& : This Is More Like It

[Guest guest]

& : This Is More Like It

By D. Simpson, CFA Fri Jun 30, 1:55 PM ET

I don't know what surprises me more -- that & (NYSE: JNJ - News) is doing something on the drug side of it business, or that there was a deal in the hepatitis-C market and Novartis (NYSE: NVS - News) wasn't involved.

J & J and Vertex Pharmaceuticals (Nasdaq: VRTX - News) announced today that they have reached an agreement for the co-marketing of Vertex's experimental VX-950 drug for hepatitis C. Under the terms of the agreement, J & J gets rights outside the U.S. in exchange for $165 million in upfront payments, another $380 million in potential milestone payments, and a generous royalty rate somewhere in the 20% range.

Even for a high-potential drug like VX-950, that's a generous agreement for a drug still in phase 2 testing. And I think that, at some level, competition must have played a role in the price. As I said before, Novartis has been locking up hep-C drugs left and right, and Pfizer (NYSE: PFE - News) is now on the prowl as well, with billions of dollars to spend on marketing partnerships or outright buyouts. But given what we've seen lately in the bidding for Guidant and the deal with Pfizer for the consumer business, J & J isn't afraid of trading cash for the opportunity to grow a little faster.

What remains to be seen, though, is how much further J & J is willing to go. There are still several unpartnered drugs out there, as well as more than a few medical-technology buyout candidates. And while I realize this violates value-investing orthodoxy, I think I'd rather see J & J pay a little too much for a good business than sit on its nest egg like a stubborn chicken. After all, I recall & getting a lot of criticism for overpaying for Cordis back in the day, but nobody seems to be complaining about the profits from its Cypher drug-eluting stent today.

In closing, I'm very curious to see how the hep-C world plays out in the next few years. Companies including Schering Plough (NYSE: SGP - News), Novartis, Human Genome Sciences (Nasdaq: HGSI - News), and Valeant (NYSE: VRX - News) all have something at stake here. Even granting that many drugs currently in trials will fail, I'll be eager to see whether the market becomes "winner take all" or whether it gets spread out among a host of effective medications.

& is a Motley Fool Income Investor recommendation. Pfizer has been recommended in Motley Fool Inside Value, and Vertex is a Motley Fool Rule Breakers pick.

Fool contributor Simpson owns shares of & and Valeant but has no financial interest in any other stocks mentioned (that means he's neither long nor short the shares). The Motley Fool has a disclosure policy.

http://news./s/fool/20060630/bs_fool_fool/115169014619