Teva Pharmaceutical Industries (NYSE:TEVA) was almost certainly not the name OncoGenex Pharmaceuticals (NASDAQ:OGXI) investors had in mind as they waited for the Canadian company to deliver a much hyped deal over its lead oncology candidate, OGX-011.
Encouraging phase II data and the promise of a lucrative transaction propelled OncoGenex shares skyward earlier this year, but yesterday they came crashing back down amid disappointment over the deal terms and identity of the partner, which some have suggested casts aspersions on the quality of the asset. Still, whilst Teva might not currently be considered an A-list oncology name, the analysis below reveals that it does have a couple of novel compounds in development, and the move is certainly in line with recent comments from the Israeli generics giant regarding diversification. Assuming the drug is a success, in the long run this could well be considered a wise partnership.
The compound in question, OGX-011 or custirsen sodium, is an antisense molecule that works by blocking production of clusterin. This protein is produced in large quantities by many cancers in response to treatments such as chemotherapy and radiation, which help tumour cells to survive and proliferate. Teva and OncoGenex believe OGX-011 can be developed to target resistance to cancer treatments, and used as an adjunct therapy to enhance the effectiveness of chemotherapy.
Buying the rights will cost Teva $60m upfront, which includes a $10m equity investment struck at $37.38, a significant premium to OncoGenex’s share price prior to the deal, $29.70, and an even bigger premium now that the stock is trading at $21.
Regulatory and sales milestones could reach $370m, whilst tiered royalties range from the mid-teens to the mid-twenties. Teva is shouldering all the costs, while OncoGenex has an option to co-promote in the US and Canada.
Observers have found a few things to grumble about in these terms. First, they do not appear overly generous for a promising, phase III ready oncology candidate. Secondly, Isis Pharmaceuticals (NASDAQ:ISIS), the antisense specialist whose know-how was used to develop the molecule, will receive $10m of the upfront and is due a mid-single digit royalty from OncoGenex, further diminishing the value of the deal.
High risk product
These quibbles are certainly reasonable. However, at the end of the day, despite the stunning phase II results announced earlier this year OGX-011 remains a high risk product.
The results from a phase II study in men with advanced prostate cancer, which produced a 6.9 month survival benefit, were certainly impressive. But as EP Vantage pointed out earlier this year, the trial was small and the antisense field in general has yet to be widely validated, both clinically and commercially (OncoGenex defies gravity but can it clear the atmosphere?, October 7, 2009).
The most advanced antisense product in development, mipomersen, partnered by Isis with Genzyme (GENZ), is not exactly a poster child for the field, and there was always a risk that the antisense association would cap deal terms for OGX-011, and possibly even deter some partners.
Looking at it another way, investors’ expectations may well have been too high for this deal, and OncoGenex’s management could possibly have managed them better.
However, Teva is now in the driving seat, and this is not necessarily a bad thing. As the table below shows OGX-011 will become the flagship product in the company’s proprietary oncology pipeline, meaning it will certainly receive a lot of attention. As such, the product may well see far more R&D dollars come its way than if it was the high risk candidate in a bulging pipeline of cancer drugs within a big pharma company.
The programme laid out so far is ambitious and underlines that Teva is serious; two phase III trials are expected to start next year, in first and second-line chemotherapy in metastatic castrate resistant prostate cancer. In early 2011 there are plans for a study in first line advanced, unresectable non-small cell lung cancer.
Earlier this year, Teva reiterated its desire to grow its branded product offerings, and this is without doubt a step in that direction. The company is increasingly being linked with non-generic targets, such as Active Biotech, which has a prostate cancer compound that would fit nicely into a portfolio alongside OGX-011 (Active Biotech climbs the ranks as expectations surge, December 21, 2009).
As such, OncoGenex investors should reconsider their disappointment. Teva might not be the first name in mind when investors are waiting for a partner to be announced, but that mindset might well have to change.