Calithera Biosciences Inc(NASDAQ:CALA) is an early week runner, with the company currently trading at around a 46% premium to its Monday morning open. The upside comes on the back of an announcement that it will partner up with healthcare incumbent Incyte Corporation (NASDAQ:INCY) on one of its lead oncology assets. Markets are clearly bullish on the deal’s potential, but near to medium term, is there any further upside to be had in the aftermath of the announcement?
Let’s take a look.
So, the arrangement relates to a drug called CB-1158, and it is what is called a first-in-class, small molecule arginase inhibitor. To get an idea of how this drug works, it’s first important to understand a little bit about human cells in general. There is something called the tumor macroenvironment, which is the phrase used to describe the cellular makeup and – to repeat the word – environment that surrounds cancer cells and their resultant tumors. This macroenvironment has numerous impacts on the way that the body treats cancer cells, but one of the most important, and the most vital as far as cancer cell proliferation is concerned, is the way that it hides the cancer cells from the immune system. In a healthy immune system, and a normalized macroenvironment, the immune system would recognize pathogenic cells and destroy them. The cancerous macroenvironment, on the other hand, shields the cancer cells from said immune system, and as such, the cells aren’t destroyed (meaning they can proliferate relatively unchecked).
So where does CB-1158, come in to the equation?
Arginase is an enzyme that – as per the latest research in the space – plays a key role in this shielding of cancerous cells from the immune system. The theory is, then, that by inhibiting this enzyme, Calithera’s asset can effectively unshield the cancer cells, and increase their vulnerability to an immune system attack. This latter concept is important, as it defines the mechanism of action (MOA) for the drug. Specifically, it likely won’t be too effective on its own. It is basically pulling the cancer cells out from behind a curtain, so that the immune system can attack them. As such, the drug needs to combine with another drug, specifically an immuno oncology therapy, in order to serve as sort of a double pronged attack on the cells. Immuno oncology is Incyte’s core focus area, and therein lies the basis of the collaboration.
So, looking at the deal that’s just been announced, the two companies will jointly conduct and fund development of the drug, and Incyte will pick up global development activities. The latter will fund 70% of global development, and Calithera will foot the bill for the remaining 30%. If the drug is approved, the two companies will share profits and losses at 60% and 40% respectively. Concurrent to the profit share and the development cost arrangements, Calithera is set to receive more than $430 million in potential development milestones, and then future royalties based on future international (i.e. non-US) sales.
There also exists an opt-out element of the arrangement, which affords Calithera an opportunity to get out of having to fund development, but also involves the removing of the potential for royalty sales on the product. It does, however, bring with it an opportunity to pull in up to $750 million in development milestones.
So, what is our take on the arrangement? Well, we see this as something of a win-win for both companies, with Incyte picking up development rights to a drug that could serve as a strong adjuvant to a number of its lead assets, and Calithera potentially bringing in development milestones at high single digit multiples of its current market capitalization. With the opt out clause available to the latter, it seems that Calithera may have edged the deal in terms of favorability.
As far as near to medium term potential is concerned, we see Calithera continuing to run as the development pathway for this drug matures. Chances are the latest collaboration will only serve to accelerate said pathway, and that means we should be in line for a number of catalysts hitting press across the coming 24 months.
Now, we wait to see how things play out. Definitely one to keep an eye on moving forward.