EXCLUSIVE: Analysts Weigh In On Controversial Juno Therapeutics/Celgene Deal, With Mixed Feelings Abounding

Published: Jun 30, 2015

EXCLUSIVE: Analysts Weigh In On Controversial Juno/Celgene Deal, With Mixed Feelings Abounding
June 30, 2015
By Riley McDermid, BioSpace.com Breaking News Sr. Editor

Wall Street is already having mixed feelings about a massive deal announced yesterday between Celgene Corporation and Juno Therapeutics , with some saying the $1 billion collaboration is massively overpriced and must mean Celgene is either “desperate or insane” to pay such a hefty fee for the 10-year agreement.

"Bottom line is we like that Celgene is making a big commitment to CAR-T as we think this will be an important hematological platform in the future -- but certainly would agree with the likely pending consensus view that the price tag is also big," wrote RBC Capital analyst Michael Yee in a note to investors late Monday.

The companies jointly announced the collaborative agreement to leverage T cell therapeutic strategies Monday afternoon. The collaboration will have with an initial focus on Chimeric Antigen Receptor Technology (CAR-T) and T Cell Receptor (TCR) technologies, the companies said. soared in afterhours trading Monday, hitting a high of $64 after the stock closed at $46.61.

Under the terms of the deal Celgene Corporation (CELG) has acquired a $1 billion stake in Seattle-based Juno Therapeutics (JUNO) as the two companies entered into a 10 year collaborative agreement to leverage combined immunology and oncology expertise to develop treatments for cancer and autoimmune diseases. Celgene said it will absorb much of that cost in the third quarter of 2015. That has some analysts wondering if the cost of the deal is worth the risk.

“This deal comes as a surprise to us given the very limited validation for CAR-T cell approaches, or TCR technologies, outside their core CD19 indication, as well as the many competitors actively engaged in the field and likely to erode its ultimate value,” wrote Geoffrey Porges, an analyst with Sanford Bernstein, in a research note.

“We think this deal will be hard to swallow for Celgene shareholders. Celgene's management are to be congratulated on the audacity of their deal making, but we expect investors to bridle at the company's increasingly aggressive front-end loading of their transactions. This transaction amounts to pre-paying much of the cost of a distant asset well in advance of the delivery of the asset,” wrote Porges.

“The reasons for the company adopting these terms seems to be associated with Celgene's desire to protect their pro-forma earnings. Front end loading such terms defy good judgment in an industry known for its development failures and technological disappointments; CAR T has yet to be proven beyond the relatively narrow CD19 B cell malignancy arena and the clinical utility of the increasingly commonly pursued TCR technology alternative has not been proven,” he said. “It remains possible that alternative approaches (such as the NIH's individualized T cell therapy or off-the-shelf bispecific antibodies) could be more effective or easier to use than allogeneic T cell approaches.”

But other market watchers said they believe it is a solid deal for both companies, said Piper Jaffray analyst Joshua Schimmer in his research note post-announcement, particularly because it helps wipe out other patent issues with competitors like Kite Therapeutics early on.

“In short, CELG spent $1B to buy into the adoptive T cell therapy and acquire OUS (which is often 50 percent+ of the global market) rights for CD19 and CD22 and pretty much anything else JUNO develops, as well as the ability to co-promote up to 3 programs of JUNO (excluding CD19 and CD22) with 50 percent profit sharing,” wrote Schimmer.

“This transaction essentially leaps the company forward into a leading position in the I/O space as the company now possesses all the modalities (i.e. PD-L1, T cell therapy, anti-CD47, lenalidomide and others) required to address challenges in both hematological and solid tumors,” he wrote.

“Additionally, CELG doesn't have to worry about bumping into KITE's U.S. patent estate until one of the later global-right programs approaches commercialization,” said Schimmer. “JUNO also gets co-commercialization rights on CELG programs which target T cells, although our interpretation is that CELG just potentially got almost half the value of the company (OUS rights on everything minus a royalty obligation) for $1B of OUS cash plus development funding.”

Hans Bishop, chief executive officer of Juno, said Celgene is a natural partner and will help Juno realize the full potential of clinical research, while still maintaining a level of independence to explore other business possibilities that “pop up.” Bishop said he thinks the scientific synergy between the two companies will allow them to advance the therapeutic pipelines of both Juno and Celgene.

Celgene has leading small molecule and protein capabilities that complement Juno’s advanced engineered T cell capabilities,” Bishop said on a conference call.

Additionally, the collaboration thrusts Juno into the top tiers of immunooncology drugmakers, Bishop said. Bob Hugin, Celgene’s chairman and CEO, touted Juno’s capabilities. He said the early clinical data of Juno’s CAR-T approaches is impressive. He said the investment is giving Celgene upsides to its existing financial targets.

Under terms of the deal, Celgene will pay approximately $1 billion, which includes a $150 million upfront payment and an agreement to purchase slightly less than 9.1 million shares of stock at $93 per share. Celgene will have the option to be the commercialization partner for Juno’s oncology and cell therapy auto-immune product candidates, including Juno’s CD19 and CD22 directed CAR-T product candidates.

That price may be worth it, said ISI Evercore analyst Mark Schoenebaum, if only because Celgene now has the right to snap up Juno’s entire oncology platform.

CELG has right to entire Juno portfolio in oncology and cell therapy auto-immune products,” he wrote in a note to investors late Monday.

“ For products that CELG chooses to not enter into global profit share (including Juno's CD19 and CD22 CAR-T), opt ins for CELG are at pre-defined times,” said Schoenebaum. “Rates of ROW royalties to Juno (high single digit to mid-teens) would be tied to timing of opt-in with higher prices tied to later decisions to opt in (Ex. if CD19 and CD 22, royalty would be in mid-teens).”

Juno will be responsible for research and development in North America and will retain commercialization rights in those territories. Celgene will be responsible for development and commercialization in other Europe, Asia, emerging markets and the rest of the world. Celgene will pay Juno a royalty on sales in those territories. Additionally, Celegne will be eligible to select two programs, excluding CD19 and CD22, to be subject to a global profit sharing agreement under which the companies will share worldwide expenses (with the exception of China) and profits equally.

Over the course of the next 10 years Celgene will have the option to purchase additional equity in Juno, and own up to 30 percent of the company. The transaction is expected to be completed by the end of the summer.

Hugin said the Juno deal is the third significant partnership over the past six months and expects to see revenue form the collaborations by 2020. In April, Celgene Corporation struck two deals with other pharmaceutical companies with a combined value of $110 million to advance its oncology platform, continuing the cancer drugmaking company’s deal making trend to advance its oncology pipeline. Celgene entered into an $80 million agreement with Agios Pharmaceuticals to develop AG-881, a small molecule that has shown in preclinical studies to fully penetrate the blood brain barrier and inhibit isocitrate dehydrogenase-1 (IDH1) and IDH2 mutant cancer models.

Celgene also announced today it struck a $30 million agreement with one-year-old Canada-based Northern Biologics to advance that company’s work in oncology and fibrosis therapeutics.

Also in April, Celgene entered into a collaborative agreement with AstraZeneca PLC (AZN) that will allow the U.S.-based drug firm to develop MEDI4736, AstraZeneca’s immunotherapy treatment for blood cancer.

In 2014 Celgene entered into 10 deals, shelling out an average of $222 million in upfront payments to its partners. Juno is developing cell-based cancer immunotherapies based on chimeric antigen receptor and high-affinity T cell receptor technologies to genetically engineer T cells to recognize and kill cancer. JCAR015 is Juno’s chimeric antigen receptor product candidate indicated for the treatment of relapsed or refractory B-cell acute lymphoblastic leukemia.

JCAR015 is currently the subject of a Phase I trial, which is designed to determine the safety and appropriate dose of modified T cells in patients. Chimeric antigen receptor technology employs the body’s immune system to attack cancer cells. JCAR014, JCAR016 and JCAR017 are also Juno CAR-T cell product candidates in current levels of testing.

Still, some analysts remained cautious. In a note titled “Celgene Marries Juno Shortly After Divorcing BLUE,” Cowen analyst Eric Schmidt, said that while his team likes the deal, there still remain significant headwinds for competitors trying to make a dent in the crowded CAR-T space.

“On the other hand, we do believe that Kite Pharma, Inc. (KITE, $59, Outperform) and bluebird bio (BLUE, $159, Outperform) own seminal intellectual property in the CAR and TCR fields, respectively. Today’s collaboration does not address how Celgene/Juno might gain access to this IP,” wrote Schmidt. “In addition, we would expect the financial structure of the transaction (front-end loaded payments for R&D that will be excluded from CELG’s P&L) to raise the usual eyebrows around Celgene’s non-GAAP accounting policies.”

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