Yesterday, Novartis Pharma AG (NVS) signed an agreement with Vanda Pharmaceuticals Inc. for the acquisition of exclusive US and Canadian rights to Fanapt (iloperidone), an oral medication that is approved by the US Food and Drug Administration (FDA) for the acute treatment of adults with schizophrenia.

Fanapt belongs to a new generation of schizophrenia drugs known as atypical antipsychotics. In addition to gaining exclusive commercialization rights to the oral formulation of Fanapt in the US and Canada, Novartis will also have exclusive rights to develop and commercialize a long-acting injectable (or depot) formulation of the medicine for these markets.

Vanda will receive an upfront payment of $200 million from Novartis. Besides this, the company will receive additional payments based on the achievement of defined development and commercial milestones. Vanda will also receive royalties on product sales. Vanda has retained rights to develop and commercialize Fanapt outside the US and Canada.

However, Novartis has the option to enter into discussions with Vanda to co-commercialize Fanapt in the territories not covered by the agreement. The transaction is scheduled to close by the end of 2009. This deal should help strengthen Novartis’ psychiatry portfolio.

Novartis already has Clozaril in its portfolio. But, Novartis no longer has marketing exclusivity on this drug. With the launch of Fanapt in early 2010, Novartis will look to gain share in the schizophrenia market. Schizophrenia is a severe psychiatric disorder which is estimated to affect more than 2 million adults in the US and nearly 250,000 Canadians.

However, we note that the schizophrenia maket is highly crowded. Currently available treatments include AstraZeneca’s (AZN) Seroquel, Eli Lilly’s (LLY) Zyprexa, Pfizer’s (PFE) Geodon, Bristol-Myers Squibbs’ (BMY) Abilify and Johnson & Johnson’s (JNJ) Risperdal.

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