Replies to post #94471 on Biotech Values

[mcbio]

Re: ARRY/NVS Collaboration for ARRY-162

ARRY's development responsibilities are as follows

"Under the Agreement, Array is responsible for completing the on-going Phase 1 clinical trial of ARRY-162 and the further development of ARRY-162 for up to two indications. Novartis is responsible for all other development activities. Novartis is also responsible for the commercialization of products under the Agreement, subject to Array's option to co-detail approved drugs in the United States. "

Turtle, thanks for posting this. I'm on the road this week with limited access so I appreciate it. I'll update the ARRY RMF this weekend when I return home.

I'm very happy to see this news and the subsequent stock reaction as it's nice to be above $4 again (whether temporary or not). I haven't and don't intend to sell any of my shares yet though. I'm hoping for at least $5/share before I consider taking any profits as I still think the valuation looks intriguing given all that ARRY has ongoing both with partnered and unpartnered drugs.

The $45M up-front is very welcome. I don't know how this compares to the RDEA up-front for their MEK inhibitor(s) and would have to research that further. I saw where you posted that this deal may not have been as favorable, because it included all of ARRY's MEK inhibitors (other than the one already partnered with AZN), including ARRY-300. However, note that ARRY-162 is the only MEK inhibitor that I am aware of that ARRY is actively developing. Management previously indicated that ARRY-300 was more potent than 162, but potency is not an issue with MEK inhibitors. Accordingly, ARRY removed 300 from their 2010 milestones and it appears to only be a compound that will move forward in development should there be an issue with 162. I don't recall management ever specifically discussing any additional follow-on MEK inhibitors behind 300.

The licensing arrangement itself is interesting and the co-development aspect appears to be a departure from ARRY's typical licensing strategy of foregoing future clinical expenses for a lowered royalty. This is obviously a higher risk/reward strategy so I'm anxious to hear management discuss this decision during the next conference call. Should we take this deal as more bullish or bearish compared to the usual licensing strategy? E.g. is it bullish in that perhaps ARRY opted to go for a higher royalty and bear more of the cost of development because management has increased confidence in the likelihood of success for the compound? Or is it bearish in that maybe NVS only opted for a partnering deal if ARRY agreed to bear more of the cost of clinical development (though NVS would obviously be sacrificing more upside in such a scenario)? I tend to be more bearish/skeptical, so I'll assume the latter is more likely, but I'll leave that open for debate. Also, I think the language regarding the co-development responsibilities itself is a little vague and I'd like a little more clarity. E.g., what specifically does ARRY being responsible for "the further development of ARRY-162 for up to two indications" mean? Does that mean ARRY must handle development of ARRY-162 and bear all of the clinical expenses of development through Phase 3 trials for up to two indications in order to receive a higher royalty? After reading through the 8-K in a bit more detail, it sounds as if ARRY may elect to give up its right to co-develop ARRY-162 and may forego future clinical expenses in exchange for a royalty rate that still appear to be double-digits. I think that is a very key point so let me know if I am misinterpreting the 8-K. The relevant language is:

"Array will pay a percentage of development costs up to a maximum amount with annual caps. Array may opt out of paying its share of development costs with respect to one or more products; the U.S. royalty rate would then be reduced for any such product based on a specified formula, subject to a minimum that equals the royalty rate on sales outside the United States, and Array would no longer have the right to develop or detail such product."

If I am reading this right, this makes me view the licensing deal more bullishly as ARRY is not locked into the development costs and may exchange their co-development rights (and forego the significant clinical expenses) for what still appears to be a double-digit royalty in the U.S.

Given prior guidance from management, I think ARRY-380 is likely to be the next clinical-stage compound to be partnered. (Management previously indicated that they expect to partner two pre-clinical programs in 2010 as well.) I also think that such a deal could even be more lucrative than the 162 deal given the potential of an oral Herceptin.