Was Rigel's $1.2B RA deal over-hyped?

When Rigel Pharmaceuticals rolled out its new partnership with AstraZeneca for R788 (fostamatinib) last week, it had all the ingredients for a big day on Wall Street: A big pharma partner name, a $1.2 billion deal total and a lead program for rheumatoid arthritis, a blockbuster drug market.

Its reward: Rigel's shares immediately plunged nine percent.

That left Simos Simeonidis, an analyst for Rodman & Renshaw, scratching his head. After all, he noted, Rigel's deal terms were bigger than what Bristol-Myers Squibb and Eli Lilly had paid to partner on RA programs.

"We believe that the terms Rigel secured compare very favorably to the other two compounds that are now in the hands of U.S. large pharma companies, with higher economics in terms of both up-front and future milestones," he told investors in a note.

Maybe, he speculated, Rigel's investors included quite a few speculators who never planned to hang on to the stock after a deal was done.

Actually, though, other analysts didn't seem too impressed by the deal terms at all. And in that lies a story that should serve as a cautionary tale for the biotech industry, where mastering the art of deal-making is essential to survival.

Problem number one: $800 million of the deal total was for back-end, sales-based milestones. Rigel can rely "only" on $100 million of that big total up front.

"Such post-launch milestones are an old trick used by biotech executives to bump up the headline value of a deal," scoffed Jacob Plieth at the Wall Street Journal. And he speculates that the milestones are covering up a low royalty rate. In contrast to Rigel, Incyte scored a deal laden with $665 million in pre-launch milestones for its oral RA drug. 

Pfizer's late-stage JAK 3 inhibitor--CP-690,550--is likely two years ahead of R788, says Jefferies' analyst Jeffrey Holford, "and there are many potential competing oral products for RA in development."

Some investors thought Rigel was hyping its stock, pumping up the share price as it prepared a move to raise needed funds on the market. Maybe that's why soon after the AstraZeneca announcement left Rigel's share price in the doldrums COO Raul Rodriguez told Reuters that the company was "likely" within 90 days of another deal on its psoriasis program.

There were other good reasons, though, for investors to get nervous about the deal.

Rigel's RA drug is about to enter a late-stage trial, but their drug failed a big Phase IIb trial dubbed TASKi3, and markets hate a trial failure at any stage. Jefferies noted quickly that that trial raised some troubling questions about the safety and efficacy of the drug. But that was hardly news by the time the deal was signed, sealed and delivered.

"Despite the shortcomings in the TASKi3 trial, as a result of a higher than expected placebo response rates, Rigel was always keen to pursue further clinical trials based on fairly consistent Phase II response data in the drug-treated groups," notes Datamonitor. "In signing the partnership, AstraZeneca clearly sees the potential for R788 as a treatment for RA patients, and particularly in disease-modifying antirheumatic drug (DMARD)-failure patients."

Over the past year AstraZeneca--like a lot of other Big Pharma outfits--has moved to cut back on its in-house R&D work as it turns more to external collaborations like these to grab hold of late-stage prospects. But despite the increased appetite for new partnerships, pharma companies clearly aren't paying premiums for added risk.

Nevertheless, there's no doubt that other biotechs would love to have Rigel's problems. The deal with AstraZeneca gives the developer a solid collaborator who can do a proper job in Phase III. The right kind of trial design can possibly address the issue with placebo response. And it has more money to use on follow-up programs.

All that should help ease Rigel's pain as the developer recovers from its most recent whipping. - John Carroll (twitter | email)

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