Friday, July 10, 2009

What's a Biodollar Worth? Let's Ask Vertex

Vertex announced this morning that it intended to sell (to an unnamed buyer) its future milestone payments associated with the filing, approval and launch of telaprevir in Europe.

Those milestones would be paid out by J&J, which licensed European rights to the HCV protease inhibitor from Vertex in 2006, and could total $250 million: $100 million for filing and approval of the molecule, $150 million for launch. (It's not clear how these break down--launch in heterogeneous Europe is obviously different than launch in the US, for example.)

But what are they worth right now? Vertex isn't saying yet, but sooner or later we'll get another datapoint to help us determine the elusive dollar-to-biodollar exchange rate.

Of course telaprevir isn't an early stage molecule; it's in Phase III trials and predicted to be the first HCV protease inhibitor on the market. So the value of biodollars associated with telaprevir is going to be much different than the value of those associated with earlier-stage alliances. But there remains an element of risk, to be sure. Even promising Phase III drugs implode from time to time.

Vertex has demonstrated a flexible financing strategy over the past couple years. Last year the company netted $160 million from the sale of its royalty stream on the HIV therapies it co-discovered with GSK. And in between the royalty sale and today's announcement Vertex raised some $540 million through equity offerings; clearly the company doesn't have trouble bringing in cash through more traditional means.

So why monetize the JNJ milestones now? Because drug development is damn expensive, and even for a company like Vertex, cash is king.

At the end of the first quarter the company had about $870 million in cash and nearly $300 million in debt (about half of which it has since converted to common stock). But it also burns through cash pretty quickly, and by our back-of-the-envelop calculation that's lately to the tune of about than $125 million in the average quarter, and that's without expenses related to the acquisition of ViroChem or any other deal Vertex wants to pursue. So until telaprevir sales start coming in, even a net cash position of more than $600 million won't last the company very long.

The math isn't our strong suit and we'll update if and when we hear back from Vertex.

UPDATE: No official word from Vertex but we think our rough calculation is in the right ballpark. We should also note that this isn't a done deal, and when it does close we'll be able to see for ourselves the current value of these future milestones.

Forbes' Matt Herper brings up an interesting point on his twitter feed, and we think he's only half facetious: Will, he asks, the Vertex deal lead to hot trading in biobucks derivatives?

We think though it's certainly possible this isn't the last milestone monetization deal we'll see (and probably isn't the first either, though can't think of any off the top of our heads) it's hard to imagine that the royalty and synthetic royalty buyers--who would be the logical buyers here too--would allow the mission creep into the earlier and riskier development stages that would make any serious market possible. Those guys get edgy buying future royalties for registration-staged projects, much less Phase III or even earlier. That risk would mean seriously low prices paid for most milestone packages. Sure we may see a few more telaprevir-style deals, but that's probably it.

We could be wrong. What do you think?

image from flickr user tadson used under a creative commons license.

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