Johnson & Johnson (JNJ, Financial) announced this week that it has licensed an asset from Cerecor Inc. (CERC, Financial). The deal brings with it a cash infusion for the small-cap biotechnology company and should serve to underpin what looks to be a promising development stage program for pharma giant J&J.
Almost immediately subsequent to the deal closing, though, Cerecor CEO and President Uli Hacksell announced his immediate retirement. That's a bit of a strange situation in anybody's book, and the official line from Hacksell is that the J&J deal means that he "can be optimistic about a bright future for the company."
For shareholders, it might be tough to know how to play this one. The resignation of a CEO immediately after what essentially amounts to an unloading of a lead asset sort of leaves the company in a bind. With that said, the capital injection associated with the deal means that Cerecor now has a decent cash runway and – at the smaller end of the biotechnology market – cash runway can be as important as a promising pipeline.
Cerecor has a drug called CERC-301 (not that one that's involved in this deal), which it's investigating as a potential treatment for neurological indications. The drug failed to show any real impact in two midstage depression trials, though, and its success across other indications is far from certain. For the foreseeable future, therefore, it looks as though a large portion of the company's valuation is going to be rooted in how successful J&J is with the drug it just picked up from Cerecor.
So what's the drug and what are its chances of success? Further, what does success mean for Cerecor?
The drug in question is called CERC-501 and it's part of a family of drugs called kappa opioid receptor (KOR) antagonists. The company tried to show that it could be useful as a treatment for nicotine addiction but a few months ago reported what amounted to pretty disappointing data from that effort. The KOR is one of the most widely established as crucial elements of neurological conditions, but it's also one of the least understood. In other words, we know that it plays a key role in the onset and development of certain neurological disorders, but we don't know why.
Based on this statement that it might not work in the treatment of something like nicotine addiction doesn’t really tell us too much about how it might work in other conditions. For a company like Cerecor, which prior to this deal didn’t have a substantial cash balance, these sorts of hit-and-miss assets can be too much of a risk. The company doesn’t have the money to initiate five or six different trials to see what works and what doesn’t. This isn’t the case for a behemoth like J&J, though, and it seems that this ability to risk a failed trial without impacting numbers too much is what's at the core of this deal.
To put that another way, it may cost J&J $100 million or more in failed trial dollars, but if the company can get a hit in any one of the major neurological conditions to which this drug can potentially be applicable, the lost dollars are worth the billion dollars in potential revenue from the hit.
And that's the key to this deal. Cerecor can't afford the hundreds of millions of dollars in failed trials, but it developed the asset and wants to ensure that it stands to gain from CERC-501 hitting markets in any indication. With the J&J deal, it now stands to do just that.
To quickly touch on the terms, J&J (through its Janssen unit) is paying $25 million up front for the rights to the drug in all indications and will pay another $20 million as measured against certain development type milestones.
With this cash in the bank, Cerecor has a runway through the end of 2018 (as announced by the CEO on his retiring) and will almost certainly spend that cash advancing 301 along its development pathway. With that said, this one is a royalty play for the time being. That's not a bad thing, but it’s the case that markets are probably going to be using the 501 program, as carried out by J&J, as a bellwether for success near term.
Disclosure: The author holds no positions in the stocks mentioned in this piece.
