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On September 24, 2013, AbbVie (ABBV) signed the $405 million global alliance with Galapagos (OTCPK:GLPYY) to develop and commercialize its oral drug to treat main mutations in cystic fibrosis, or CF. This is an inherited chronic disease that primarily affects the lungs, pancreas, liver, and intestine.

In this alliance, AbbVie will identify the compounds that help in correcting the defects (correctors) and enhancing the activity (potentiators) of two mutations, G551D and F508del, in cystic fibrosis transmembrane regulator, or CFTR. The CFTR is a protein that helps in transferring chloride ions across cell membranes.

Around 90% of CF patients carry F508del mutation that results in defective CFTR protein foldings and processing in the endoplasmic reticulum, leading to a reduction of CFTR at the cell surface. G551D accounts for 4%-5% cases of CF and is the third most common CF-related mutation. The success in these developments will enable both companies to establish their footprint in the CF drug market.

Partnership Details

In this partnership, both companies will develop potentiators and correctors, which were discovered by Galapagos. This will further expand the efficiency of molecules, and the partnership will commence its trial phase I study by the end of 2014. Galapagos will receive the initial upfront payment of $45 million from AbbVie to develop this drug from preclinical trial to the end of phase II. AbbVie will be responsible for commercial activities and both the companies will share responsibilities and fundings for phase III trials. AbbVie will co-promote this drug in Belgium, the Netherlands, and Luxembourg, while Galapagos will retain exclusive rights in China and Korea.

Additionally, Galapagos will also receive a total milestone payment of $360 million, related to achievements in development and regulatory milestones. The company is eligible for double-digit royalty payments on achieving minimum sales milestones.

AbbVie expertise

AbbVie's deeper understanding of molecules and its expertise in identifying and developing the molecules will help it develop this drug more effective with strong potentiators and correctors ability. With its vast experience, it will look after the safety and efficacy of this molecule and is responsible for development related to phase III trial study. It will also follow the process required for the regulatory approval for this drug. AbbVie's past experience marketing "Creon", the delayed-release capsules of pancreatic enzyme to improve CF patients' food digestion, will provide an opportunity to the company to grab a significant portion of the CF drug market with its new drug.

According to GlobalData, the CF drug market across the U.K., France, Germany, Italy, Spain, and the U.S. is expected to grow at the CAGR of 31.9% to $4.6 billion by 2017 from $1.2 billion in 2012.

The partnership will enhance the abilities of this molecule and is expected to compete against Vertex Pharmaceuticals' (VRTX) "Kalydeco" and Novartis' "Tobi". The successful development and commercialization of this new drug by AbbVie and Galapagos will help it grab a significant CF drug market share.

Another deal

On May 17, 2013, to maintain its leading position in Rheumatoid arthritis, or RA, AbbVie entered the worldwide license agreement with Galapagos. Abbvie will develop Galapagos GLPG0634, JAK1 inhibitor, for the treatment of RA and Crohn's disease, an inflammatory disease. JAK1 inhibitor is an enzyme with immune-modulating effects that helps in treating inflammatory autoimmune diseases. Galapagos acquired the rights of GLPG0634 from GlaxoSmithKline after the end of their arthritis alliance.

In this deal, Galapagos is funded by AbbVie to complete the phase II trial for Crohn's disease, and AbbVie will pay $50 million on its successful completion, which is expected by the second quarter of 2015. AbbVie has experience developing the world's top selling RA drug, "Humira," that has generated revenue of around $4.85 billion in the first half of 2013. AbbVie's expertise will help it in developing GLPG0634, which is currently under phase IIb study for RA, and it is about to enter phase II studies of Crohn's disease. AbbVie will be responsible for developing and advancing this drug after phase IIb for Crohn's disease and phase III responsibility for RA.

Crohn's disease is a serious chronic inflammatory autoimmune disease that affects millions of people globally. Around one million people are suffering in Europe and more than 500,000 people are suffering in the U.S. We expect this will provide the companies with opportunities in Crohn's disease, which would enhance their future revenue.

With these two deals, Galapagos has raised its 2013 guidance of cash balance to $200 million from $160 million and has kept its revenue guidance intact at $256 million for 2013. We expect the agreements between the companies will deepen their relationship and exchange their knowledge and expertise in developing these two drugs more efficient to treat the patients with complete safety.

Competitors in CF

Vertex's Kalydeco was approved by the FDA in January 2012, and it received approval in Europe in July 2012 for the treatment of G551D mutation. Due to Kalydeco's efficacy in treating people with G551 mutation, it generated revenue of around $161 million in the first half of this year, with year-over-year revenue growth of more than 150%.

On September 30, 2013, Vertex submitted a Supplemental New Drug Application, or sNDA, to the FDA for the approval of Kalydeco monotherapy for patients with non-G551D gating mutations. Additionally, Vertex will submit the Marketing Authorization Application, or MAA, variation in Europe by the end of October 2013 for treating patients with at least one non-G551D gating mutation.

Recently, with the aim of treating patients with F508del, the second type of CF mutation, Vertex initiated the phase III trial of another CF drug, "Lumacaftor". It has enrolled people with the F508del mutation under the TRAFFIC and TRANSPORT phase III study of Lumacaftor in combination with Kalydeco. The results of this phase III trial are expected in the middle of 2014. It is also planning to submit a NDA in the U.S. and MAA in Europe by the second half of 2014 for this combination. We believe, with the acceptance by the regulatory bodies, Vertex has a strong scope to treat patients with both types of mutation, G551D and F508del, and Kalydeco is expected to contribute significantly to the company's revenue and earnings in the future.

Conclusion

AbbVie has partnered with Galapagos for developing and commercializing CF, RA, and Crohn's diseases drugs, which will enable it to tap the opportunities present in these drugs' markets. With its expertise in developing the drugs, AbbVie will expand and strengthen its drug pipeline. It has also raised the lower side of 2013 diluted EPS guidance from $3.03-$3.13 to $3.07-$3.13.

Further, AbbVie is trailing at the PE multiple of 14.8 compared to the industry's PE of 15.8, which shows that its stock is currently trailing at its intrinsic value. Moreover, we expect the positive indications in the trial phase studies will result in a meaningful rise in AbbVie's stock price. It can be considered as a good buying opportunity for investors in the long run.

Source: AbbVie: Can New Ventures Fuel Its Growth?

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Satya Prakash, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.