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Glaxo Buys into Synta, Investors Sell

Wednesday, 10 Oct 2007 | 1:08 PM ET
CNBC.com

Melanoma -- a type of skin cancer -- is the most common form of cancer. It can spread very quickly and the prognosis often is not good. The American Cancer Society estimates that nearly 60,000 new cases of melanoma will be diagnosed this year and more than 8,000 patients will die. You can find out more about it on the ACS's website.

A small biotech company, Synta Pharmaceuticals , is one of several firms working on a treatment for it. They include Bristol-Myers Squibb , Onyx Pharmaceuticals, Medarex and Vical , just to name a few.

Well, this morning, in a continuation of the trend of big pharma turning to small biotech for promising products, GlaxoSmithKline is partnering with SNTA on its late-stage drug for metastatic melanoma -- skin cancer that has spread.

A mid-stage test shows the once-a-week intravenous infusion doubled the time patients lived without the cancer progressing. It will soon go into a large, phase-3 clinical trial in 15 countries, including the U.S.

Glaxo is giving Synta $80 million cash up front and, over time, may fork over a total of more than a billion dollars in milestone payments (when Synta reaches certain, pre-specified goals in the development of the drug) and stock purchases.

Synta CEO Safi Bachall says there was a bidding war, but he didn't name names. If all goes well, Bachall told me in an interview this morning that the drug could be on the market in about two years from now.

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When a little biotech like SNTA announces a pretty lucrative deal like this one, the stock almost always goes up. Not this time. With the exception of a big pop in volatile, pre-market trading and a tiny move into positive territory when I reported the story on "Squawk on the Street," the stock is selling off.

You see, SNTA shares have nearly doubled over the past several weeks on rumors and speculation that a deal might be in the offing. They were trading for five bucks in late August and until today were changing hands for about 10 dollars.

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So, there could be simple "selling on the news." The volume is very high. On an average day, 130,000 shares are traded. As I write this just a couple of hours into the trading day, the volume is above six million shares.

The other pressure on the stock could be that, under the terms of the deal, Synta will have to pay for the phase-3 clinical trial and the filing of the application for approval by the Food and Drug Administration out of its own pocket. On the conference call, however, a Synta executive said the $135 million in Glaxo's milestone payments built into the agreement should more than cover those costs.

As is often the case with under-the-radar biotechs like SNTA, only a handful of analysts cover the stock. Rodman & Renshaw's senior biotech guy, Mike King, is one of 'em. He writes in a research note to clients this morning, "We continue to reiterate our Market Outperform rating and $16 price target. We believe this is excellent news for Synta as it validates [the drug], provides a significant amount of cash to the company to continue operations, and provides a world class partner with which to continue development of the drug."

R&R owns at least one percent of SNTA shares, makes a market in the stock and wants to bank the company.

Questions? Comments? Pharma@cnbc.com

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