2nd UPDATE: Celgene To Buy Gloucester Pharma for At Least $340 Million

Celgene Corp. (CELG) agreed to acquire privately held Gloucester Pharmaceuticals Inc. for $340 million plus milestone payments of up to $300 million in a deal to bolster its position in blood cancer treatments.

The deal, Celgene's first major move since buying Pharmion Corp. for $2.9 billion last year, provides the Summit, N.J., company with a product that will launch early next year. Celgene, which had 2008 revenue of $2.3 billion, gets most of sales from blood cancer treatments Revlimid, Thalomid and Vidaza.

Celgene's shares recently traded down 1% to $55.44. Shares of Allos Therapeutics Inc. (ALTH) fell 14% to $5.70 as it faces future competition from industy heavyweight Celgene.

The acquisition, expected to close in the first quarter, won't have a major impact on the balance sheet, which showed $2.8 billion in cash, cash equivalents, and marketable securities at the end of September. It will have no impact on earnings in 2010, but it will add to the bottom-line in 2011, excluding deal-related costs.

Oppenheimer & Co. analyst Brian Abrahams noted that the deal makes "good strategic sense" for Celgene because of its current product lineup, although it is not transformative.

Gloucester's Istodax was approved by the Food and Drug Administration last month for treatment of cutaneous T-cell lymphoma, or CTCL, a type of non-Hodgkin's lymphoma, in patients failing prior systemic therapy.

Sanford Bernstein analyst Geoffrey Porges estimates that the drug could see peak annual sales of $150 million to $240 million in CTCL, but he warns that sales will build gradually because of slow disease progress and the long duration of available treatment regimens.

Istodax is also being studied in peripheral T-cell lymphoma, or PTCL, with enrollment in a key trial completed early next year and data coming later in 2010. A Celgene spokesman said the company could file for approval for PTCL by the end of next year.

The company declined to provide additional details on the future payments in the deal, except that they will be related to future U.S. and international regulatory milestones.

The deal structure highlights a trend of drug makers using structured acquisition agreements with smaller drug developers as a way to acquire assets, while mitigating failure risk and paying only for success.

Allos got approval of Folotyn in September for treatment of PTCL, but now will face formidible competition from well-established Celgene.

Furthermore, some on Wall Street had hoped that Allos would strike a partnership or takeover with Celgene, and there is concern that Folotyn may not be as effective as Istodax.

"There is a feeling that Gloucester might have the better drug and gotten taken over," said Needham & Co. analyst Mark Monane.

But he stressed that Celgene's interest in CTCL and PTCL should provide some validation to Allos investors, because it shows that the market for such drugs is large.

-By Thomas Gryta, Dow Jones Newswires; 212-416-2169; [e-mail]

(Tess Stynes contributed to this report)