Five years after Tercica Inc. first acquired rights to Genentech Inc.'s insulin-like growth factor-1 (IGF-1) - for which it gained approval as Increlex in 2005 for short stature in children with primary IGF-1 deficiency - the two companies expanded their collaboration to develop combination IGF-1 and growth hormone products for idiopathic short stature and adult growth hormone deficiency.

That deal could be worth up to $53 million to Tercica, including $13 million in equity investment. The remainder would include opt-in payments, research and development cost reimbursement and milestone payments. Genentech initially is purchasing 708,591 shares of Tercica's stock for $4 million. Shares of Tercica (NASDAQ:TRCA) climbed 12.9 percent, or 70 cents, Wednesday to close at $6.12, while South San Francisco-based Genentech's stock (NYSE:DNA) closed at $75.93, up $1.08.

"We're excited to embark on this collaboration," which involves the development of two next-generation products that combine Tercica's Increlex with Genentech's recombinant human growth hormone Nutropin AQ, Tercica's President and CEO John Scarlett said during a conference call. "Both drug components are FDA-approved," and both were designed with the intent that they could one day be administered together as a single injection.

Under the terms, Brisbane, Calif.-based Tercica will lead and fund the development program, with Phase II studies in idiopathic short stature (ISS) and adult growth hormone deficiency (AGHD), expected to begin in early 2008. Genentech will retain opt-in rights through the completion of Phase II, and if it exercises that right, the companies will share costs and profits for remaining development and commercialization. If Genentech declines, Tercica will hold all worldwide rights and would pay royalties to Genentech upon commercialization.

In the meantime, Scarlett assured investors that the company has adequate financing - with anticipated $95 million to $100 million at the end of 2007, plus any non-dilutive funds from licensing ex-U.S. rights to Increlex/Nutropin - to move forward on the Phase II trials in both indications without "additional equity financing and without sacrificing our goal to reach profitability in 2010."

Tercica expects to seek a Japanese partner for the combination product, though it plans to sublicense other ex-U.S. rights to Ipsen SA, of Paris, its European partner for Increlex. In late May, the Committee for Medicinal Products for Human Use recommended approval of Increlex to treat short stature due to primary IGF-1 deficiency, and Tercica is awaiting Aug. 30, 2007, PDUFA data for sustained-release Somatuline Autogel in acromegaly. The company gained rights to Autogel from Ipsen as part of the Increlex deal.

Following the Genentech deal, Tercica is giving Ipsen, in a separate agreement, the right to purchase about 500,000 pro-rata shares for a total of about $2.9 million.

Pending positive clinical results, the combination product could end up carving out a healthy chunk of the overall growth hormone market, which is expected to exceed $2.5 billion in worldwide sales this year, said Richard King, Tercica's chief operating officer.

Pediatric short stature makes up about 80 percent of that market, with the majority of those cases resulting from something other than growth hormone deficiency. While growth hormone alone is "highly effective in [patients with] true growth hormone deficiency," the addition of IGF-1 as a growth hormone sensitizer might prove efficacious in that larger patient population. Early studies showed that the combination product demonstrated greater benefit as opposed to growth hormone when given as a single agent at higher doses.

The worldwide ISS market is estimated to be between $400 million and $500 million, or about 20 percent of the overall growth hormone market, according to analyst Matthew Osborne, of New York-based Lazard Capital Markets LLC, who maintained a "Buy" rating on Tercica's stock, with a price target of $8. In a research note, Osborne noted that a number of physicians already are using Increlex for ISS on an off-label basis but that results are "premature." The Nutropin/Increlex combination drug "could prove superior to Increlex" in ISS.

The AGHD market is smaller, though Tercica estimated that the worldwide market could be anywhere from $250 million to $500 million. And if the programs in ISS and AGHD are successful, it likely would lead to further investigation of a combination product in other large-market metabolic indications, such as obesity and Type II diabetes.

The expansion deal with Genentech also amends the companies' original agreement over Increlex so that Tercica is no longer obligated to file an investigational new drug application for Increlex in diabetes by the end of the year, "effectively removing what we have seen as a key risk factor," analyst Christopher Raymond, of Chicago-based Robert W. Baird & Co. Inc. wrote in a research note.

Scarlett said Tercica has "no plans to pursue diabetes for Increlex."

Sales of Increlex continue to grow, especially now that the product doesn't have to share the market with Iplex, a complex of recombinant human IGF-1 and its binding protein IGFBP-3 marketed by Richmond, Va.-based Insmed Inc. Iplex hit the market shortly after Increlex, but Insmed agreed to take it off the market earlier this year as part of a patent settlement.

Though the company has not yet released its second-quarter earnings, Scarlett said Increlex sales totaled about $2 million for the three months ending June 30. (See BioWorld Today, March 8, 2007.)

The company reported a net loss of $12.4 million, or 25 cents per share, for the first quarter of 2007.