The up tick in merger activity this year appeared to be continuing with last night’s announcement that Johnson & Johnson had tabled a $43 a share, or $970m, offer for  Cougar Biotechnology in a move that will bolster its rapidly growing oncology business.

On the surface it looks as if J&J, which has until now remained aloof from the recent flurry of deal making in the pharma sector, is paying to specifically get hold of CB7360, Cougar’s treatment for prostate cancer. However, the economical-looking premium to the current share price, a humble 16%, compares unfavourably with some previous deals in the space and with the demand for decent late-stage novel cancer drugs running high, J&J might want to watch out for another predator trumping its offer. 

Investors, however, seemed broadly pleased with the deal today, and pushed Cougar shares up to $42.70, just shy of the offer price. Shares in BTG, the UK biotech group which originally out licensed the drug to Cougar in 2004 retaining low-digit royalty rights and milestone payments, were only 1% higher in London markets.

Novel mode of action

CB7630 is attractive because it works in a very different way to other prostate cancer treatments, acting on both the testes, reducing the  testosterone prostate cancers need to grow and the adrenal gland, which can produce low levels of androgen which is responsible for  testosterone production. This means that patients who fail on androgen deprivation therapies, but have tumours which are still dependent on  testosterone, can be treated. 

Outside of CB7630, which is also been tested in breast cancer, Cougar’s pipeline is admittedly slender; CB3304 is currently in phase II trials for multiple myeloma and phase I for non-Hodgkin’s lymphoma, and  CB1089 is in phase II trials for prostate cancer, but after them the company only has two pre-clinical tublin inhibitor products.  

Going it alone

Until this compelling offer from J&J, Cougar had looked as if it might take the drug all the way to commercialisation, and then seek a partner, to extract maximum value for  CB7630 (Abiraterone data adding weight to Cougar and BTG , July 22, 2008). But it is questionable with a cash pile of $91m what resources the group would have been able to throw into continuing expensive phase III trials and marketing the drug, and a fundraising would almost certainly have been required. 

So on one hand the offer from J&J looks as if it has come just in the nick of time, although in terms of extracting maximum long-term value the company may have been better off tapping the markets for extra money and remaining independent until  CB7630 proved its worth.   

According to consensus forecasts from EvaluatePharma, CB7630 is forecast to make revenues of $407m for Cougar on the assumption of a co-promote deal for the drug in the US and royalties from the rest of the world. Peak sales are also forecast to hit $1bn. Add onto this the predicted peak sales of $400m for both  CB3304 and  CB1089 and the J&J offer price still looks a little light.

Long term strategy

However, J&J might argue, because CB7630 was only moved into phase III trials in the larger, more lucrative pre-chemotherapy population at the end of April, and data is not expected before the end of 2010, it has in reality bought a phase II drug, with all its inherent risk and the offer price reflects that.  

But CB7630 is also currently testing the drug in metastatic castration-resistant prostate cancer in phase III, and could come up with data as early as the end of 2009, or early 2010. As such, J&J may have wanted to clinch a deal ahead of this trial, which if positive might have pushed the price tag up.  

It could also have been the basis for earlier than expected entry of the drug onto the market, where physicians might use it off label for pre-chemotherapy patients, rapidly increasing sales. 

If this does happen at least those sales will now be J&J's.