Staff Writer

The Biotechnology Value Fund (BVF), a historically activist investor group, revealed in a 13-D filing Tuesday the reason for its recent interest in diagnostics firm Celera Corp.: BVF wants Celera to spin out its royalty interest in Merck & Co. Inc.'s Phase III osteoporosis drug, odanacatib.

Over the past year, BVF has spent about $47.7 million to acquire 8 million shares of Celera, amassing a 9.8 percent ownership stake.

Now, according to the SEC filing, BVF wants to see potential money-maker odanacatib carved away from the rest of Celera's money-losing operations.

The concept is somewhat similar to how PDL BioPharma Inc. separated its profitable royalty streams from its unprofitable drug development business with the Facet Biotech Corp. spinout - except in this case, the potentially profitable royalty stream is under the radar for many Celera investors.

Celera is known for its laboratory services and molecular diagnostics businesses, not for potential future royalties on long-ago divested products. With annual diagnostics revenues around $166 million and a market capitalization of $542 million, Celera is "basically . . . being valued just on diagnostics," spokesperson David Speechly confirmed.

Yet BVF stated in its filing that the odanacatib royalties alone could be worth a "significant multiple" of Celera's current value and could generate "tremendous" free cash flow. "Significant shareholder value could be unlocked" if Celera "spins out, or otherwise segregates and distributes" its interest in odanacatib, the filing said.

Odanacatib inhibits cathepsin K, a protease central to the function of the osteoclasts that break down bone. Its role in osteoporosis was identified in the early 1990s by a South San Francisco-based biotech called Khepri Pharmaceuticals Inc. Khepri was acquired by Arris Pharmaceutical Corp. for $21 million in 1995, and Arris licensed the program to Merck in 1996. (See BioWorld Today, Nov. 18, 1996.)

Arris eventually merged with Sequana Therapeutics Inc. in a stock swap valued at $166 million and became Axys Pharmaceuticals Inc. Celera then bought Axys in 2001 for $173 million, inheriting the deal with Merck. Meanwhile, Merck identified a small-molecule cathepsin K inhibitor and advanced it through clinical trials. (See BioWorld Today, June 14, 2001.)

Odanacatib currently is being studied in a 20,000-patient Phase III trial seeking to reduce fracture risk in postmenopausal women with osteoporosis.

Merck has said it expects to file a new drug application in 2012.

Merck's own market-leading bisphosphonate for osteoporosis, Fosamax (alendronate), once boasted annual sales of more than $3 billion. Fosamax has since gone generic, and competing bisphosphonates like Boniva (ibandronate, F. Hoffmann-La Roche Ltd.), Actonel (risedronate, Procter & Gamble) and Reclast (zoledronic acid, Novartis AG) have joined the market.

Yet odanacatib could offer a new mechanism of action for osteoporosis . . . as could Amgen Inc.'s RANK ligand inhibitor Prolia (denosumab), which is expected to gain approval for postmenopausal osteoporosis in the coming months. (See BioWorld Today, Jan. 27, 2010.)

Analysts predict that Prolia will generate around $1 billion annually in osteoporosis. If odanacatib were to achieve similar success, then Celera would collect a 7.5 percent royalty - or roughly $75 million per year.

Of course, Prolia's greatest potential is not in osteoporosis but in reducing fractures in cancer patients with bone metastases, and possibly preventing those metastases. (See story in this issue.)

Merck had been studying odanacatib for the prevention of bone metastases but discontinued the program for what it called strategic reasons, emphasizing that there were no safety or efficacy concerns.

Although BVF's filing focuses on odanacatib, Celera has a royalty interest in other products as well. In 2006, the company out-licensed two HDAC inhibitors for cancer and other early stage product candidates to Pharmacyclics Inc. in exchange for $150 million in payments and mid- to high-single-digit royalties. A few months later, Celera out-licensed a cathepsin S inhibitor program for autoimmune diseases to Schering AG for $365 million in payments and low-double-digit royalties. (See BioWorld Today, April 11, 2006, and June 22, 2006.)

Whether Celera will consider BVF's proposal remains to be seen. Speechly declined to comment on whether the company was in favor of or opposed to the idea of spinning out its royalty streams. He did, however, emphasize that Celera has a positive relationship with BVF and "ultimately wants to do whatever we can to maximize shareholder value."

Shares of Alameda, Calif.-based Celera (NASDAQ:CRA) gained 36 cents to close at $6.58 on Tuesday.

Published  February 10, 2010