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Abbott Labs Inks $1.35 Billion Biotech Deal

Stocks in this article: ABT

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) -- Abbott Labs (ABT) recently announced a $1.35 billion deal with Belgian drug developer Galapagos to develop and commercialize an oral JAK1 inhibitor in Phase II development to treat autoimmune diseases, including rheumatoid arthritis.

The company has also entered a deal with University of North Texas science center for human identification testing. The deals will strengthen Abbott's foothold in autoimmune and diagnostics market. Our price estimate for Abbott Labs stands at $62, implying a premium of about 10% to the current market price.

See Full Analysis for Abbott Labs here.

Abbott's Humira, one of the world's largest selling drugs and a leader for treatment of rheumatoid arthritis, is likely to face competition from other oral JAK inhibitors including Pfizer's tofacitinib, if they manage to get U.S. regulatory approvals. Humira is a TNF inhibitor and is injected in the body.

In addition, Humira with lose its U. S. patent protection at the end of 2016. The collaboration will give Abbott a channel fend off new entrants and help it retain its market leader position in autoimmune market.

The autoimmune segment constitutes nearly 20% of our price estimate for the company. Accordingly, any substantial progress towards development of new oral JAK1 inhibitor drug could impact our estimate of the company's value.

Abbott will have to shell out approximately $1.35 billion including an initial payment of $150 million for the global rights. Upon the successful completion of the Phase II studies and meeting certain pre-agreed criteria, Abbott will license the drug for $200 million and will take responsibility of further testing and development.

Galapagos would also be eligible to receive additional milestone payments up to $1 billion in addition to tiered double-digit royalties on net sales, once the drug receives final regulatory approvals and upon commercialization. However, Galapagos will retain co-promotion rights in Belgium, the Netherlands and Luxembourg.

The company has entered into an agreement with the University of North Texas Science Center, one of the leading forensics institutions, to evaluate and promote the company's PLEX-ID instrument for use in analyzing human remains to support missing persons and human trafficking investigations. The collaboration may help Abbott strengthen its position in molecular and in-vitro diagnostics market.

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