Incyte Corp. (INCY, Financial) just announced a fresh deal with small-cap biotechnology company MacroGenics Inc. (MGNX, Financial), and both companies are picking up some strength on the back of the news. MacroGenics traded at a close to 20% premium to its preannouncement market capitalization Wednesday morning. Incyte was up a couple of percentage points, having spiked in the early session but subsequently settled down.
This gain might not seem as substantial of the form, but when you consider the size of Incyte compared to that of MacroGenics, it's a solid market response to the development.
In light of this response, then, here is a look at the deal, what it means for both companies and what to look for going forward as supportive of continued strength tied to the arrangement.
At core, Incyte is paying MacroGenics for access to one of its primary development assets, a drug called MGA012. The latter is part of a family of drugs called PD-1 inhibitors, and Incyte has been trying to get one of these sorts of drugs to market for quite some time now but hasn't had much luck to date. The company paid $25 million upfront (and committed a further $770 million in milestones) to a Chinese entity called Jiangsu Hengrui Medicine a couple of years ago for the rights to the latter's anti-PD-1 antibody outside of China. In data released earlier this year, it was shown that the drug in question produced an increased risk of what's called skin capillary hemangioma, which is an abnormal buildup of blood vessels on or under the surface of the skin.
In any other asset class, this would be too much of a problem. Hemangiomas are relatively low risk and as adverse events are generally classed as grade one. In this instance, though, physicians have a very large portfolio of this type of asset to choose from and drug-specific adverse events are normally regarded as enough to translate to the failure of a development program.
So, with the MacroGenics deal, Incyte is essentially trying again with a fresh set in the same class.
The idea is to combine it with some of its own, already approved, and college assets in an attempt to boost efficacy and help the company compete with others in the space that are already using PD-1 assets to bolster their respective portfolios – companies like Merck & Co. Inc. (MRK, Financial) and Bristol-Myers Squibb Co. (BMY, Financial).
In terms of the numbers associated with the transaction, Incyte has paid $150 million up front to MacroGenics, and there's the potential for a further $750 million in milestones, broken down into $420 million in development and regulatory landmarks and $330 million in commercial targets.
So what is the deal mean for Incyte?
The company needed to pick up an asset like this if it is going to compete with the above mentioned two health care behemoths, so from a competitive perspective, this is a smart move from Incyte. Combine that with the fact that its previous PD-1 asset doesn't look like it's going to hit markets anytime soon and the timing of the deal seems pertinent.
With that said, though, markets aren’t going to forget the Chinese growth failure so that's why we are seeing a relatively muted response from this side of the equation.
From the perspective of MacroGenics, things are a little rosier. For a company at its end of the biotechnology space, capital resource is a major risk factor and the $150 million up front will go a long way toward adding runway to the company's other research and development efforts. This, in turn, will make it attractive to traders and investors looking to pick up an exposure to the technology space.
All said, this is a good deal from both sides, but Incyte needs to show that the MacroGenics asset can bolster its own portfolio, and can do so safely, before the company can call the arrangement a success.
Disclosure: The author has no positions in any of the stocks mentioned in this piece.
