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ZymoGenetics Hands Over Atacicept Rights to Partner, Merck KGaA

Xconomy Seattle — 

ZymoGenetics is making a sacrifice to conserve cash. The Seattle biotech company (NASDAQ: ZGEN) said today it has agreed to hand over atacicept—its leading drug candidate for autoimmune diseases like lupus, rheumatoid arthritis, and multiple sclerosis—to its partner, Darmstadt, Germany-based Merck KGaA.

The move means that the German partner will now have to pay for all of the drug’s development costs, and, in return, it will get 100 percent of the worldwide commercial rights. ZymoGenetics stands to get milestone payments and royalties that will run into the “high teens” in terms of a percentage of Merck KGaA’s atacicept sales, if it becomes a marketed product, said ZymoGenetics president Doug Williams.

The move will allow ZymoGenetics to save more than $200 million in estimated development costs as atacicept (pronounced Uh-tack-EE-sept) advances through the final stages of clinical trials over the next several years, Williams says. But it also limits ZymoGenetics’ ability to reap the rewards from an experimental drug it discovered internally, which has potential to exceed $1 billion a year in sales, said David Miller, president of Biotech Stock Research, an independent equity research firm in Seattle.

“In a better investing environment, the company would have chosen to sell shares and hold on to a larger percentage of atacicept revenues, but these are the types of tough decisions that companies have to make when the stock market is this bad for biotech,” Miller says. Under the circumstances, he said the ZymoGenetics deal could turn out positive if it can get 17 to 18 percent of a billion-dollar revenue stream, without paying any more of the costs. “It’s nothing to sneeze at,” he says.

ZymoGenetics, as we have written, has gotten into a bit of a bind this year. Sales of its first marketed product, Recothrom for surgical bleeding, have gotten off to a slower start than expected. The company reported a net loss of $37 million in the second quarter and said it had $117 million left in the bank at the end of June.

Since investors can do the math pretty easily about how fast the cash horde is diminishing, many have been speculating ZymoGenetics would need to turn to investors to raise more equity capital. That has depressed the stock price to $8.43, where it closed yesterday, down 28 percent this year. Williams confirmed the company would have had to raise a lot of money to stay in the game with atacicept, and shifting the costs to Merck Serono will lift that burden.

ZymoGenetics doesn’t plan to undergo any layoffs of its 500 employees, and it now plans to shift a small number of people from the atacicept project to other opportunities in the pipeline, namely PEG-Interferon Lambda for the liver disease hepatitis C, Williams says.

Atacicept is meant to work unlike any other marketed drug. It is a genetically engineered protein that’s designed to block BLyS and April, a pair of proteins that stimulate the growth of B cells, which can create antibodies that go awry and attack healthy tissue. Across autoimmune diseases, atacicept is being tested in multiple trials for rheumatoid arthritis, systemic lupus, and multiple sclerosis. The earliest data from well-controlled trials is expected to be available in late 2009 or early 2010, Williams says.

That means the company could be waiting a long time, and spending a lot of its cash, during a bad biotech stock market before knowing what it really has. “We thought long and hard about this,” Williams says. “We feel very good about the decision because we can still capture a lot of the value,” he says. ZymoGenetics also will receive a higher-than-normal royalty rate because it stuck with the program as long as it did, and helped craft what it thinks is a winning clinical trial strategy.

Williams didn’t say how much ZymoGenetics has invested in atacicept to date, although he said it spent $19 million on it last year, and another $19 million in the first six months of this year, with bigger bills still to come as hundreds of patients enroll in trials.

ZymoGenetics originally entered the atacicept partnership with Serono, the world’s leading maker of fertility drugs, in 2001. Serono was acquired by Merck KGaA in September 2006. The companies will still work together on a research alliance, although it has been amended so that ZymoGenetics will now take control of another drug, IL-31 monoclonal antibody, while Merck Serono will have control over IL-17RC. Both treatments are for inflammatory diseases.

I didn’t get the sense that Williams, an Xconomist, feels he might be giving away the company jewels here. Lupus is a graveyard for drug development, where scientists are still working to agree on the best measurement for success, and no new therapy has been approved for 40 years. Genentech and Biogen Idec’s Rituxan, a hit drug for lymphoma and rheumatoid arthritis, failed in a large study against lupus earlier this year.

Rheumatoid arthritis is a huge market worth $10 billion a year, according to IMS Health, a market research firm. But it’s also fiercely competitive, led by Amgen’s Enbrel, Abbott Laboratories’ Humira and Johnson & Johnson’s Remicade. Multiple sclerosis is another tough field, with Biogen Idec and other companies firmly entrenched. Williams had some interesting reasoning about why the company now wants to shift its resources over to the PEG-Interferon Lambda program for hepatitis C, but that’s a story for another day.