Why Pay Royalties? Just Buy the Whole Company

Why Pay Royalties? Just Buy the Whole Company

A longer-living population is driving big investments in prostate cancer treatment -- to patients' benefit. The latest investment comes from Bayer , the drug manufacturing giant diligently building an oncology powerhouse around its Nexavar.

Bayer is building its franchise by partnering with small biotech firms with promising pipelines. It's a solid strategy because it allows Bayer to spread around the risk of developing new drugs. But those partnerships can become pricey when they're successful, especially in multibillion-dollar indications like prostate cancer.

And that's exactly what happened with Bayer's Norwegian partner Algeta ASA, whose Xofiga is set to compete against prostate cancer treatments including Medivation's Xtandi and Johnson & Johnson's Zytiga. As a result, Bayer is offering Algeta ASA $2.4 billion before it has to potentially shell out billions more in profit and royalties.

Locking up Xofigo
Prostate cancer is the second most common cancer behind skin cancer, according to the American Cancer Society. 238,590 men will be diagnosed with prostate cancer, and 29,720 will die from the disease in 2013, according to the National Cancer Institute.

As a result, there's a big market eager for new treatments, particularly in hard-to-treat cases like castration-resistant prostate cancer.

Algeta is the team behind Xofigo, a promising radiotherapy cancer treatment that won FDA approval for those tough cases in May -- three months ahead of schedule. The drug is designed to treat prostate cancer that has spread into patient's bones by targeting abnormal bone growth. In patients, a phase 3 trial of Xofigo improved overall survival to 14 months compared to 11.2 months for placebo.

Sales of Xofigo, which costs $70,000 for a full six-course treatment, began this year in the United States and totaled just $17 million in the third quarter. But those sales should climb as Bayer's marketing team gets busy following Xofigo's EU approval in November.

The two companies have been co-developing Xofigo since 2009, and the FDA and EU approvals put Bayer on the hook to split profit on sales of Xofigo in the United States, while paying royalties to Algeta on non-U.S. sales.

Adding up to big money
Bayer estimates that Xofigo and four other emerging drugs in its pipeline could generate as much as $7.5 billion in combined peak annual sales. That has analysts projecting Xofigo sales could reach $940 million by 2018, according to Thomson Reuters Pharma.

Bayer's bid for Algeta comes after Johnson & Johnson, who markets Zytiga as a treatment for castration-resistant prostate cancer, paid up to $1 billion earlier this year to buy Aragon Pharmaceuticals.

J&J took the leap to get a hold of Aragon's ARN-509, a second-generation version of Medivation's competing prostate cancer drug Xtandi Both Xtandi and ARN-509 were developed in the same lab at UCLA, and J&J believes the younger sibling will help insulate its Zytiga franchise.

Medivation is currently awaiting a decision from the FDA to expand Xtandi's label to include the coveted pre-chemotherapy indication. Currently, Zytiga is the only one of the new generation of drugs to boast that honor, an advantage its likely to lose. For this reason, J&J thinks the Aragon acquisition not only gives the company a potential successor when Zytiga loses patent protection in 2016, but a drug able to displace Xtandi over time.

Timing of the deal
Bayer would likely hope to wrap up a deal for Algeta sooner rather than later in order to avoid paying out milestones tied to EU approval and profit tied to growing sales in the U.S. Bayer handed over a $64.5 million milestone payment for U.S. approval in May. Algeta may prove a willing seller -- after some haggling -- since Algeta is splitting costs for U.S. commercialization. Those costs totaled $27 million in the third quarter. Handing over full commercialization to the much larger Bayer would also likely make Xofigo a bigger threat to Medivation and Johnson, something both Bayer and Algeta would welcome.

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The article Why Pay Royalties? Just Buy the Whole Company originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd also owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published