Deal with Bristol-Myers could bring ZymoGenetics $1 billion

In an industry hit hard by the financial crisis, the blockbuster deal ZymoGenetics and pharmaceutical giant Bristol-Myers Squibb unveiled Monday made a splash.

The announcement turned many heads at one of the most important biotech gatherings, the JP Morgan annual health-care conference that began Monday in San Francisco.

ZymoGenetics' long-suffering stock also got a strong push in after-hours trading after news that it could get $1 billion or more in payments if its hepatitis C product reaches certain scientific, regulatory and commercial milestones.

David Miller, an analyst with Seattle-based Biotech Stock Research who was at the conference, called the agreement "a really big deal."

Conference attendees "were all impressed somebody would pay $1 billion for a drug that's not even out of Phase 1 yet," Miller said, referring to the fact the compound, PEG-interferon lambda, is still in early-stage clinical trials.

In addition to the payments from Bristol-Myers, Seattle-based ZymoGenetics stands to collect sales revenue and royalties if the compound gets to market.

The companies said Monday they agreed to jointly develop the ZymoGenetics product in the U.S. and Europe. ZymoGenetics can choose whether to sell interferon lambda in the U.S., alongside Bristol-Myers — keeping 40 percent of the profits — or receive double-digit royalties. ZymoGenetics will also get royalties on interferon lambda sold outside of the U.S.

The deal also would put $85 million in ZymoGenetics' pocket immediately — a boon at a time when markets are rocky and the company's stock has suffered because of sluggish sales of its only commercial product, Recothrom, a blood-clotting drug.

The company stands poised to receive an additional $115 million from the deal in 2009, said Chief Executive Doug Williams.

"It's hard not to be a little giddy about the economics," he said. "It really put us in a much stronger financial position."

PEG-Interferon lambda is designed to strengthen the body's response against the hepatitis C virus. It's in early-stage clinical tests, designed to gauge safety and side effects in human patients.

Interim results presented last November showed antiviral activity with less side effects than other interferon products, according to the company.

Such partnerships are not unusual, as they enable research-oriented biotechs to complete expensive clinical trials with the backing of cash-rich pharmaceutical firms hungry for new products.

ZymoGenetics' latest deal is among the largest the region has seen, surpassing even the agreement Seattle Genetics signed with Genentech in early 2007, which could bring the Bothell biotech more than $800 million in milestone payments.

Bristol-Myers' money will allow ZymoGenetics "to pay our way" through the development of interferon lambda, still retaining a significant cut of profits, said Williams. Bristol-Myers will pay 80 percent of the cost of developing the drug.

The deal does not mean ZymoGenetics will stop its belt-tightening efforts, which recently led to layoffs and the sale of some property.

"Given the current financial circumstances, it's time to be prudent with the cash that we have," Williams said.

Besides the $85 million upfront payment and a future $20 million license fee, Bristol-Myers would pay ZymoGenetics up to $430 million upon hitting certain scientific and regulatory milestones, up to $287 million if the product is developed for other potential indications, and up to $285 million more based on certain commercial milestones.

Federal antitrust regulators will have to approve the deal.

ZymoGenetics shares closed at $3.12 Monday, up 7.9 percent. They're down 74 percent from a 52-week high of $15.23. In after-hours trading, they hit $4.40, up 41 percent.

Ángel González: 206-515-5644 or agonzalez@seattletimes.com