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ZymoGenetics Snags $1.1 Billion Partnership With Bristol-Myers For Hepatitis C Drug

Xconomy Seattle — 

Update with detail from regulatory filing at the end: ZymoGenetics has broken out of its slump with a home run. The Seattle-based biotech is announcing today it has signed a global partnership with drug giant Bristol-Myers Squibb, worth as much as $1.1 billion, to co-develop an experimental treatment for hepatitis C, a chronic liver infection that ails millions of people.

The deal will provide ZymoGenetics with an immediate infusion of $85 million in cash, and another $20 million license fee in 2009. ZymoGenetics (NASDAQ: ZGEN) also stands to gain $430 million in payments from Bristol if the medicine, pegylated interferon lambda, reaches certain goals in its development as a treatment for hepatitis C. ZymoGenetics could also pull in another $287 million if the drug reaches certain milestones as a treatment for other diseases, and $285 million more if the product reaches the marketplace and exceeds sales thresholds.

The deal represents a lifeline for ZymoGenetics, which has gotten itself into a predicament. The company lost 76 percent of its stock value in 2008 when its first marketed product failed to live up to its first-year expectations, and one of its leading drug candidates failed in a clinical trial. But on the back burner, in an earlier stage of development, the pegylated interferon lambda candidate showed an ability to kill the hepatitis C virus without causing the nasty flu-like symptoms that force many patients to quit taking standard meds, according to research presented at a medical meeting in November. Doug Williams, the company’s president and now CEO, swore throughout the fall that ZymoGenetics’ drug was a hidden gem. If it pans out in more rigorous studies, the opportunity will be big, with an estimated 3.2 million people in the U.S. infected with hepatitis C, and about 170 million worldwide.

The new partnership with Bristol-Myers is the biggest in ZymoGenetics’ 28-year history. It’s “incredibly important,” said company spokeswoman Susan Specht, in an email. Zymo’s Williams said in a statement that Bristol-Myers is an “ideal partner” and that “we share the vision that PEG-Interferon lambda could become an important part of treating patients with Hepatitis C.”

Under the deal, ZymoGenetics will be responsible for a significant portion of the costs for developing pegylated interferon lambda in early-stage clinical trials, and will pick up some of the bills for mid-stage studies, although it didn’t say specifically what percentage of the expenses. Bristol-Myers will be responsible for marketing the drug outside of the U.S., and it will give ZymoGenetics a “double-digit” percentage royalty on sales in those territories. In the U.S., ZymoGenetics will have the option to co-promote the drug with Bristol-Myers’ sales force, and split profits, although ZymoGenetics didn’t disclose the profit-split ratio. If ZymoGenetics decides to save its money and let Bristol-Myers do all the marketing by itself, Zymo would still get a piece of the pie, via royalties on U.S. sales that represent a “double-digit” percentage of sales.

ZymoGenetics plans to field detailed questions about the deal in a conference call with investors at 8:30 am Eastern time tomorrow. For now, Specht declined to answer many key questions sure to surface, like how the companies will divvy up development expenses, the percentage split of the profits ZymoGenetics stands to collect, or how large the clinical trial budget is expected to be to bring this drug to the marketplace. Some of the details will be disclosed in a regulatory filing, and ZymoGenetics chief financial officer Jim Johnson will be able to discuss how the deal will affect the company’s cash balance and spending rate, she said.

ZymoGenetics and Bristol-Myers Squibb apparently were able to bury the hatchet pretty quickly to form this partnership. ZymoGenetics dropped a patent infringement lawsuit against Bristol as recently as October, when it agreed to settle for a $21 million cash payment.

The two companies will now join forces to compete in a marketplace of new drugs for hepatitis C that is fast becoming crowded. Cambridge, MA-based Vertex Pharmaceuticals is leading the way with an experimental drug called telaprevir, a protease inhibitor, that’s shown an ability to cure roughly two-thirds of patients with hepatitis C in about six months, compared with about one-third who do that well after taking standard pegylated interferon alpha and ribavirin for almost a year. Other drugs in different classes, such as nucleoside inhibitors and non-nucleoside inhibitors, are at earlier phases of testing, attempting to attack the virus from different angles. That makes it likely that an HIV-style cocktail approach will be widely used in the future, says Steve Worland, CEO of Anadys Pharmaceuticals, a San Diego-based company with a non-nucleoside drug in an early phase of development.

ZymoGenetics’ Williams, in an interview in September, said he welcomes the progress of Vertex and its fast-followers. ZymoGenetics is hopeful that its new version of interferon could someday replace the standard interferons, which are the backbone of hepatitis C therapy today. The side effects of the standard drugs are so bad that only a fraction of the estimated 3.2 million people infected in the U.S. seek treatment, so any way to get their virus-killing ability with fewer side effects could open up a large potential market, he said.

The ZymoGenetics candidate, in its first 18 patients, didn’t show any signs that it caused fevers or damaged blood cell counts, a couple of the side effects that plague the standard interferons.

Update: 1:20 pm Pacific. ZymoGenetics said in a regulatory filing that it will pay 20 percent of the cost of developing pegylated interferon lambda, and Bristol-Myers will pay for 80 percent of costs, provided that ZymoGenetics pays the first $100 million of development costs, taking the drug beyond the initiation of Phase II clinical trials. ZymoGenetics will get 40 percent of the U.S. profits if it elects to co-promote the drug, with Bristol-Myers getting 60 percent. Bristol-Myers also can terminate ZymoGenetics’ co-promotion rights if Zymo’s cash balance falls below $35 million, and it is unable to boost the cash balance above $35 million within 10 days. If that happens, ZymoGenetics would get a royalty stream on U.S. sales, according to the filing.

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