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Post# of 252439
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microcapfun

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microcapfun

Re: DewDiligence post# 60826

Wednesday, 04/02/2008 12:59:12 AM

Wednesday, April 02, 2008 12:59:12 AM

Post# of 252439
Is it too late to comment on the CEGE - Takeda deal?

I studied the contract, listened to the cc ... It looks like a very good deal to me - and I hate to say that, having been a CEGE critic for some time. U.S. royalties are tiered. Incremental royalties start out at 20%, then go up to 30% (at some unknown sales level), then 40%, then 50% (!!), then down to 40%, and finally they level out at 30%. See Section 8.4 of this:
http://www.sec.gov/Archives/edgar/data/865231/000119312508071298/dex101.htm

My guess is that average royalties will be ~35%.

My rule of thumb is that royalties for therapeutics in the 20-25% range correspond to retaining about half the value of the therapeutic. (Any arguments with that?) So CEGE appears to be retaining ~3/4 of the value of GVAX prostate in the U.S., and they don't have to do any of the sales and marketing ... though they have the right to co-develop w/o any impact to the royalty structure if they so choose.

Ex-U.S. royalties are not tiered and vary from country to country between 12% and 20%. Probably CEGE is retaining ~1/3 of the value of GVAX prostate ex-U.S.

There is also $50M upfront, and registration and manufacturing milestones of up to $270M. CEGE is responsible for manufacturing but gets reimbursed in full. My feeling is that if GVAX prostate gets approval in the U.S., Europe and Japan and CEGE doesn't run into manufacturing problems, they may get the entire $270M in milestones.

It's not like they have to reach $1 trillion in sales to get the last few $M.

Takeda is taking over all Vital-1/2 costs except for CEGE FTEs, and if GVAX prostate is approved, they will pay for all additional GVAX prostate development costs - in addition to all commercial and regulatory costs (except for CEGE FTEs).

So including Vital-1/2 expenses, Takeda is probably putting up a total of >$100M before they even find out if GVAX prostate works at all. (There was never a randomized Phase 2 study of GVAX prostate!) And CEGE gets to reduce their cash burn significantly - or keep the same cash burn and take another GVAX indication (presumably pancreatic or leukemia) forward into Phase 3.

Plus CEGE is free to partner each GVAX indication separately. If GVAX works for prostate cancer, it may work for any other type of cancer as long as the cell lines are well chosen.

I think this is a great deal for CEGE. I can't find any problems with it - and I looked pretty hard.

But as Feuerstein points out, Vital-1 and Vital-2 may well still fail. (Personally I think the odds are slightly over 50% that they will both fail.) GVAX prostate + MDX-010 looks very good in the first few patients, but that will require a lot more development work since it is now only in Phase I. According to the contract, it appears that in the event Vital-1 and Vital-2 fail and more development work is required, CEGE has to help pay for that up to some maximum level. Whether they would be financially able to do so is questionable. Even after this deal the stock price is only ~$3/share and cash is about the same as debt. (Most of the debt is convertible at $9.10/share in 2011.)

In summary - yeah CEGE is still going to be in a lot of trouble if Vital-1 and Vital-2 both fail, but they look a lot better than they did before the Takeda deal was announced.

micro

Life is an IQ test.

email: microcapfun@yahoo.com

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