Here’s What The Celgene Corporation (NASDAQ:CELG) Deal Means For BeiGene, Ltd. (NASDAQ:BGNE)

BeiGene, Ltd. (NASDAQ:BGNE) announced on Wednesday evening that it has struck a deal with biotech behemoth Celgene Corporation (NASDAQ:CELG), with said deal rooted in one of the former’s lead development assets – a drug called BGB-A317. It is an oncology drug that BeiGene is trying to get approved in globally for the treatment of patients with solid tumor cancers and the latest announcement marks a relatively big step forward for BeiGene in terms of achieving its aim.

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For those not familiar with this asset, it is what’s called a PD-1 inhibitor. This class of treatment types is becoming increasingly prevalent in oncology, primarily in the US, but also across Europe and throughout Asia, and it is a sort of immunotherapy type treatment. From a mechanism of action (MOA) perspective the drug works by inhibiting (as inferred by the name) a checkpoint called PD-1. In healthy cells, this checkpoint is used to alert the immune system to the necessity of getting rid of an aging, and potentially dangerous, cell in the human body. T cells identify the aging cells and activate the checkpoint, subsequent to which the cell undertakes what’s called apoptosis, which is a form of programmed cell death. The immune system then goes about cleaning up the mess and disposing of the dead cell. Cancer cells, on the other hand, are able to hide from T cells and, as a result, don’t undergo the usual programmed death mechanisms that healthy cells do. This leads to the unchecked proliferation and replication associated with tumor development.

Through the inhibition of PD-1, these sorts of drugs are able to stop the cancer cells from being able to hide from the immune system and, by proxy, stop them from replicating uncontrollably.

That’s the mechanism of action that underpins this asset class, what about the deal?

As per the latest announcement, BeiGene will pick up an upfront payment of $263m and Celgene will purchase 32.7m shares (5.9%) of the company at $59.55, by way of its American Depositary Shares (ADS).

In addition to the upfront capital injection and the big name backer, BeiGene is also eligible to receive up to $980 million in development, regulatory and sales milestone payments and royalties on future sales of BGB-A317.

Celgene will be responsible for the development and commercialization of the drug in the United States, Europe, Japan and rest of world outside Asia, meaning BeiGene will remain in control of the asset in its domestic territories, most notably China. Additionally, and importantly for the company and its shareholders, BeiGene will also acquire Celgene’s commercial operations in China and gain an exclusive license to commercialize the company’s approved therapies– Abraxane, Revlimid and Vidaza – in the region.

This transforms the company from a development stage entity to a commercial entity in China practically overnight – something that rarely happens in the healthcare space and something that shareholders will no doubt be happy to accommodate.

This is a great deal for BeiGene given the terms and the progress that the drug has already made towards commercialization and markets are responding accordingly. Subsequent to the announcement, the company gained 27% on its market capitalization and currently trades for $66.28, or a market cap of $2.64 billion.

As far as what happens going forward is concerned, all eyes are now on the development pathway for the drug.

While there exists some promising early-stage data, and BeiGene has in hand some compelling evidence that its PD-1 inhibitor, BGB-A317, can be effective in treating its target population of solid tumor patients, the drug still has quite a long way to go before efficacy and safety are confirmed. This isn’t necessarily a bad thing; it brings with it the potential for numerous near and long-term catalysts, each of which could drive an upside reevaluation for BeiGene, not just because of the drug moving closer to commercialization, but also because the company is set to receive the above-noted milestone payments on the back of any development based advance. It does bring with it a degree of risk, however, especially for anybody considering picking up a position in response to the latest development and in anticipation of a successful development pathway for BGB-A317 going forward. The capital injection and the license acquisition for the Chinese market drugs mitigates this risk somewhat, but not entirely.

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