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J&J Inks New Research Pact

On the same day that it agreed to spend $16.6 billion for Pfizer's (PFE - Get Report) nonprescription drugs and consumer products, Johnson & Johnson (JNJ - Get Report) made a more modest investment to develop experimental prescription treatments for diabetes and obesity.

The deal with privately held Metabolex of Hayward, Calif., was overshadowed by the Pfizer transaction , but it serves as another example of how big drug companies look outside their laboratories for potential prescription products.

Although prescription drugs account for the biggest portion of J&J's sales, Wall Street has become worried about future growth for a division that contributed 44% of corporate revenue last year.

"The biggest risks to our overweight rating relates to competition for key branded pharmaceuticals and/or meaningful delay to important pipeline projects," says Michael Weinstein of JP Morgan in a research report. He doesn't own shares, but his firm has had a recent investment-banking relationship.

The agreement with Metabolex calls for J&J to pay $40 million up front in equity and convertible financing, plus as much as an extra $508 million depending on certain research and sales goals.

The companies will collaborate on two Metabolex products now in clinical trials, as well as unnamed products for which J&J gets an exclusive worldwide license.

Metabolex is trying to develop drugs that enable the body to better process insulin and reduce the side effects, such as weight gain and fluid build-up, that characterize existing drugs. In addition, Metabolex will get an exclusive license to a J&J diabetes drug, which has completed early-stage clinical testing, and an experimental J&J obesity drug.

The J&J agreement "provides us with financial resources and clinical development and commercial expertise, while allowing us to lead clinical development of our two lead product candidates," said Harold E. Van Wart, president and CEO of Metabolex, in a prepared statement.

"Metabolex's expertise and portfolio of potential high-value product candidates for metabolic diseases make it an ideal fit for our strategy of collaborating with best-in-class companies," said Dr. Garry Neil group president for J&J's pharmaceutical research and development.

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