Celgene Gets OncoMed Cancer Pipeline, Maybe Dirt Cheap

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OncoMed Pharmaceuticals Inc. (OMED) just went from being an obscure biotech to one on the map with more security than it had. The company can thank Celgene Corp. (CELG) for this development. The news is that Celgene will jointly develop and commercialize up to six potential anti-cancer stem cell treatments out of OncoMed's drug candidate pipeline. OncoMed just secured more capital and safety, and Celgene may have just bought up rights to a drug pipeline on the cheap.

Celgene will give OncoMed $177.25 million upfront, which includes a $22.25 million equity investment in OncoMed. The six candidates include OncoMed's Demcizumab and up to five additional pre-clinical biologics programs.

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What may have just taken place is that Celgene just bought a new anti-cancer stem cell pipeline on the cheap. This may still be a great deal for OncoMed, but there is a lot of money at stake down the road.

Usually when you see a gain of 80% it is due to a buyout. That is not the case here. OncoMed shares were up 81% at $25.50 on last look, against a 52-week range of $12.07 to $31.00. OncoMed is also only worth $710 million, and that is after the massive pop. Again, it seems as though Celgene did a great service here. For $155 million it secured rights to a drug pipeline. It also gets stock for $22 million or so that almost doubled in value.

Celgene is worth some $66 billion in market cap. Revenue is expected to grow almost 17% to $6.4 billion in 2013 and another 15% or so up to $7.4 billion in 2014. The company has almost $5.85 billion in cash and short-term investments and more than $4.2 billion in long-term debt.

This investment may have just saved Celgene from spending $700 million or so upfront on unproven drug candidates. It may turn out that Celgene ends up having to pay more down the road, depending on the successes and failures and on how much revenue it gives up as a result of the partnership. Still, this preserves cash now and allows it to only have to really give up cash if the drugs become successes.

What is surprising is that the market reaction to Celgene has been muted. Perhaps the needle is just becoming too big to easily move a $66 billion market value. Celgene shares were down 0.8% at $161.75 on last look, versus a 52-week range of $77.22 to $165.74. Another possibility is that the move has already been huge in Celgene's stock. Celgene's consensus price target from analysts is $172.20.

As a reminder, most cancer drugs that become successful are blockbuster drugs, as long as they are for common cancers. Even if Celgene sacrifices revenue ahead by the licensing deals, it did not burn through its cash on a pipeline full of new pre-clinical, Phase I and Phase II studies.

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