AstraZeneca in $1bn diabetes deal

AstraZeneca has taken further steps to boost its ailing pipeline by striking a $1bn agreement with Bristol-Myers Squibb to develop two of its diabetes drugs.

The deal came as welcome news to the City after both companies recently scrapped potential treatments for diabetes following disappointing clinical results. Shares in AstraZeneca increased 1.5 per cent to close the day 42p up at 2836p.

The Anglo-Swedish company is to make an initial payment of $100m to the US firm Bristol-Myers to develop saxagliptin, which is in final-stage trials, and dapagliflozin which is in second-stage trials. This would be followed by a $650m payment if the drugs passed development and regulatory hurdles and a further $300m if certain sales milestones are met.

Analysts were broadly positive about the move due to the late-stage development of the assets. Mike Ward, analyst at Nomura Code, said it made good sense for both companies and gave Bristol-Myers the clout it needed in a competitive market.

However, Jeremy Batstone, analyst at Charles Stanley, said the deal represented "another effort by AstraZeneca to acquire a late stage product expensively" and said the deal would add half a per cent to its R&D costs as a percentage of sales.

"The deal works our well for BM as it lacks sufficient commercialisation resource to market the products once approval has been achieved and goes a long way towards validating the product's existing clinical data in a popular clinical area," he added.

Diabetes is estimated to affect more than 230 million people worldwide. Diabetics do not produce or properly use insulin, the hormone needed to carry glucose from the blood into cells, where it is converted into energy. When insulin is not present, the result is high levels of glucose in the blood and this can lead to complications in the eyes, kidneys, central nervous system and heart.

Saxagliptin belongs to a new class of drugs called dipeptidyl peptidase-4 inhibitors which improve insulin release and decrease blood sugar in patients with Type 2 diabetes.

Two other companies are also working in this area, Merck and Novartis who are planning for US regulatory approval during the first half of 2008. Analysts believe saxagliptin will be the third drug on the market.

This is just the latest in a number of large deals AstraZeneca has signed - including its takeover of Cambridge Antibody Technology last year - in an attempt to get its pipeline on track after the failure of a number of drugs and competition from generic manufacturers.

AstraZeneca's chief executive David Brennan said diabetes was a particular area of scientific interest for the company.

"Diabetes is a disease reaching almost epidemic proportions in many regions throughout the world," he said. "Our combined expertise will develop new areas of opportunity for both companies and the potential to bring real medical benefit to the wider community."