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ABLYNX: Massive upfront from new Merck-Serono alliance

ABLYNX: Massive upfront from new Merck-Serono alliance

9.11.2011 9:40

Ablynx and Merck-Serono, a division of Merck (34,24 USD, -0,67%) KGaA, entered into a third agreement to co-discover and co-develop Nanobodies against two targets in osteoarthritis. Unique features of the Nanobody technology will be exploited with the aim of developing multi-specific products.
Ablynx will receive a € 20m upfront payment, payable in 2 tranches over the next three months, which should coverall discovery and development costs, excluding the Nanobody manufacturing and certain animal tests to deliver a preclinical package. If Merck Serono accepts a preclinical package, it will trigger a € 15m payment per programme to Ablynx. At that point, Ablynx has the option to carry 50% of the further development costs and receive 50% of the resulting profits, or has the right to convert the collaboration into an exclusive, world-wide license agreement with undisclosed milestone payments and royalties.
Our View:
This is the third agreement with Merck-Serono. The first, closed in 2008, focused on oncology and immunology targets, while the second, closed in 2010, focused on an undisclosed inflammatory (rheuma) target. By focusing now on osteoarthritis, Merck-Serono is entering a more challenging area but potentially highly rewarding. Indeed, osteoarthritis is one of the largest unmet medical needs where currently the focus is on pain management as no true disease modifying therapies have been found to be effective.
The philosophy of the new deal is broadly similar to the 2010 deal:
- Ablynx commits to deliver a preclinical package per target and gets via the upfront funding a ‘carte blanche’ on how to achieve that objective.
- The massive milestone of € 20m is double the size of the 2010 upfront, but per target (recall there are two osteoarthritis targets) it is the same. The split over three months may be important for the partner from an annual budget perspective, but is of little importance to Ablynx.
- The € 15m payment upon delivery per preclinical package is similar.
- The 50:50 cost/profit sharing and licensing option is similar.
Conclusion:
Ablynx has delivered on its promise to close a new deal with an existing partner before YE11. Especially the large upfront payment should eliminate any doubts on the company’s potential to finance its development pipeline, including the recently regained TNF-alpha program. Moreover, this size of upfront payments reflects a strong believe in the competences of Ablynx and a sign of long term commitment to the project from MS. Indeed, at its annual R&D day earlier this year, MS showed during several occasions its satisfaction on the Ablynx collaboration.
Because such alliances run over several years, we assume the 2011 P&L recognition to be limited (<€ 1m). However, based on our calculations, it allows the company to reach its FY11 top-line (€ 20-25m) and cash burn guidance (€ 25-35m). We do not exclude milestone payments from Boehringer before YE11. Ablynx reports 3Q11 results on 16 November.


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