Sugen's New Sponsor Is P&U; $650 Mil. Deal Supplants AstraZeneca

Pharmacia & Upjohn will be the new big pharma sponsor for oncologic development projects stemming from Sugen's nine-year program in tyrosine kinase and tyrosine phosphatase signal transduction.

In a $650 mil. stock-for-stock transaction announced June 15, P&U is buying full control of Sugen, supplanting AstraZeneca, which has been a major sponsor for over five years.

P&U will become the overseer of a range of other corporate co-development and marketing deals including an ophthalmic development agreement between Sugen and Allergan, a preclinical pan-HER antagonist program with ASTA Medica and a Japanese commercialization deal with Taiho.

Sugen has three oncology compounds in clinical trials on its own, including a project described by the company as the furthest advanced angiogenesis cancer treatment. Sugen also has early-stage research efforts in other diseases based on signal transduction and bioinformatics screening.

P&U's investment comes at an opportune time for Sugen as it takes on more clinical costs for its three lead projects and as the AstraZeneca relationship heads toward an apparent termination in March 2000.

Sugen has one product (SU101, a platelet-derived growth factor receptor inhibitor) in Phase III trials and is about ready to jump another product (SU5416, its angiogenesis product) from Phase I directly into Phase III trials for non-small cell lung and colorectal cancers.

As of June 1, SU101 had been given to approximately 460 patients in 14 Sugen-sponsored clinical trials, including the Phase III trials in refractory primary glioblastoma. The glioblastoma trials were started in January 1998 and are designed to test the drug in about 380 first relapse patients randomized to either SU101 or procarbazine (Roche's Matulane).

P&U inherits a simmering patent dispute over SU101. Hoechst owns patents on leflunomide, which it markets as the rheumatoid arthritis therapy Arava. SU101 is also comprised of leflunomide but Sugen has been issued two cancer use patents and has applied for formulation patents. Sugen maintains that leflunomide was discovered 17 years ago and the Hoechst patents "may have expired when marketing does begin."

The decision to advance directly to Phase III with SU5416, Sugen's angiogenesis compound, indicates the intensity of the race in that part of oncology. Because the antiangiogenics, including matrix metalloproteinase inhibitors, do not have an effect on tumor response rates, companies are proceeding straight to Phase III show a survival benefit. Bayer and Agouron have taken this approach with their MMPs ("The Pink Sheet" Nov. 23, 1998, p. 16).

EntreMed is planning to start first human trials on three of its antiangiogenic compounds by the end of this year ("The Pink Sheet" April 12, p. 5).

For Sugen, advancing SU5416 into Phase III is an acceptable risk. While it may increase the chances of a development failure, the jump to the later clinical stages could increase the visibility and stimulate excitement about the project which could in turn have helped Sugen keep open its access to future funding.

For P&U, the risks and rewards are different. Having a high-visibility antiangiogenesis project should help to elevate the status of P&U as a participant in the oncology business, although it also adds a failure risk that may be more than necessary for P&U.

Sugen has predicted the start of Phase III trials for SU5416 later this summer. The P&U purchase is not expected to close until the third quarter. One of the interesting details of the change in ownership is whether it will have an effect on the SU5416 schedule.

P&U is highlighting the impact of the Sugen pipeline on its position in the oncology business. "With the addition of the cytostatic platform represented by Sugen, we position P&U to become the new challenger in the oncology category," P&U declared. Oncology is currently ranked as P&U's second largest area of focus, behind metabolic diseases.

AstraZeneca's relationship with Sugen was more limited than P&U's assumption of the full range of projects. AstraZeneca has funded work on five cancer areas, specifically excluding projects that Sugen wanted for its own development. AstraZeneca indicated that it feels the Sugen relationship has moved AstraZeneca's in-house projects ahead and is most important for the know-how that has been transferred.

In a June 15 statement announcing its intention to vote its almost 20% holding in Sugen shares in favor of the sale, AstraZeneca said: "The collaboration has augmented the work AstraZeneca has carried out on its own kinase target research programs and has broadened the opportunities available to us."

The June 15 statement by AstraZeneca exhibits concern about the implicit question of how it could let a major oncology development firm go to another owner while pursuing its widely proclaimed goal of catching Bristol-Myers Squibb as the number one in oncology.

AstraZeneca points out that it has two home-grown compounds in clinical trials similar to the Sugen projects: "an EGF receptor kinase inhibitor and a VEGF receptor kinase inhibitor."

AstraZeneca is also walking away from the Sugen relationship with a good-sized paper gain. The company bought its first position in Sugen in 1994 with a $7.5 mil. participation in Sugen's initial public offering.

AstraZeneca will return about $2.55 for each dollar invested in Sugen for a net gain of $1.55 for each dollar invested. AstraZeneca's approximately 3 mil. shares purchased from a cumulative investment of $36.8 mil. will be worth $94 mil. in P&U. AstraZeneca will hold approximately 1.7 mil. P&U shares (.3% ).

Sugen has used a broad array of commercial agreements and funding mechanisms to keep its cash levels sufficient for its clinical development projects and a technical scientific staff of about 150.

Most recently in March, the firm signed a $2.4 mil. commercialization agreement with Laborarorios Del Dr. Esteve for sales in Spain and sold $28 mil. of convertible notes in a private placement.

The note sale also contained warrants for an extra $21 mil. at the conversion price of $20.50, about 50% below the per share P&U buyout price. The Spanish company paid $31.50 for its $1 mil. stock investment as part of the commercialization deal.

The note sale helped replenish Sugen's cash position to about $62 mil. It had dropped to $47.3 mil. at the end of last year from $75.3 mil. at the end of 1997. P&U will also get a large accumulated loss position with Sugen which may help defray some of the purchase costs. The company has an accumulated deficit of over $150 mil.

P&U announced the deal one week after an FDA advisory committee review for one of its European cancer products. The company received a recommendation for approval of Ellence (epirubicin) for adjuvant therapy for early stage breast cancer in combination with fluorouracil and cyclophosphamide from FDA's Oncologic Advisory Committee June 7.

Approved in Europe, Ellence generated $177 mil. in 1998 sales. A first-line indication against metastatic breast cancer was not accepted by the FDA advisory committee ("The Pink Sheet" June 14, p. 3). An NDA for Aromasin (exemestane) for advanced metastatic breast cancer was filed in December. Camptosar (irinotecan) is providing growth to P&U current cancer line. The product had sales of $193 mil. and is growing rapidly this year (up 53%).

P&U also is preparing to submit an NDA for a prostate cancer drug in September for the luteinizing hormone-releasing hormone Trellasar (triptorelin). The product, licensed from Debiopharma, has an application pending also for gynecological indications.

Some of Sugen's agreements may pose awkward competitive situations for P&U in the future. For example, the Allergan deal would have P&U developing treatments for conditions related to optical neovascularization. Ophthalmic indications have become a big business for P&U based on the success of Xalantan (latanoprost) in glaucoma treatment.

Similarly, a Sugen agreement a year ago with the Israeli firm, ProChon Biotech, calls for collaborative work on dwarfism and growth disorders. P&U has a major frachise in the growth disorder business with Genotropin, the company's leading product.

P&U announced a second corporate deal the same day as the Sugen purchase to bolster the growth hormone line. P&U purchased 19.9% of Texas-based Sensus Drug Development Corporation. Sensus is developing an orphan drug, pegvisomant, under a "fast track" review at FDA. The drug is a growth hormone antagonist for acromegaly (gigantism).

Under the terms of the merger agreement, Sugen stockholders will receive approximately $31 worth of P&U stock for each share of Sugen, as long as the price of P&U stock is between $60.16 and $49.22 at the close of the transaction. If the merger agreement is terminated, P&U has the right to purchase 19.9% of Sugen's common stock and is entitled to a fee of $17 mil.