CymaBay Therapeutics Inc (NASDAQ:CBAY) is running up on the news that it has scored an exclusive licensing agreement with Kowa Pharmaceuticals America, Inc. for the development and commercialization of its lead gout asset in the United States. For the tiny biotech, which carries a market capitalization of less than $50 million (although this is set to rise at market open on Wednesday), this is a big deal. Kowa Pharmaceuticals America is the US arm (and fully owned subsidiary) of the Japanese privately held pharma giant Kowa Company, Ltd, and there’s substantial capital potential on the deal as it matures.

Ahead of market open, then, let’s take a look at the drug in question, and try to figure out what it means for CymaBay going forward.

First, a quick look at the agreement. CymaBay will receive up to $15 million in upfront and near-term milestone payments. While we don’t have the exact terms of the deal, the assumption is that these near term milestones are rooted in the initiation of a phase III trial, and perhaps stretching out to enrollment completion (although probably not, more likely just the initiation and the manufacturing of the drug doses required). Beyond the initial $15 million, there’s an additional $190 million in payments based upon the achievement of specific development, regulatory and sales milestones.

If the drug hits commercialization, CymaBay will pick up tiered, double digit royalties on future sales of the drug, while Kowa (and this is a big point) will cover all development and commercialization costs.

These sorts of deals are not unusual at this end of the biotech space. There’s a $100 million cost associated with the carrying out of the phase III that CymaBay needs to get this one through to commercialization. When you’re heading out of phase II, and you’ve got the standard cash holding of a biotech of this company’s size (say, a few million dollars at the top end) you’ve got two primary choices – raise capital or find a partner. The first is heavily dilutive to shareholders. The second is not dilutive (generally, and even if it is, it’s far less dilutive) and removes a massive portion of the risk.

CymaBay has obviously gone for the second choice, and shareholders are relieved, and that’s a secondary reason as to why the company is running up. As a quick side note, there’s an element of dilution on the cards, on the back of the company noted at the end of last month that it intends to raise $15.7 million. That’s probably going to be overlooked somewhat, however.

Anyway, back to the drug. As mentioned, it’s going after gout – a disease in which defective metabolism of uric acid causes arthritis. High levels of what’s called serum uric acid are known to be associated with the condition, so CymaBay is working on the assumption that by reducing serum uric acid (this basically just means uric acid amount in the blood) it can help alleviate gout. In a pretty extensive phase II study, arhalofenate has been shown to decrease serum uric acid while also suppressing gout flares, suggesting that the association is correlative with severity, and that – in turn – arhalofenate can be an effective treatment. Safety hasn’t really been an issue in the trials to date, and there’s a real unmet need here, so going on the information we’ve got available to us, we think the chances look good for the drug going forward. Of course, so does Kowa, and that’s why the company is paying $190 million for US rights to arhalofenate.

It’s under development as a combination therapy with a drug called Febuxostat, which Takeda Pharmaceutical Co Ltd (ADR) (OTCMKTS:TKPYY) picked up approval for in the US at the end of the last decade, and which is designed to reduce uric acid production. The thinking is, then, that a two pronged approach – one that stops the acid being produced (or lowers the level produced) and one that helps reduce the levels of that acid that has been produced.

So what are we looking for next?

The initiation of the phase III is what we’re looking to as solidifying the deal between the two companies, and triggering some of the near term milestones payments associated with the agreement.