Cell Genesys, Inc. (NASDAQ: CEGE) has announced a global alliance with Takeda Pharmaceutical Company Limited in Japan.  The companies will develop and commercialize Cell Genesys’ GVAX immunotherapy for prostate cancer, which is the company’s lead product candidate.  It is also currently in Phase 3 clinical development studies.

For exclusive worldwide commercial rights to for prostate cancer, Takeda is paying Cell Genesys $50 million upfront with additional milestone payments totaling up to $270 million.  The additional payments relate to regulatory approval and commercialization for prostate cancer in the U.s., E.U., and in Japan.

Takeda will pay tiered double-digit royalties based on net sales in the United States and it will pay flat double-digit royalties based on net sales in all other regions.  Takeda will also pay from here on out for all external development costs associated with the ongoing Phase 3 studies of GVAX immunotherapy for prostate cancer.  Takeda will also pay for all additional development costs and all of the commercialization costs.  Cell Genesys will maintain manufacturing and supplies of the product and will retain rights to co-promote GVAX immunotherapy for prostate cancer in the United States.

GVAX immunotherapy for prostate cancer is currently in two Phase 3 clinical trials, VITAL-1 and VITAL-2, in advanced prostate cancer patients. It is also under FDA FAST TRACK designation and both trials have completed Special Protocol Assessment agreements.

The company currently estimates that there will be sufficient events to trigger the final analysis for VITAL-1 in the second half of 2009. Patients are continuing to enroll in the VITAL-2 trial at nearly 100 clinical sites in North America and Europe. Cell Genesys has targeted the completion of enrollment for VITAL-2 with approximately 600 patients in the first half of 2009.  It then expects there will be sufficient events to trigger the pre-planned interim analysis in the same time frame.

The options may say it all.  The JANUARY-2010 $2.50 CALLS last traded at $1.30, which is greater than a 50% premium for a slightly out of the money call.  In fact, buying a JANUARY-2010 $2.50 straddle would cost more than owning the stock.  No wonder the open interest isn’t all that high.

Some may argue that this undermines the value of the prostate cancertreatment’s value on a fully-rolled-out basis if it reaches fullapproval and is a success because this has blockbuster potential.  Others will argue that this gets itsliquidity back in line with its long-term debt.  Shares of Cell Genesys closed down under 1% at $2.35 today, and the 52-week trading range is $1.78 to $7.30.  Its market cap is a mere $185 million. 

Jon C. Ogg
March 31, 2008

Jon Ogg produces the Special Situation Investing Newsletter and he can be reached at [email protected]; he does not own securities in the companies he covers.

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