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Rigel Investors Balk at AstraZeneca Deal


They're unable to focus on the overall payout, and seem stuck on lower-than-expected upfront payment.

Sometimes it's hard for investors to see the big picture, which seems to be the case with Rigel Pharmaceuticals (RIGL).

The stock fell like snow on Tuesday, dropping an initial 8% only to recover slightly to stick around $9. The precipitous drop in the stock price came after the drug-development company announced that it's inked a deal with the Anglo-Swedish drugmaker AstraZeneca (AZN) for its late-stage rheumatoid arthritis drug.

According to the terms of the deal, AstraZeneca will pay $100 million upfront for fostamatinib disodium, or R788, with an additional $345 million once certain developmental milestones are reached, as well as the possibility of $800 million once certain sales milestones are reached, and royalty payments -- totaling an upwards of $1.24 billion for Rigel when all is said and done.

The deal with AstraZeneca seems to fulfill all of a small drugmaker's wildest dreams -- it allows the small pharmaceutical developer to partner with a large-cap pharma that's backed by a significant sales force and will assume all of the development and regulatory costs of the drug.

Yet, Rigel investors had a tough time focusing on the overall payout of the deal and seem to be stuck on lower-than-expected upfront payment, as well as AstraZeneca's lack of expertise in the RA field. "Our initial take is that the terms are solid; while the upfront payment of $100M may be slightly below Street expectations," writes Oppenheimer analyst Brian Abrahams in a note to investors on Tuesday, "the fact that AZN will fund 100% of the substantial future development costs is a positive surprise and should significantly reduce RIGL's go-forward cash burn."

Beyond the smaller-than-expected upfront payout for the drug, investors seem to have qualms with the way the royalty payments are structured. "Rigel had hoped for a deal with profit sharing, 50/50, economics," wrote RBC Capital Markets analyst Jason Kantor in a note to investors. "This would equate to mid-20% royalties. Although the exact rate was not disclosed, the release stated 'significant stepped double-digit royalties' which we interpret as at least very high teens and likely above 20% on average"

While AstraZeneca is one of the world's leading pharmaceutical manufacturers with a market cap of $63 billion, the it's far from a leader in the rheumatology field.

Rheumatoid arthritis is an autoimmune inflammatory disease that causes damage to the joints, as well as other organs. The deal stands to be potentially lucrative for both companies; the rheumatoid arthritis market was estimated to be about $13 billion globally in 2009, up from $1.3 billion a decade earlier. The drug has currently competed three phase 2 clinical trials and AstraZeneca will develop a phase 3 program to be initiated this year. The company expects to file for approval with the FDA in 2013.

The collaboration with Rigel comes at the perfect time for AstraZeneca, which is expected to see a significant drop in sales once its blockbuster statin Crestor loses patent protection. Crestor is already one of the best-selling drugs in the world with revenues of $4.5 billion in 2009, up 25% from $3.6 billion in 2008, but the blockbuster will lose patent protection in 2016. The company is already fighting plenty of court battles trying to defend that 2016 date as generic companies like Israel's Teva Pharmaceuticals (TEVA) try to get the patent expiration pushed up. (See, AstraZeneca Goes to the Well One Last Time.)
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