Bayer's Curious Acquisition Of Cancer Drug Maker Algeta

| About: Algeta ASA (ALGZF)
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Algeta ASA (OTC:ALGZF) in Oslo, Norway, announced on 19 December that its board approved the sale of the company for the equivalent of $2.9 billion to global pharmaceutical and chemical company Bayer AG (OTCPK:BAYRY). Algeta's lead product is Xofigo, a radium-based compound to treat late-stage prostate cancer that Bayer already licensed in 2009 and with whom Algeta partners in the drug's development and commercialization. News of the acquisition stressed Bayer's getting "outright control" of Xofigo through the acquisition, but a look at Algeta's technology suggests Bayer is getting more for its $2.9 billion than a single drug it already markets.

Investor snapshot

Bayer AG, based in Leverkusen, Germany, is a multi-national enterprise with sales in 2012 of €39.8 billion ($54.4 billion), an 8.8 percent increase over 2011. The company's net income of €2.5 billion ($3.4 billion) and earnings per share of €2.96 ($4.05) in 2012 were down slightly from 2011. Healthcare products, mainly pharmaceuticals, drive nearly half (47%) of Bayer's sales, with advanced materials (29%) and agricultural science products (21%) contributing most of the remainder. The company's share price rose steadily during the past 12 months from about $93.00 to $136.00 a share, with its closing price on 20 December near the high end at $136.05.

A combination of biology and physics

Algeta's Xofigo is a compound of radium-223 dichloride, an isotope of radium that emits alpha particles, high-energy radiation with a short range, yet powerful enough to kill cancer cells. Radium-223 has a half-life of 11.4 days, enough time to allow four weeks between doses, as well as remain active during industrial production and distribution.

The drug is intended for patients with advanced-stage prostate cancer, where the cancer spreads to the patient's bones and becomes castration resistant, and who have received treatments to lower testosterone that stimulates the spread of the cancer. Xofigo is administered through intravenous injections, and works by binding to minerals in bone tissue. Alpha particles from the drug target cancer cells and limit further spread of the cancer, but also limit damage to surrounding healthy tissue. Any radium-223 not taken up in the bones is emitted through the digestive system.

A late-stage clinical trial of Xofigo, testing the drug against a placebo in 809 patients with late-stage prostate cancer, showed patients taking the drug had a median survival time of 14 months compared to 11 months for those taking the placebo. The results of the trial prompted FDA to expedite its review and approval of the drug, which was granted in May 2013, three months ahead of schedule.

In its announcement of the Algeta acquisition, Bayer said the drug was among its top five new pharmaceutical products with a potential estimated sales of €1 billion per year. Nonetheless, the company's underlying technology may provide more long-lasting value to Bayer than Xofigo alone.

Prostate cancer is just one of type of cancer that spreads to bones, a process called bone metastasis. Breast cancer is another type where bone metastasis is common. In 2010-11, according to, Bayer and Algeta planned a clinical trial of a radium-223 compound with breast cancer patients having bone metastasis, but that trial has not yet begun.

More than bones

Algeta is working with another radioactive isotope, thorium-227, that also emits alpha particles. This program is in its early stages, according to Algeta, but already involves collaborations with the pharmaceutical company Sanofi (NYSE:SNY) and biotechnology firms Ablynx and Immunomedics.

Therapies made from thorium-227 will likely work in a different way to combat cancer than those derived from radium-223 and treat different forms of the disease. Algeta says its research, called targeted thorium conjugates, focuses on linking thorium-227 to single, specific antibodies, thus using the immune system to attack cancer cells. The collaboration with Immunomedics, for example, targets cancers of the blood, such as leukemia and lymphoma.

Cancer immunotherapy is a hot topic now in biotechnology and pharmaceuticals - noted by Science magazine as its breakthrough of 2013 - with many biotech and pharma companies working on cancer treatments that harness the body's immune system. In the announcement of the Bayer acquisition, Algeta's chairman Holst Annexstad said, "We are also pleased that Bayer intends to further invest in the potential of Algeta's targeted thorium conjugate research platform," which suggests Bayer has every intention of exploiting that technology, even if the field is getting crowded.

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.