Celgene reaches into deep pockets again

Enticed by tumor drug, Celgene acquires Abraxis BioScience for nearly $3 billion upfront and up to $650 million if certain goals are met

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SUMMIT, N.J.—Since announcing their $3 billion-plus acquisition deal on June 30, biopharmaceutical company Celgene Corp. and Los Angeles-based biotechnology firm Abraxis BioScience Inc. have gone dark on the details of the deal pending its finalization, but that hasn't stopped newswires from lighting up or shareholders and analysts from dissecting the financial terms of the blockbuster agreement.

Notably, this acquisition offer is Celgene's second high-figure deal of the year, as the company announced in January its acquisition of Gloucester Pharmaceuticals, a privately held biotechnology firm based in Cambridge, Mass., for $340 million in cash plus $300 million in future U.S. and international regulatory milestone payments.

Intended to accelerate Celgene's strategy to become a global leader in oncology, this latest transaction adds ABRAXANE, Abraxis' metastatic breast cancer treatment drug, as well as a nanoparticle albumin bound (nab) technology that leverages albumin nanoparticles for delivery of chemotherapeutics to tumors, to Celgene's portfolio of cancer products.

ABRAXANE was approved in January 2005 by the U.S. Food and Drug Administration (FDA) for the treatment of breast cancer after failure of combination chemotherapy for metastatic disease or relapse within six months of adjuvant chemotherapy. The chemotherapy compound was also approved by the European Medicines Agency in January 2008 for a similar indication. Additionally, ABRAXANE has received orphan drug designation for stage IIB-IV melanoma and pancreatic cancer.

Abraxis' nab-driven chemotherapy penetrates the blood-stroma barrier to reach the tumor cell. Its proposed mechanism of delivery is thought to target a previously unrecognized, tumor-activated, albumin-specific biologic pathway with a nanoshell of the human blood protein albumin. This nano-shuttle system is believed to activate an albumin-specific (Gp60) receptor-mediated transcytosis path through the cell wall of proliferating tumor cells, using caveolin-1 activated caveolar transport. Once in the stromal micro-environment, the albumin-bound drug may be preferentially localized by a second albumin-specific binding protein, SPARC, a protein secreted into the stroma by tumor cells. According to Abraxis, the resulting collapse of stroma surrounding the tumor cell may thus enhance the delivery of the nab-chemotherapeutic to the intracellular core of the tumor cell itself.

The terms of the acquisition offer are directly tied to the potential commercial opportunity of both of these assets. An upfront payment valuing Abraxis at approximately $2.9 billion is accompanied by several cash milestone payments: $250 million upon FDA approval of ABRAXANE for non-small cell lung cancer with a progression-free survival claim; $300 million upon FDA approval of ABRAXANE for pancreatic cancer; $100 million upon FDA approval of ABRAXANE for pancreatic cancer by April 1, 2013; and finally, an unspecified amount of potential cash royalty payments upon achievement of certain ABRAXANE and nab-pipeline products net revenue thresholds.

Celgene CEO Bob Hugin said in a statement announcing the deal that the company sees great opportunity "to leverage our clinical, regulatory and commercial capabilities to provide metastatic breast cancer patients with an innovative treatment in ABRAXANE" as well as the potential of the compound "to treat additional solid tumor malignancies such as non-small cell lung and pancreatic cancer."

"The potential of nab-based therapeutics developed by Abraxis, coupled with Celgene's innovative science, offers the potential to deliver long-term value to patients, doctors and all of our stakeholders," Hugin added.

Dr. Patrick Soon-Shiong, executive chairman of Abraxis, said in a statement that the company's nab technology platform "is changing the treatment paradigm for difficult-to-treat cancers." Soon-Shiong added, "in Celgene, we have found the ideal partner to further expand the reach of ABRAXANE and our other treatments, in order to improve the lives of patients worldwide."

Some Abraxis investors, however, are not quite as enthusiastic. Within 24 hours of the acquisition offer announcement, a lawsuit was filed on behalf of Abraxis shareholders, alleging that members of the company's board of directors breached their fiduciary duty for failing to adequately shop for fair offers and selling Abraxis too cheaply. Under the terms of the agreement, each share of Abraxis BioScience common stock will be converted into the right to receive an upfront payment of $58 in cash and 0.2617 shares of Celgene common stock.

Pending the outcome of this litigation and regulatory and other customary approvals, the transaction will close in the fourth quarter.

The value of the deal—which is deemed either very high or too low, depending on whom you ask—was the subject of much analyst discussion in July.

The Wall Street Journal's John Jannarone noted that Celgene's shares fell 5 percent after the deal was announced, and warned that investors should consider whether Celgene is drifting in the direction of Gilead Sciences, which now trades at 8.9 times next year's earnings because of fears over looming patent expirations, generic competition and uncertain prospects for internal product development.

"In the near term, Celgene's prospects are brighter than Gilead's," Jannorone concedes. "Analysts expect Celgene's revenue to grow 16 percent next year, compared with 7 percent for Gilead." But he cautions, "Abraxane in itself doesn't solve Celgene's eventual patent problem. And unless the drug is approved for new uses in coming years, the deal will probably leave Celgene worse off because of the high price."

Brett Skolnik, head of healthcare mergers and acquisitions for BMO Capital Markets, noted that the deal is structured to allow both the buyer and seller to share the risks related to drug development. Milestones also encourage buyer and seller to look beyond the merger, making it more likely the deal will be beneficial to both sides in the long term, Skolnik told Reuters.

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