UC Regents had originally licensed the rights to the molecules used in creating Xtandi to Medivation. But a few years later the UCLA researchers developed two new molecules, A51 and A52, which the university patented without disclosing their existence to Medivation. In 2009, UCLA licensed them to venture capital funded Aragon in San Diego. When Medivation found out about the patents in 2011, it sued Aragon and the UC Regents. Last December a court decided that Aragon had the right to the compounds and UCLA had done nothing wrong.

Medivation's SEC 8-K filing reveals that the company filed an appeal on April 15, 2013. The process will most likely take 12-18 months, so a California Court of Appeals decision is not expected until sometime in 2014. There is also ongoing litigation between the University of California and Medivation over whether the company has to make royalty payments to the University when it receives commercial milestone payments from Astellas. A trial on this issue is scheduled for July 2013. Another trial over Medivation's allegations of fraud against Dr Jung is set to start in October 2013.

Anti-androgen drugs

Approximately one in every six American men will be diagnosed with prostate cancer during his lifetime and 29,000 men die annually from the disease. Typical treatments aimed at eradicating the tumor, like surgery or radiation, are unsuccessful in 30 percent of men. Metastatic castration-resistant prostate cancer means the cancer has spread beyond the prostate to other parts of the body and surgery is not an option anymore. One possibility still open at this point is reducing or eliminating the volume of androgens produced by the body. Androgens are hormones, such as testosterone, that are important for normal male sexual development. Anti-androgen drugs such as Lupron can stop the testicles from making androgens, but other cells in the body, including prostate cancer cells themselves, can still make small amounts that may fuel cancer growth.

Johnson & Johnson's Zytiga blocks an enzyme called CYP17, which helps stop these cells from making certain hormones, including androgens. Zytiga has been shown to shrink or slow the growth of some of these tumors in men with advanced castrate-resistant prostate cancer and help them to live longer. Medivation's Xtandi uses a different idea. In order to affect prostate cancer cells, Androgens have to bind to a protein in the cells called the androgen receptor (AR). The receptor then sends a signal to the cells instructing them to grow and divide. Xtandi blocks this signal from the androgen receptor to the cell.

ARN-509 is a more advanced version of that. J&J's acquisition of Aragon suggests that it considers this the best in class of the second-generation androgen receptor inhibitors in development. There are certainly others that J&J could have acquired or licensed, like ODM-201 or Tokai's galeterone. ODM-201 is being developed by a Finnish company, Orion Pharma in partnership with Endo Pharmaceuticals (NASDAQ:ENDP). Privately held Tokai Pharmaceuticals' galeterone originates from the research of Angela Brodie and Vincent Njar at the University of Maryland. Brodie is best known for her work with aromatase inhibitors, which are now commonly used for the treatment of breast cancer.

J&J's choice of ARN-509 is not good news for other companies with AR antagonists in early-stage development, because the choice means that J&J thinks Aragon's idea is the best around and because J&J has the financial muscle to make it a success.

Is ARN-509 potentially better than Xtandi?

In an interview the inventor, Dr Charles Sawyers noted that ARN-509 is "more potent" than Xtandi and "might produce a higher percentage of responders or a longer duration of response." Also, ARN-509 will allow J&J to compete in earlier stages of prostate cancer with a drug that does not require the use of steroids, which has been a problem for Zytiga in treating pre-chemotherapy patients.

Competition over pricing might also arise. At a cost of $7,450 a month, Xtandi is considerably more expensive than Zytiga, which costs around $5,500 per month. This aggressive premium pricing strategy opens the door to competitors, such as ARN-509, who may offer equally effective, but less expensive drugs.

Investor's summary

In its first full year on the market, 2012, J&J's Zytiga generated revenue of $961 million, which makes it a "near blockbuster." (Drugs are considered blockbusters above $1 billion in sales). Zytiga is one of the most successful oncology drug launches in history. It is now approved in 65 countries and has helped a huge number of men everywhere. Because Zytiga's formula, abiraterone acetate was unused for a long time after its discovery, the patent is scheduled to expire soon.

The patent was applied for some 20 years ago by researchers at the Institute of Cancer Research in England but was neglected for many years. Interest in it was practically non-existent until some sharp investigators like Dr. Peter Nelson and his colleagues at the Fred Hutchinson Cancer Research Center discovered a unique property of the drug: it lowers testosterone levels inside the prostate tumor itself by preventing cancer cells from churning out the hormone, as opposed to simply lowering adrenal-gland produced testosterone circulating in the blood. This makes a big difference and drew the attention of Big Pharma.

But success came a little late in the life of the patent. Zytiga's U.S. patents for drug substance and product expire in February 2014 and for New Chemical Entity in April 2016. This puts pressure on JNJ to find a successor and ARN-509 seems to fit the bill. J&J has the resources and expertise to fund the large Phase 3 clinical trials that are needed, not only for the drugs used in the treatment of prostate cancer, but potentially also in breast cancer.

This acquisition also implies that Johnson & Johnson's lawyers do not think Medivation's appeal over intellectual property rights is too strong or too difficult to handle. In any case, Medivation won't feel the heat from ARN-509 in the treatment of prostate cancer for at least a few years. Time-consuming registration trials need to be completed that show the drug works against the current standard of care with equally good or better survival benefit. The comparison drug used in the trials will most likely be J&J's own Zytiga.

Peter F. Lebowitz, M.D., oncology executive with Janssen Research & Development (a J&J company) said:

"The acquisition of Aragon further enhances our leadership in prostate cancer drug development. ARN-509 complements Zytiga and provides the potential for exciting, novel approaches to treating prostate cancer patients. Prostate cancer is one of our main areas of focus, and we are pleased to be adding ARN-509 to our portfolio."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.