Staff Writer

Montreal-based MethylGene Inc. is exercising its right to convert to a royalty stream and milestone arrangement with Celgene Corp. for pipeline oncology product MGCD0103 as provided under the license and collaboration agreement between the companies formed in January 2006.

As part of the original deal, MethylGene and Celgene divided the development costs 60/40, with the U.S.-based biotech taking on the greater share of those costs. MethylGene maintained co-promotion rights and 50 percent of future profit sharing in North America.

That arrangement was a "superior option" at the time, said Donald Corcoran, CEO of MethylGene. But since then, timelines have changed and the company's analysis of the royalty-milestone arrangement is that it would be "a better option for MethylGene," he told BioWorld Today.

A clinical hold placed on the program was not in itself a driver of that decision, though it has "added to the decision," Corcoran said.

After a 90-day transition period, MethylGene will no longer be responsible for funding development costs required to obtain market approval for MGCD0103, and Summit, N.J.-based Celgene will assume 100 percent of the program costs for its licensed territories.

In addition, MethylGene will receive royalties in lieu of profit sharing in North America and is eligible to receive milestone payments of up to $141 million, as agreed in the original contract between the companies. Celgene will also pay royalties to MethylGene on annual net sales in its territories.

Now, Corcoran said, the company can focus on funding the programs that it owns 100 percent, meaning those that aren't partnered.

Philippa Flint, analyst with RBC Capital Markets, said in a research note that she does not expect significant increases in research and development spending by MethylGene as it reallocates its resources to earlier stage products: MGD265 in Phase I for solid tumors and antifungal product MDG290 expected to enter Phase I by the end of the year.

However, she wrote, "over the medium-term, we have decreased our R&D expenses as MYG will not be paying for a Phase III program for MGCD0103."

As of June 30, MethylGene had $48.3 million in cash, cash equivalents and short-term investments. Flint said, "We anticipate the company will need to raise additional funds in H2, 2009."

Shares of MethylGene (TSX:MYG) closed Friday at C34 cents(US32 cents) on the Toronto Stock Exchange, up 4 cents or 13.33 percent. Shares in Celgene (NASDAQ:CELG) closed at $67.50, up $3.22 or 5.02 percent.