National Editor

With Phase III data for its weight-loss drug Axokine expected any day, Regeneron Pharmaceuticals Inc.'s Interleukin-1 Trap technology, in Phase II trials, has snared the company a deal valued at $75 million with Novartis AG for rheumatoid arthritis and other indications.

"It's a phenomenal deal," said Steven Harr, analyst with Morgan Stanley in New York, even if the market did not react accordingly. Regeneron's shares (NASDAQ:REGN) closed Friday at $17.31, down $2.04, or 10.5 percent. Anticipation of the Axokine data caused the lukewarm response, which "might not be rational," Harr said.

"Nobody wants to jump in front of that," he said.

Novartis, of Basel, Switzerland, is paying $27 million in cash and making a $48 million equity investment in Regeneron through a stock purchase, with the potential for $275 million more in milestone payments related to marketing approvals in the U.S. and Europe and to achieving product revenue targets.

Company officials were traveling from Switzerland, where they finalized the agreement, and could not be reached, a spokesperson said.

Under the terms of the deal, profits in North America and Europe will be split, along with promotion rights.

"Our model assumed a profit-split arrangement in the U.S., but the retention of profit-split rights in the EU came as a modestly positive surprise," Harr wrote in a research note.

Development costs in 2003 will be shared, too. After that, Novartis will pay pre-Phase III development expenses. Phase III expenses and pre-launch costs will be divided equally by the companies, but Novartis will provide a loan to finance Regeneron's share.

The loan and interest are repayable in full five years after the initial product launch of the IL-1 Trap, or five years after termination of Novartis' rights to the IL-1 Trap under the agreement, whichever occurs first.

Regeneron retains full rights to Japan. In all other markets, the companies will have co-promotion rights, with Novartis getting 75 percent of the profits in those regions.

Novartis also will provide a commercial manufacturing facility, although clinical supplies for the IL-Trap research will continue to be made at Regeneron's plant in Rensselaer, N.Y.

"We had always assumed they'd have to build a manufacturing plant, and that's $150 million to $200 million, a lot to ask from a company of this size," Harr told BioWorld Today. Regeneron has "real issues with cash burn over the next two to three years, and now they don't have to pay for anything" in the Novartis deal, which later could be broadened to include preclinical or early stage IL-1 antagonists.

Harr projected that Regeneron will save about $150 million from 2003 to 2005, so the total cash burn falls to $465 million from $610 million.

"You can't lose as long as the drug gets on the market," Harr said, adding that the IL-Trap "probably works," so Regeneron "would have had to pay that cash [for the manufacturing facility] anyway in the next three years, and now they have to pay the loan back in about eight years."

The IL-Trap blocks IL-1, which regulates immune and inflammatory responses by attaching to cell-surface receptors in the immune system. Regeneron's technology "traps" target cytokines in the bloodstream before they can attach. The IL-Trap mimics natural cell receptors by deploying the two components needed to bind the cytokines - which, once attached to the "trap," are flushed from the body. Data from a 200-patient Phase II study with IL-Trap are expected in the third quarter.

Due even sooner are results from a Phase III trial of Regeneron's obesity drug Axokine, a genetically re-engineered version of ciliary neurotrophic factor. (See BioWorld Today, Aug. 1, 2001.)

"It's a very difficult trial to get a hold on, with a very large number of patients in many centers," Harr said. "But we think it's going to be pretty good." About 4,000 patients were expected to be tested at more than 60 U.S. centers.

The market for Axokine looks promising as well, he said.

"You've got Xenical and Meridia, and neither of those is working very well," Harr said. "Meridia has [the side effect of] hypertension, and Xenical has flatulence and explosive diarrhea." Xenical (orlistat) is marketed by Hoffmann-La Roche Inc., of Nutley, N.J., and Meridia (sibutramine hydrochloride monohydrate) by Knoll Pharmaceutical Co., of Mt. Olive, N.J.

In the stock sale to Novartis, the price per Regeneron share will be determined based on the average closing price for 20 consecutive trading days ending May 9.

Morgan Stanley makes a market in Regeneron securities and in the next three months expects to receive or seek compensation for investment banking services from the company, according to Harr's research note.