The Deal: Royalty Pharma Buys Quest Drug Rights For $485M

NEW YORK ( The Deal) -- Lab test provider Quest Diagnostics Inc. ( DGX) has made another deal in its ongoing effort to sell off assets that don't fit its new core business strategy, this time selling royalty rights for the drug ibrutinib to RP Management LLC, which is known as Royalty Pharma.

Quest said Thursday that Royalty is paying $485 million cash for the payment stream from ibrutinib, a cancer drug being developed by Pharmacyclics Inc. ( PCYC) and Johnson & Johnson's ( JNJ) biologics unit Janssen. Madison, N.J.-based Quest obtained the royalties for the drug in its purchase of gene-based diagnostics company Celera Corp.

Quest bought Celera for $657 million in 2011 to further its growth strategy at the time to become a leader in esoteric and gene-based testing for cancer, cardiovascular disease, infectious disease and neurological disorders. At the time of the sale, Celera CEO Kathy Ordonez said her company's "discovery and validation of new biomarkers exceeded our capacity to commercialize them."

Then Quest was hit hard in the interim by lower healthcare utilization and reductions in reimbursement. In May 2012, Quest named a new CEO, Stephen Rusckowski. While contemplating its strategy turnaround, the company also felt the sting of Hurricane Sandy, which cut fourth-quarter 2012 revenue by $21 million.

In November, Rusckowski said he was refocusing the company's business on diagnostic information systems to drive shareholder value and restore growth. Quest has been adhering to that strategy and selling off assets that don't dovetail with it. It also has a new senior management team in place.

Quest sold HemoCue AB in February for about $300 million, six years after acquiring it to help the company expand globally. HemoCue, which provides hemoglobin, glucose and other testing systems worldwide, brought roughly $120 million less than what Quest paid for it in 2007. Quest sold it to Danaher Corp. unit Radio-meter Medical ApS.

In a Thursday conference call with investors, Rusckowski said, "We saw continued revenue softness in the second quarter compared to the prior year." This year, he said "is a building year; we are making good progress executing our five-point strategy and we expect stronger performance in the second half."

Quest will use the roughly $300 million net from the ibrutinib royalty sale to repurchase shares. It repurchased $405 million in shares during the second quarter, bringing year to date share repurchases to $467 million.

Royalty Pharma could see revenue from ibrutinib next year. Pharmacyclics filed ibrutinib's new drug application with the Food and Drug Administration on July 10, so its approval could come in early 2014. Ibrutinib is an investigational oral Bruton's tyrosine kinase inhibitor. The company is seeking approval for two indications in relapsed/refractory B-cell malignancy -- mantle cell lymphoma and chronic lymphocytic leukemia/small lymphocytic lymphoma.

Ibrutinib received FDA "breakthrough therapy" designations for all three indications. The designation allows drug sponsors more intensive FDA guidance on an efficient drug development program and access to FDA senior managers and review officials during the review.

Written by Pamela Taulbee

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