Did Celgene’s Billion Dollar Deal With Juno Just Save The Biotech Bull Market?

30 Jun 2015 | Author: | No comments yet »

Celgene to Pay Juno $1 Billion as Part of 10-Year Collaboration.

The $1 billion drug development partnership biotech giant Celgene (CELG) unveiled yesterday with Juno Therapeutics (JUNO) is doing great things for investors in the fledgling drug maker, sending the stock soaring 20% in morning market action. Under terms of the agreement, Celgene will pay Juno $150 million in upfront fees, and purchase 9.1 million or $846.3 million of newly issued shares, in exchange for the certain options to market Juno’s experimental immunotherapy treatments. Many of the large fund systems that are invested in too-good-to-be-true Puerto Rican bonds are also invested in many household biotech and pharma companies. Add to the mix other headwinds coming out of both Europe (remember Lagarde just asked Yellen not to raise rates in a very public forum) and China’s market deterioration and consequent rate cut all indicate that we are in for some market turbulence. The companies will initially focus on treatments Juno is developing that involve genetically engineering immune-system warriors called T cells to attack tumors, a hot and fast-moving strategy that has shown promise in treating leukemia and other cancers of the blood.

Executives said the pact would combine strengths of both companies to speed development of such treatments and increase their presence in the broader race to develop cancer-immunotherapy treatments. “We are now in a stronger than ever position to become a leader in the cellular immunotherapy space,” Hans Bishop, Juno’s chief executive officer, told analysts in a conference call announcing the deal. “The collaboration also brings together unique and complementary strengths that promise to create a leader in immuno-oncology more broadly.” The agreement underscores growing interest in the bioengineered T cell technologies, which ramp up the power of the cells to see and attack tumors. A deal with Celgene, which is one of the largest biotechnology companies, could help Juno better compete with Novartis, the Swiss pharmaceutical giant, which is developing similar treatments, which are called chimeric antigen receptor T cells, or CAR-T.

Juno, based in Seattle, was launched just 19 months ago based on discoveries by scientists at Fred Hutchinson Cancer Research, Memorial Sloan Kettering Cancer Center and the Seattle Children’s Research Institute. But yesterday’s announcement by Celgene to invest $1 billion in Juno Therapeutics through a ten-year collaboration might just keep the biotech bull market running for a bit longer. Specifically, critics complain that it is unwise for Celgene to commit so much money up front for an unproven technology We think this deal will be hard to swallow for Celgene shareholders. Juno Therapeutics Inc. executives, employees, and their families gather for a photograph during the company’s initial public offering at the Nasdaq MarketSite in New York, U.S., on Friday, Dec. 19, 2014.

No such drug is approved for sale yet, but in small clinical trials the approach has led to some substantial remissions among patients with various blood cancers. “Celgene is the ideal partner for Juno to help us realize the full potential of our science and clinical research while maintaining the independence we, our employees, partners and investors believe is so critical for true innovation,” Hans Bishop, the chief executive of Juno, said in a statement. Juno doesn’t have any drugs on the market, but expects to launch a trial of a CAR T cell treatment in adult lymphoblastic leukemia at midyear that could lead to approval in the U.S., Mr. Celgene’s management are to be congratulated on the audacity of their deal making, but we expect investors to bridle at the company’s increasingly aggressive front-end loading of their transactions.

It is also known for entering into what some analysts see as generous deals with smaller companies for new drugs and technology, giving it access to a wide variety of potential approaches to treating cancer. Blue/Bloomberg Celgene is simultaneously being criticized by some and lauded by others for its decision to lock up the technology at early stage immunotherapy company Juno Therapeutics, but the deal is in Celgene’s best interest. Front end loading such terms defy good judgment in an industry known for its development failures and technological disappointments; CAR T has yet to be proven beyond the relatively narrow CD19 B cell malignancy arena and the clinical utility of the increasingly commonly pursued TCR technology alternative has not been proven. It remains possible that alternative approaches (such as the NIH’s individualized T cell therapy or off-the-shelf bispecific antibodies) could be more effective or easier to use than allogeneic T cell approaches. With several companies in the CAR-T space, including Kite Pharma and bluebird bio, any one of these companies could rise to threaten Celgene’s franchise, including Juno Therapeutics.

If one views the nearly 100% premium being paid for JUNO’s stock as a form of upfront payment, then Celgene is essentially paying ~$577MM (~$427MM in stock premium + $150MM in cash) to Juno while buying 10% of Juno’s stock at market price. Celgene, based in Summit, N.J., has been on a deal-making spree in recent years as the threat of generic competition to its biggest drug by revenue, Revlimid, has loomed larger. Given that Juno featured a ~$4B valuation (before the deal), and that Celgene’s ex-U.S. rights might represent ~50% of the WW value associated this pipeline, then Celgene’s payment does not appear particularly aggressive. Celgene derived nearly a third of its $7.67 billion in global sales last year from Revlimid, a blood-cancer treatment whose patents are being challenged by generic drug makers. Meanwhile, Celgene (1) could also enter a global profit sharing arrangement on up to three other candidates originating at Juno, (2) gains the right to nominate a Juno Board member, and (3) can increase its ownership to 30% by buying shares at a premium.

Rather than acquiring companies and potentially disrupting their discovery ecosystems, Celgene often makes investments in private or public companies through collaborations, thereby allowing teams to continue their work adequately resourced. As threats to Revlimid have grown, Celgene has undertaken an aggressive research and development strategy, entering partnerships with companies including Bluebird Bio Inc. and Agios Pharmaceuticals Inc., AGIO 1.22 % that have expertise in promising, if risky areas of biotechnology. Juno is up almost 57% since the company went public in December, dramatically beating the 15% gain by the Nasdaq Biotechnology Index during the same time span. In exchange, Celgene receives the added benefit of maintaining its core focus and keeping its balance sheets as lean as is possible for a $90 billion market company. By lending these companies its name and cash resources, banks and investors had a great deal more confidence entering into transactions with the Celgene targets.

Had Celgene simply acquired these companies outright, it would have caused delays in programs, distracted both Celgene and the target companies, and bogged down Celgene’s financials. Some analysts have said that investors have become overly enthusiastic about engineered T cells, given that the therapies can have severe side effects. What’s more likely to happen is a feeding frenzy as companies rush to announce partnerships with the first CAR-T immunotherapy company they meet who will accept a term sheet. Those shaking their heads at Celgene know that while Juno’s technology has shown incredible promise, there’s always the potential for a disproportionate amount of risk to reward in the biotech space.

Celgene is not known for being hostile in its business development pursuits, and the management and shareholders of a company like Juno would be unwilling to sell the company at $45 or even $85 a share given the valuations and stock price of many of its peers. By now Celgene has looked at hundreds of immune oncology plays from around the world, and it seems to have found what it wants in Juno, at least for now.

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