DotW: On the Front Burner

It's one of life's great ironies that the minute children head back to school, the mercury soars. It isn't just the temperature that's heating up, however.

The tepid deal-making climate of recent weeks came to a slow boil this week with Dainippon Sumitomo showing the Japanese aren't afraid to pay a bundle to build a presence in the U.S. market (see below). Too bad the seventh largest Japanese drug maker is late to that party--Takeda, Eisai, and Shionogi get bragging rights for being early adopters.

DxS continued to get in on the companion diagnostics action, with a tie-up with Lilly's ImClone division for a diagnostic test for Erbitux. Talk about serial monetization--DxS has partnered with nearly every developer of an EGFR inhibitor, from AstraZeneca to Boehringer Ingelheim to Amgen. Will the company's strategy work? The debate over business models for companion diagnostics rages on...

So, too, does the ongoing debate over health care reform. (It never did get back burnered, did it?)

Congress won't be back in session until next Tuesday but already President Obama is stirring the pot with an address on the hill set for next week. It's likely to be the most important speech of the Prez's career to date--his honeymoon lasted a little bit longer than 100 days, but poll numbers show he's got some work to do, especially on the health care front.

Meantime things are heating up between Biogen and Elan. In a surprise ruling yesterday, Judge Deborah Batts ruled in Biogen's favor, giving Elan just 23 days to sort out some new deal with J&J that doesn't infringe on the two biotech's change-of-control provision for Tysabri. (Note to Elan's CEO Kelly Martin: good luck with that. And fear not, if things don't work out, there's always a nice "no deal of the week" write-up as compensation.)

Like health care reform, swine flu never really got off the front burner either. It may not count as a four letter word (yet)--unless you are Miss Piggy--but if you need a refresher on proper "H1N1 etiquette" Elmo's your guy--er, muppet.

We hope the three day weekend provides a chance to cool down. Until then, here's another edition of

Dainippon Sumitomo/Sepracor: Stop the presses! Another Japanese pharma wakes up to the challenges of selling in its home market and wants to diversify, buying a toe-hold in the U.S. In 2007 Eisai got the ball rolling with its acquistion of MGI Pharma; last year saw the billion dollar deals by Takeda (Millennium) and Shionogi (Sciele). Now it's the turn of Japan's seventh largest drugmaker, Dainippon, which officially announced Sept. 3, it was buying specialty pharmaceutical player Sepracor in a deal worth $2.6 billion. At $23-a-share, Dainippon's cash offer represents a 27.6 percent premium over Sepracor's Sept. 1 closing price of $18.03. The deal gives Dainippon a portfolio of marketed and pipeline medicines, including the sleep aid Lunesta (don't forget the moth!), the asthma medicine Xopenex, and anti-epileptic Stedessa, which is under review at the FDA. Perhaps more importantly, the deal also provides Dainippon with a ready-made commercial group, including 1,200 sales reps and an experienced regulatory team. That's important because the Japanese pharma is in the throes of preparing an NDA filing for its novel schizophrenia drug lurasidone. Phase III data released in August showed lurasidone was significantly more effective than placebo in treating schizophrenia with similar effects on weight and total cholesterol. But the anti-psychotic market is crowded, and positive data alone will not be enough to grab market share, especially come 2011 when Eli Lilly's Zyprexa is scheduled to go generic.

Leo Pharma/Peplin: The privately-held Danish firm Leo Pharma scooped up the Aussie turned U.S. biotech this week in a deal worth about $287.5 million in cash. It's proof yet again that medical dermatology has gotten under the skin of at least some biopharma cos. (Want other proof? Think GSK/Stiefel Labs. On a much smaller scale 10-year-old SkinMedica sold two derm assets this week to Bayer for an undisclosed price) In the case of Peplin, the purchase price, which involves a CHESS Depository Interest (hey, it's still partly Australian), amounts to a 72% premium to the company's Aug. 31 close of A$0.60. Leo is far from a household word stateside, but that doesn't mean it's not bringing home the bacon--a sizzling $1.1 billion in 2008, up 9% from 2007. As part of the transaction, Leo is also providing Peplin with access to credit of up to $24 million until the deal closes. Peplin didn't say what the money would be used for, but it has a substantial - and costly -- development program underway for its late stage actinic keratosis medicine, even as it sits on just $17.6 million in cash and cash equivalents. For the money, Leo gets Peplin's lead product, a gel called PEP005 currently in Phase III clinical trials for treatment of actinic keratosis, a common skin lesion, on both head and non-head extremities. AK lesions can lead to cancer if they are not treated, but current therapies are cumbersome and not effective enough.

Bayer/Algeta: Interest in phase III oncology products continues to bubble too. Bayer fell hook line and sinker for Norwegian cancer therapeutics maker Algeta's radiopharmaceutical Alpharadin this week, inking a deal worth $61 million upfront and $800 million in extra bio-bucks. The German drug maker has agreed to foot the bill for most future development costs of Alpharadin as a treatment for bone metastases from HRPC and other cancer indications.
A formulation of radium 223 chloride, Alpharadin is being tested in men with late-stage, hormone refractory prostate cancer, an indication where the only drug approved is the chemotherapeutic agent docetaxel. Big Pharmas have been keenly interested in therapies for HRPC despite some late stage flame-outs such as satraplatin. Recall Johnson & Johnson snapped up the oral, Phase III abiraterone (CB7630) for advanced prostate cancer via its nearly $1 billion planned acquisition of Cougar Biotechnology earlier in the year. For recent investors in Algeta--the company raised a $37.5 million PIPE earlier in the year with backing from Abingworth--the partnership news provided a quick return, and showed the wisdom of VC investment in public companies. Abingworth and its co-investors got their shares at a 28% discount when they did the deal in February; the stock price has been on a steady climb from 10.90 Kroners ever since, with the company's share price reaching 56 Kroners Sept. 3, the day the Bayer deal was announced.

Roche/PTC Therapeutics: PTC Therapeutics' GEMS technology platform certainly has lived up to its name of late. The privately held biotech announced a new R&D collaboration with Roche on Sept. 2 that could yield nearly $1 billion in milestones over the life of the deal. (In your DOTW two-fer, the biotech also reported that Celgene exercised its option to advance work on a joint oncology discovery project.) As part of the Roche deal, PTC gains $12 million upfront, as well as all important research funding (every little bit helps, we say). In exchange the biotech will use its GEMS (Gene Expression Modulation by Small molecules) technology, designed to yield orally available compounds that modulate post-transciptional control mechanisms, to identify candidates for four central nervous system targets the companies will select jointly. Of course, Roche handsomely threw in some healthy bio-bucks: PTC could earn up to $239 million per target in research, development, regulatory and commercialization milestones, as well as double-digit royalties on sales from any resulting product, under the deal. (Nice, but if that works out PTC will be a Roche subsidiary long before investors see that money.) Meantime, PTC continues to push forward with its Duchenne muscular dystrophy therapy, ataluren. The orally available compound, which is partnered with Genzyme in a deal that leaves PTC with North American commercialization rights, is also being studied as a potential treatment for cystic fibrosis and hemophilia.

Image courtesy of flickrer dan_greenberg used with permission through a creative commons license.

Deals of the Week: Contents Under Pressure

It's been one of those weeks, hasn't it? Seems like almost every biopharma news story this week illustrated the industry's dire straits. Okay, there was some good news. Pfizer and Eisai won an appeal against a recommendation by the UK government that discouraged use of the Alzheimer’s drug Aricept. But don't get too excited. The British government didn't authorize wider use of the medication. Instead, the drug companies get access to the computer models NICE researchers use to weigh a drug's cost-effectiveness versus its clinical utility.

Meanwhile, Johnson & Johnson announced another round of lay-offs this week, axing 400 employees from OrthoBiotech and Centocor as it combines the two organizations' sales and marketing teams, while Wyeth reduced its numbers by another 1200. The dynamic duo of Genentech and Biogen Idec announced that its best-selling antibody Rituxan doesn't treat lupus any better than placebo, while another fab pair--Genzyme and Isis--struck out with regulators concerning their cholesterol lowering mipomersen.

But we're awarding Merck this week's award for staying on message despite a trifecta of negative news. Late last Friday came the Food & Drug Administration's announcement that it was issuing a "not approvable" letter for the Singulair/Claritin allergy combo being developed in conjunction with Schering. Merck had barely recovered when the FDA delivered more bad news late Monday: another non-approvable letter for another combo pill, the company's extended-release niacin plus the anti-flushing agent laropiprant called Cordaptive. And on Wednesday, came yet another letter from regulators, this time warning Merck about deficiencies at its vaccine manufacturing plant in West Point, PA. Merck wasn't the only company feted by regulators this past week. (In need of amusement? Check out this post from WSJ Health Blog, where Merck CEO Dick Clark admits he "can't blame the media." Whew. I feel soooo much better now.)

Are you feeling the pressure too? Take a load off. It's time for...


Pfizer/Esperion: More than a year after Pfizer closed down its Michigan operations, Esperion, the Ann Arbor company Pfizer bought back in 2003 for $1.3 billion and then shut down, is getting a new lease on life (and a new lease on some Pfizer lab space). Pfizer announced this week that it is spinning out Esperion under the leadership of the original firm's founder, Roger Newton, with $22.8 million in tranched venture backing from co-lead investors Aisling Capital, Alta Partners and Domain Associates, as well as Arboretum Ventures.

Our colleagues at The Pink Sheet Daily were on the case yesterday with the story here (subscription necessary). Esperion 2.0 restarts with a small molecule dual inhibitor of fatty acid and cholesterol synthesis that has not yet reached preclinical. The molecule was part of the original Esperion package bought by Pfizer five years ago, but according to Newton, Pfizer chose not to develop the drug candidate. For now, Pfizer will hang on to the rest of Esperion 1.0's stable of HDL raisers--despite the fact that the ones slated for further development--including the driver of that original acquisition, ETC-216, aka Apolipoprotein A-1 Milano--have been shelved for "scientific and technical reasons," according to the Big Pharma. Why? Pfizer R&D chief Martin Mackay told IN VIVO today that Pfizer would like to out-license the assets separately, perhaps using them as a quid in a separate transaction that will hopefully fetch more immediate and significant value.

That's just fine by Roger Newton, who told us that 216 was never part of his discussions with Pfizer on the spin-out. So now that Pfizer has broken the seal on its spin-out strategy is there more deal flow to come? Our Pink Sheet Daily colleagues think so, reporting yesterday that Pfizer is putting together dermatology and CNS packages destined for separate out-licensing deals. We'll have a more in-depth analysis of Esperion 2.0 in the next issue of START-UP and on Pfizer's spin-off and out-licensing strategy in the May IN VIVO.

Medtronic/ Scil Medical Technology: Medtronic’s recent deal with Scil Medical Technology might seem small, but it’s the latest move by the device giant to beef up its biologics business and tackle the so-called convergence between medical devices and biomaterials. The agreement with Scil, a German biopharmaceutical company, centers around that firm’s biologic rhGDF-5 (recombinant human growth and differentiating factor 5), a dental regenerative technology that can regenerate teeth and treat periodontal disease. Under the deal, Scil will continue to push research and development for new dental products while Medtronic will handle clinical trials, regulatory approvals and commercialization. No financial terms were disclosed. The dental application complements Medtronic's own INFUSE Bone Graft program, which won a green light from FDA a year ago for certain oral maxillofacial and dental bone grafting procedures. It's likely that Medtronic is hunting for other deals in this space based on comments Chad Cornell, director of corporate development at Medtronic, made at our IN3 West meeting in Las Vegas earlier this year. (Shame on you if you didn't make the meeting, but you can read that entire discussion here.)

EUSA Pharma/International Drug Development and EUSA Pharma/Alize Pharma Group: EUSA contines to aspire to become a transatlantic spec pharma in the vein of Shire. This week comes news that the two-year-old company is selling off two groups of early stage assets as it continues to focus on building commercial infrastructure in the US and Europe. International Drug Development (IDD) has bought up the start-up's monoclonal antibody research business, which includes a team of research and development scientists and a well characterized library of antibodies; Alize Pharma, meanwhile, has purchased its recombinant L-asparaginase therapeutic research program for acute lymphoblastic leukemia. Terms of neither deal were disclosed, but the agreement with Alize Pharma gives EUSA some kind of call-back option on any resulting product. "This provides EUSA with access to a potential future product that is an ideal fit with the company's oncology focus," the company noted in a press release issued May 1. Both the antibody and the oncology programs originally came to EUSA through its 2007 acquisition of OPi SA. Readers might recall that EUSA has been ruthless in its pursuit of building late stage development and commercial expertise in what it considers its core areas: oncology, pain, and critical care. Back in February EUSA outlicensed a preclinical fully human anti-IL-6 antibody to GSK for $44 million. Then in March the company spent nearly $23 million to acquire Cytogen, a struggling US outfit with expertise in pain and cancer and 40 sales reps to boot. As we noted in an earlier blog post, EUSA has managed to assemble 9 marketed drugs, five late-stage programs, and raise $275 million since its inception, making building a spec pharma look easy. (For another perspective, check out this article from our September 2007 IN VIVO.)

Sepracor/Arrow International: Sepracor decided it was worth its while to make nice with Arrow International, settling a patent dispute over its inhaler solution, Xopenex, that has embroiled Sepracor and an Arrow division, Breath Limited. Under the terms of the deal, Breath has a 180-day exclusive license to launch generic versions of the drug starting in 2012 in exchange for double-digit royalties on generic sales. Perhaps that overture helped smooth the path for another deal between the Massachusetts-based company and Arrow: a global licensing and development deal for a combination Xopenox/ ipratropium therapy that is expected to begin Phase III trials shortly. Arrow's not getting much of an up-front payment--just $500,000--as part of the deal. But milestones for the combo therapy could eventually total $ 70 million. Meanwhile, in a third deal (yes, count them), Sepracor announced its acquisition of Arrow International's Oryx Pharmaceuticals for $50 million up-front plus another $20 million in milestone payments. The tie-up with Oryx, a specialty pharma that in-licenses and markets prescription meds in Canada, could give Sepracor some much needed home field advantage as it seeks to market Lunesta, Brovana, and eslicarbazine in our Northern neighbor. In the press release annoucing the acquisition, Sepracor execs noted that the purchase "fulfills a long-standing corporate objective of developing a commercial footprint in...the Canadian pharmaceutical market." Geographic expansion is, of course, essential to Sepracor right now. In its most recent quarterly earnings report, the company noted that Q1 revenue dropped to $320.8 million from nearly $328 million for the same period last year, while net income slid from $19 million to about $12 million. One reason for the decline: flagging Xopenex prices. As we reported in a recent issue of The RPM Report, Medicare has slashed reimbursement of the drug.
Image courtesy of Flickr user massdistraction through a creative comments license.

Deals of the Week: Deal--or No Deal

The debate over Vytorin's medical benefits and, by extension, the utility of all cholesterol meds, continues to rage. Meantime, the Zyprexa marketing scandal reared its head: new this week, the NY Times reports Lilly is in talks with federal prosecutors to settle investigations into its marketing of the antipsychotic. If an agreement is reached, it could cost the pharma $1 billion, the largest fine ever paid by a drugmaker for breaking federal laws governing a medicine's promotion.

And, it was earnings week, with fourth quarter reports from Wyeth (up, but flat forecast for '08 due to generic Protonix), AZ (down), BMS (down, and WSJ's Health Blog highlights concerns that this big pharma may be affected by the sub-prime mess), Novo Nordisk (down, but did beat analysts' expectations sending the stock up), and Merck (down, thanks to Vioxx settlements) among others.

All in all, a crazy week, but not necessarily on the deal-making front. That's prompted this IN VIVO blogger to ponder the deals that happened--and those that did not. Without further ado, the Deal or No Deal edition.

First, a look at the actual deals that got done...

Inverness/Matria: On Monday Inverness announced its third major acquisition in the health management space, buying Georgia-based Matria for $900 million and the assumption of $280 million in debt. Definitely the big money deal of the week, though Wall Street reacted negatively to the news. Inverness continues to build through acquisition: the Matria deal is its twelfth in the past 12 months. (For more on Inverness's acquisition strategy, click here.) The company's recent emphasis on health management suggests another trend we've been following: the expansion of the diagnostic business model to include services not exclusively related to in vitro tests or reagents. Such business activity has muddied the waters stretching the definition of what it means to be a diagnostic company.

Sepracor/Nycomed: A few weeks ago when Nycomed got FDA approval for its inhaled corticosteroid ciclesonide we figured Sanofi-aventis, the original partner of Altana (bought by Nycomed in '06), still had US rights to the drug--we hadn't heard otherwise, after all. So we were a little surprised on Monday when Sepracor picked up rights to the drug (Alvesco) for $150 million upfront plus various development and sales milestones. Nycomed will also receive payments for manufacturing and royalties on sales. Alvesco's route to the US market has been chock-full of speed bumps. Way back in 2002 Altana suggested the drug might be approved in 2003, but an NDA wasn't filed until December 2003. Altana and Aventis received an approvable letter in October 2004 and the drug was launched in 2005 in Europe.

Iroko Pharmaceuticals/ Merck: Specialty pharma Iroko inked a deal with Merck for non-US commercial rights to Aggrastat, a drug used alongside heparin in patients with unstable angina to prevent cardiac ischemic events. Financial terms of the deal were not disclosed. This is the third product Merck has out-licensed to Iroko and the second in the beleaguered cardiovascular space. Last spring the company acquired rights to Indocin, for rheumatoid arthritis, and Aldomet, a hypertension treatment, from the big pharma. As we reported here, the independent futures of many spec pharmas are in question, as product-poor pharmas gobble them up in hopes of fattening their pipelines. Still, primary care remains a popular space for many, especially as big pharma eschews risky products in the cardiovascular and metabolic disease space.

(Clearly someone forgot the briefcase models.)

BiogenIdec/Genmab: Perhaps we should say "No deal, yet." This week BiogenIdec was once again in the news thanks to manueuvers by Carl Icahn to install three supporters onto the company's board. Also swirling in the ether, rumors that BiogenIdec intends to buy Genmab. Certainly, such a deal would scupper any attempts by Icahn to sell the company to another entity. Adding Genmab's pipeline would go a long way to securing an independent future for the Cambridge, MA-based biotech. But such a deal won't come cheap. In part, because it seems likely that GSK might up the ante. The British pharma, after all, has three partnerships with Genmab, including a very rich co-development, co-promotion deal for the biotech's HuMax-CD20, an antibody to treat cancer and rheumatoid arthritis. Until now, GSK's had no real reason to bring Genmab in-house--it's already got rights to the antibody cow's milk, after all. But it may not be willing to stomach the risk associated with a change in Genmab ownership, deciding its worth the hefty price tag to nail down its rights to its partnered products.

Lilly/Gastrotech: Deal or No Deal? Here's an odd one for you. On Jan 28, Denmark’s Gastrotech Pharma announced it was in-licensing Lilly’s GLP-1 analog GTP 010 for IBS and functional dyspepsia. That’s a deal, not a non-deal, surely? Well, depends on how you look at it. Simply turn it over and you get….a non-opt-in by Lilly.

Lilly and Gastrotech had been collaborating on GTP 010 since 2004, when Gastrotech took over Phase II trials of this Lilly compound in IBS and dyspepsia (in part thanks to the biotech’s ownership of some use patents for GLP-1 analogs in IBS, according to chairman Hans Schambye, though no, that wasn’t mentioned in the release).

That—four years ago--was arguably the real licensing deal. And that was also when Lilly received an option to later take over development and commercialization of the compound in return for milestones and royalties.

This week's news is that Lilly didn’t take that option, which means Gastrotech gets to keep the compound, instead, paying Lilly royalties. “Sure,” Schambye acknowledged to IN VIVO Blog, “you could look at it both ways. Either party could have licensed the drug.”

See? Hmm, exactly. Now ok, we know that small biotechs need all the positive spin they can get, but we're getting pretty close to "Press Release of the Week" territory here. Perhaps Gastrotech will do something big with 010, who knows (Lilly did take an equity stake). But please, a bit of clarity and objectivity wouldn’t go amiss.

Deals of the Week: New Year's Resolutions

It's day four of the New Year and you've already broken that resolution to exercise, eat better, or spend more time with the family. Hey, it's okay. Those are tough ones to keep.

So how about an easy one: tune in every Friday for a run-down of the week's most interesting biopharma deals. It's a quick, easy way to stay on top of the industry's events, leaving more time for the kiddos or the gym, or your blackberry.

Once again, we bring you:

(Aren't you glad we aren't on strike?)

Admittedly, deal-making activity has been lighter than usual this past week. We surmise that's because execs are shining their shoes, amassing their business cards, and honing their laser pointer skills in preparation for the biotech's annual coming out party, aka the JPM conference. (The burning questions: 1. Can a company's success be correlated to its executives' neckwear preferences? 2. What color will the famous tote bag be this year?)

Sepracor/Bial: Specialty pharma Sepracor inked a much-needed licensing deal with Bial on Wednesday for the Portunguese drug maker's Phase III anti-epileptic compound BIA 2-093. (Naturally enough for Sepracor, the drug is an enantiomer, (S)-licarbazepine, a metabolite of an analogue of the off-patent anti-convulsant carbamazepine.) Last year the company lost the bidding war for Kos Pharmaceuticals to Abbott Labs and analysts began raising questions about the company's pipeline beyond its insomnia drug Lunesta. (For more, read here.) Under the terms of the agreement, Sepracor will pay Bial a $75 million up-front fee, plus an additional $100 million in development and regulatory milestones for rights to the compound in the US and Canada. In addition, Sepracor will also file the compound's new drug application with the FDA, which should occur late this year or early in 2009. "Strategically, BIA 2-093 further strengthens our existing central nervous system portfolio, which includes Lunesta for the treatment of insomnia, as well as earlier-stage candidates for various central nervous system disorders," said Adrian Adams, President and Chief Executive Officer of Sepracor in a company press release.

Merck/Addex: In terms of "biobucks", the Merck/ Addex agreement was the week's biggest splash. As we wrote yesterday, the two companies announced an exclusive licensing agreement centered around the Swiss biotech's ADX63365, an allosteric modulator currently in preclinical development for schizophrenia and other undisclosed indications. The deal terms are potentially rich: Addex could see up to $680 million in downstream development, regulatory, and sales milestones, but that would require an unlikely alignment of the R&D planets. Guaranteed money was not quite as generous, but the solid upfront of $22 million for a non-clinical compound does suggest Merck is taking the idea of allosteric modulation seriously, and is roughly an order of magnitude greater than the company's previous discovery deals ... so who knows what a deal around its lead Phase IIb candidate might look like (you'll have to wait til next year to find out). For more on Addex and allosteric modulators check out this profile of the company from the January 2006 START-UP.

Sanofi-Aventis/IDM Pharma: Bad news for IDM Pharma this week. On Monday, the company learned that its partner since 2002, Sanofi-Aventis, would no longer help develop its dendritic cancer vaccine, Uvidem, which is currently being tested as a melanoma treatment. No reason was given for the move, but cancer vaccines have had a tough go in recent months, especially after the FDA required one of the field's leading lights, Dendreon, to submit additional efficacy data for the approval of its immunotherapy Provenge. IDM noted in a release that it will continue to evaluate the Uvidem clinical program, which recently completed Phase II trials "with promising results." But already, restructuring plans are in the works, involving "staff reductions in the Company's workforce and a review of the assets and costs associated with products under development." The news comes just weeks after the biotech issued a press release with updated news about its pipeline and a promise to investigate "strategic alternatives."

Sanofi Pasteur/Crucell: On Thursday, Dutch antibody maker Crucell and Sanofi Pasteur, the vaccines division of Sanofi Aventis, announced they were teaming up to develop next-generation rabies biologicals to be used in association with a vaccine for post-exposure treatment against this fatal disease. Under the terms of the agreement, Sanofi will pay Crucell 10 million euros following the deal's execution; Crucell could receive an additional 66.5 million euros in milestones as well as an undisclosed percentage on sales of the final product if the rabies antibodies pan out. To date, Crucell has developed a combination of two rabies mABs that are well tolerated and provide immediate neutralizing activity in Phase I clinical trials. Crucell expects to enter Phase II clinical trials in the first half of this year. If approved, peak sales of the rabies antibody cocktail could exceed $300 million.

Can a Sleep Drug Awaken Demand from European Consumers?

Superficially, it’s paradoxical.

Sepracor wouldn’t sell US marketing rights to its sleep drug Lunesta, even though it could probably have gotten a great deal. And then last week it goes and sells European rights to GSK for just $20 million upfront and another $135 million in milestones?

OK, that’s by no means a true yawner. But it’s hardly a wake-up call in this age of colossal licensing fees and milestones. VX950, the barely post-proof-of-concept hepatitis C candidate from Vertex, fetched $165 million upfront, and $380 million in pre-commercial milestones for merely European rights. Why didn’t Lunesta, with US sales approaching $600 million, do at least the equivalent?

Because the comparison isn’t at all fair. Hep C is a life-threatening disease currently treated with a couple of inadequate, problematic therapies. Insomnia is probably just as big a market -- but is less important to doctors than it is to patients (for some background on the insomnia markets and related dealmaking, see our coverage here and here).

And that’s precisely the challenge. In the US, Sepracor sets its own price and then can spend hundreds of millions of dollars getting its message out to consumers. In Europe and Japan it can do neither.

Which means that Lunesta will have a lot more commercial risk outside the US than something like VX950. GSK’s $20 million bet on the product isn’t exactly trivial, but it isn’t a huge vote of confidence that European insomniacs and their doctors will clamor for Lunivia (European for Lunesta) in the face of a host of generics like racemic zopiclone, Ambien, and a number of benzodiazepines.

And it’s why so much of the deal’s $135 million in milestones apparently depends not merely on getting a centralized approval, but on getting reasonable levels of pricing from various European countries. Sepracor could still make plenty of money: we estimate that it’s getting what might, on a blended basis, work out to a 15% royalty (the rate increases with sales) plus another 10-15% profit on selling the material to GSK. But Sepracor will only make money if the drug is successful.

Thus the $20 million upfront fee represents a cautious gamble that Lunesta’s data package will not only pass muster with the EMEA, but will convince the national reimbursement groups that they should pay a premium for a drug that can be used chronically and which comes with a host of data showing its beneficial effects on insomnia-associated co-morbidities, like depression.

Same thing in Japan, where a pricing milestone on Lunesta is also a key part of the value in the deal Sepracor signed in July with Eisai. The upfront in that deal was probably considerably smaller than what GSK paid: not only is the market about half the size of Europe, the product has to jump through more clinical hoops before it can be approved. In any event, the Eisai terms were undisclosed, which means they weren’t material.

Financially material that is. Sepracor is certainly hoping they’ll be seen as strategically material. The company has recently been a punching bag for investors, taking particularly heavy punishment when new CEO Adrian Adams lowered revenue expectations for 2007 during the company’s July earnings call.

Thus the biggest value to the deals may yet be validation for Sepracor’s ability to take a product developed in the US and convince leading CNS companies they can rely on the company’s US clinical and marketplace work to win approval for, and successfully commercialize, a consumer-driven product in markets where consumers don’t rule.