Biotech/Pharmaceuticals AstraZeneca Hopes Deals Add Up By Robert Steyer TheStreet.com Staff Reporter 12/28/2005 5:21 PM EST URL: http://www.thestreet.com/p/stocks/biotech/10259362.html

AstraZeneca (AZN:NYSE ADR) has signed a string of licensing deals in recent weeks, the latest coming Wednesday and involving a small privately held biotechnology company with an experimental compound for Alzheimer's disease.

The agreement was AstraZeneca's fourth this month. Although these arrangements lack the giant price tags of mergers and acquisitions, they illustrate the reality faced by Big Pharma companies that aren't developing enough homegrown products to offset existing or impending generic competition for big-selling drugs.

AstraZeneca's deal-making also has given the company added exposure to an experimental cancer treatment, a medication for hardening of the arteries and a drug designed to combat dangerous infections.

"The deals are complementary to AstraZeneca's current portfolio," Alexandra Hauber of Bear Stearns wrote in a Dec. 23 research report. The latest transaction, which came after the research note, involves Targacept of Winston-Salem, N.C.

"We think there may be more to come," says Hauber, in a report that proved prescient. All of this activity "signals that AstraZeneca is not for sale." Hauber has an underperform rating on the stock. The analyst doesn't own shares, but her firm has had a noninvestment banking relationship with the company.

Several setbacks in the marketplace, the regulatory process and the laboratory have prompted some U.S. and foreign analysts to speculate that AstraZeneca could be vulnerable to a giant European drugmaker, such as GlaxoSmithKline (GSK:NYSE ADR) . The Anglo-Swedish company has pushed back its application to the Food and Drug Administration for new drugs for diabetes and strokes by one year until 2007.

Still, the company produced a third-quarter report in October that exceeded analysts' estimates, leading AstraZeneca to raise its full-year earnings target to a range of $2.85 to $2.90 a share from $2.75. That was the second favorable revision in 2005.

Seeking Versatility

In the case of Targacept, which filed to go public in 2004 and withdrew its application in March 2005, the AstraZeneca collaboration could be worth $300 million in upfront payments, research financing and milestone payments. In addition, Targacept will receive royalties linked to sales.

Targacept is working on a compound called TC-1734. The company believes the compound could be a treatment for Alzheimer's and other cognitive disorders, including problems linked to schizophrenia. Targacept's research focuses on neuronal nicotinic receptors, which are found on nerve cells throughout the nervous system and help regulate activity.

The AstraZeneca-Targacept agreement must be approved by the Federal Trade Commission. When that happens, the companies will begin their four-year research collaboration. AstraZeneca will finance additional safety and other tests to determine if the product will move on to the second of three stages of clinical trials needed for regulatory approval.

Targacept is conducting a Phase II clinical trial of TC-1734 as a treatment for age-associated memory impairment, and it will complete this study on its own. Targacept sells one product, Inversine for high blood pressure, and it has a depression drug in phase II clinical testing and a pain medication in phase I studies.

The biggest of AstraZeneca's recent deals was a Dec. 22 licensing pact with AtheroGenics (AGIX:Nasdaq) for the Atlanta-based biotech company's experimental drug AGI-1067, a product designed to fight the buildup of fat and calcium in arteries. The deal ultimately could be worth $1 billion, excluding royalties on sales. AstraZeneca is paying $50 million upfront.

AstraZeneca is joining AtheroGenics late in the clinical trial testing of its drug. Analysts say the key to success of AGI-1067 will be next year's release of the results from a clinical trial nicknamed ARISE. The study is comparing patients receiving the experimental drug plus standard therapies vs. patients receiving standard therapies and a placebo.

More than 6,000 heart disease patients are being evaluated in more than 250 medical centers in the U.S., Canada, U.K. and South Africa.

"Although we believe the chance of success is below 50%, we have increased by 10% the probability that ARISE will hit its primary endpoint," says Seamus Fernandez of SG Cowen in a Dec. 23 research report. "On the positive side, AstraZeneca has seen all of the AGI-1067 data and signed a $50-million check."

The $50 million represents less than 2% of AstraZeneca's R&D budget for 2004, and AtheroGenics gets no additional funds until the ARISE results, says Fernandez, who believes AtheroGenics' fair value will remain in the low $20-per-share range until the trial's results are published. AtheroGenics stock jumped nearly 20% to $19.74 on the day the deal was announced.

If ARISE succeeds, AGI-1067 could produce sales of $970 million in 2009 and $1.43 billion in 2010, Fernandez says. His firm doesn't give stock ratings, and he doesn't own shares.

Kudos

A day after announcing the agreement with AtheroGenics, AstraZeneca said it bought the private U.K. company KuDOS Pharmaceuticals for $210 million. The deal should close in early 2006. KuDOS is trying to develop drugs called DNA repair inhibitors that kill cancer cells as a single therapy or act with chemotherapy or radiation to kill cancer cells.

Almost lost in the flurry of late December transactions was the Dec. 8 announcement that AstraZeneca had licensed CytoFab, an experimental treatment for sepsis being developed by Protherics (PTIL:Nasdaq ADR) , a British biotechnology company.

Sepsis is a dangerous and potentially fatal condition caused by severe infections. AstraZeneca says about one-third of patients with severe sepsis die from organ failure. The company says some 3 million people a year are affected by sepsis.

The only sepsis drug on the market is Xigris from Eli Lilly (LLY:NYSE) . AstraZeneca plans to start a phase III trial in the U.S. and European Union in 2007.

Excluding royalties, AstraZeneca could pay Protherics about $340 million, including acquiring 4.3% of the company's shares.

AstraZeneca's stock hasn't moved much since it closed at $46.65 on Dec. 7, the day before the deal-making announcements began. It closed Wednesday at $48.85. Still, the stock is up more than 34% for the year.

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