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Try Then Buy? Sutro Deal Could Be Celgene’s Biggest Antibody Bet Yet

Xconomy New York — 

Celgene, one of biopharma’s most aggressive and creative dealmakers, said Thursday it has forged a deep partnership with South San Francisco, CA-based Sutro Biopharma that could end up with an acquisition.

If it does, it would dramatically expand Celgene’s footprint into the world of biologics, which the Summit, NJ-based company has mainly stayed away from during its climb to join Amgen, Gilead Sciences, and a few others among the big biotech elite.

At the time of this writing, Celgene is worth $76 billion, which includes a healthy 5.6 percent bump Thursday after announcing the deal on its third-quarter earnings call.

Celgene has become a powerhouse first with its multiple myeloma treatments, then by branching out into other types of cancer and most recently, autoimmune disease. All of its approved drugs to date have been small molecules, a very different business than biologics. That pattern has continued with its seemingly nonstop partnering; very few of its license deals and alliances have centered around biologics.

Sutro is by far the most significant. The deal, which builds upon a 2012 agreement between the two companies, remains, for now, a collaboration. Celgene is paying $95 million up front to work with Sutro on antibody-based therapeutics in immuno-oncology, one of the industry’s hottest fields. Sutro has built technology that the company says does two main things differently than other antibody technology companies.

It can mine for new antibodies faster, without using traditional cells like E. Coli as the “factories.” And it can modify those antibodies more accurately to hit more than one target at a time (what’s known as bi-specific or multi-specific), or be attached to tumor-killing small molecule drugs, in what’s known as an antibody-drug conjugate. Celgene wants Sutro to help it develop both kinds of products.

There are other payments involved, too, including up to $90 million more in the first three years of their R&D collaboration, and more than $1 billion in various payments if products from the work advance through development and onto the market.

But the big number in the deal remains a secret: What is Sutro worth if Celgene wants to buy it? The size of the window for Celgene to make that decision is also a secret, but if and when it does, it triggers a formula—or as Sutro CEO Bill Newell calls it, “a calculation”—that the two sides have put in place to determine Sutro’s value.

“It’s a very fair price,” said Newell. “But it’s not a fixed price.”

It’s not a stretch to say Celgene loves options to acquire. The Sutro deal is at least its sixth in three years, with Abide Therapeutics, Acetylon Pharmaceuticals, Forma Therapeutics, Quanticel Pharmaceuticals, and VentiRx Pharmaceuticals already in the portfolio. None of the options to acquire have yet been exercised, although VentiRx CEO Rob Hershberg is now working both for Celgene and for VentiRx. This summer, Celgene tapped him to run its new immuno-oncology “center of excellence” in Seattle, as Xconomy reported in July.

Newell said Sutro looked closely at that track record and was particularly encouraged by the immuno-oncology center in Seattle. “It’s fair to say they’re casting a broad net with different methods of approaching immuno-oncology therapeutics,” said Newell.

In addition to exploring new twists on monoclonal antibodies with Sutro, Celgene has tapped Bluebird Bio (NASDAQ: [[BLUE]]) for its cellular therapy approach and the aforementioned VentiRx for its small-molecule treatment that stimulates a component of the immune system called toll-like receptors.

Sutro chief scientific officer Trevor Hallam said hitting more than one immuno-oncology target at a time with a bispecific antibody could make for a better checkpoint inhibitor. That’s the type of treatment already proven to work by Bristol-Myers Squibb, which got marketing clearance in 2011 for ipilimumab (Yervoy), originally developed by the antibody developer Medarex. Ipilimumab binds to a receptor called CTLA-4 and prevents tumor cells from hiding from cytotoxic T lymphocytes, which normally would hunt down and kill them.

Other checkpoint inhibitors in development go after other targets to do roughly the same job. Those targets, PD-1 and PDL-1, are also present on healthy cells, so there’s a danger of those drugs causing unwanted side effects. Hallam said a bi- or multi-specific approach to checkpoint inhibition could do a better job to “spare healthy tissue” and let patients tolerate larger doses with “more medical impact.”

Sutro has also taken its first steps down the path more befitting an old-school, “fully integrated” biopharma company, inlcuding a manufacturing facility just south of the San Francisco airport. It’s only 10,000 square feet—by comparison, Genentech in 1998 cut the ribbon on its Northern California plant, then the world’s largest, with 310,000 square feet—but it’s the start of what Hallam called a “potential future operating system” that could take products up through commercialization.

With the Celgene deal, “we wanted to make sure Sutro was well situated, and that our investors would get a good return,” said CEO Newell. “But if they don’t exercise the option, we also want to make sure we’re positioned to go forward as a standalone company.”

The means to do so these days often comes through the public markets, where much more capital is available for growth. But the Celgene deal prevents Sutro from going public, Newell said, so that’s one less source of capital available.

An IPO was something Sutro, like many biotechs nearing $100 million in venture capital raised, had been considering. Its CFO Ed Albini told Xconomy earlier this year the company was out “talking to pure public and crossover investors,” who these days often will invest in a private biotech’s final round before an IPO. “The key, if you’re going to take crossover investors, is to find a group that will help facilitate the IPO,” Albini said.

Sutro’s most recent venture round, a $26 million Series D that closed in late 2013, brought it to more than $90 million. Its investor base has remained fairly stable, with Celgene joining previous investors, including other corporate backers—Amgen, Lilly—and VCs Skyline Ventures, SV Life Sciences, and Alta Partners. Celgene took more equity as part of the option-to-acquire deal, boosting its stake in Sutro to 15 percent, Celgene said.