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J&J to Buy Aragon for $1 Billion

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With the intention of strengthening its prostate cancer portfolio, Johnson & Johnson (JNJ) recently announced its intention to acquire privately-held, pharmaceutical discovery and development company Aragon Pharmaceuticals, Inc.

The $1 billion deal will see Aragon’s lead pipeline candidate, ARN-509, becoming a part of Johnson & Johnson’s pipeline. ARN-509 is currently in phase II development for castration resistant prostate cancer (:CRPC).

The $1 billion payout includes a $650 million upfront cash payment and up to $350 million on the achievement of milestones.

Before the deal closes in the third quarter of 2013, Aragon will transfer all assets apart from the androgen receptor antagonist program to a new company that will be spun-off. Johnson & Johnson will neither have an ownership stake in this company nor will it retain any rights to the products or programs transferred to the new company.

The deal, which is scheduled to close in the third quarter of 2013, has been approved by the boards of both companies.

Our Take

This deal signifies Johnson & Johnson’s attempt to strengthen its prostate cancer franchise especially once Zytiga loses exclusivity. Zytiga, which became a part of Johnson & Johnson’s portfolio following its acquisition of Cougar Biotechnology, is one of the company’s most successful launches in recent times. The successful development of ARN-509 will consolidate the company’s position in the prostate cancer market.

While Johnson & Johnson shareholders reacted positively to the news (shares were up 0.85%), biopharma company Medivation, Inc.’s (MDVN) shares fell 6.78%.

Medivation has a presence in the prostate cancer market in the form of Xtandi. The problem is that ARN-509 is a close structural analog of Xtandi and was developed in the same academic laboratory as Xtandi and was allegedly licensed by the University of California (:UCLA) to Aragon. Medivation had filed a lawsuit against UCLA and one of its professors claiming that it has exclusive commercial rights to ARN-509. So far, the court rulings have been in favor of UCLA and litigation continues with Medivation filing an appeal.

We believe the decline in Medivation’s share price reflects concerns regarding the company’s legal standing in the ARN-509 litigation as well as future competition. Medivation’s legal standing may be considered to be weak as Johnson & Johnson will have done its homework regarding the legal situation before deciding to acquire Aragon.

Moreover, Johnson & Johnson’s financial position ensures that any financial risks associated with the development of ARN-509 no longer exist.

However, in our view, Medivation should not be affected by this acquisition. ARN-509 is in mid-stage development and therefore, several years from commercialization. Moreover, ARN-509 needs to be shown to be superior on efficacy and/or safety to Xtandi in order to gain market share. This is a long-term concern for Medivation and should not affect Xtandi’s sales potential or near-term performance. Xtandi is already off to a strong start with first quarter 2013 sales coming in at $75.4 million.

Both Medivation and Johnson & Johnson are Zacks Rank #3 (Hold) stocks. Companies that currently look well-positioned include Biogen Idec (BIIB) and Novo Nordisk (NVO). While Biogen is a Zacks Rank #1 (Strong Buy) stock, Novo Nordisk is a Zacks Rank #2 (Buy) stock.

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Read the Full Research Report on MDVN

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