By Robert Armstrong 
    A Dow Jones Newswires Column

Johnson & Johnson (JNJ) generated $12 billion in free cash flow last year, and holds $14 billion in cash and securities.

So its $1 billion takeout of Cougar Biotechnology, Inc. (CGRB) isn't transformative. But by acquiring rather than partnering its way into the prostate cancer space, Johnson has acted boldly - and taken on a fair bit of risk.

The primary asset J&J is getting for its billion-dollar investment is Cougar's abiraterone acetate, which just entered Phase III trials for treatment-resistant prostate cancer.

J&J's pharma division has made oncology one of its five areas of therapeutic focus. The company's acquisitions have always centered on entering big, growing markets, and prostate is one of the biggest. The American Cancer Society expects that in 2009 there will be 192,000 new cases of prostate cancer diagnosed in the U.S. and 27,000 deaths.

The Phase II results for abiraterone acetate look promising. Given all this, and J&J's immense buying power, the Cougar deal is a strategic fit.

At the same time, it is worth noting that buying an oncology drug on the basis of Phase II trials is very risky. Cougar's five Phase II trials for abiraterone each enrolled between 34 and 54 people. The Phase III trial will be 10 times that size, enrolling 1,160 subjects. Lots of new information will be learned about the efficacy and safety of the drug. If it were possible to reliably predict that this news would be good, the Phase III trial wouldn't be necessary.

Investing in early-phase compounds is an irreplaceable part of big pharma's business model. Outright acquisition isn't the only way to invest, however. Partnerships or joint ventures are increasingly popular. The multinational pharma players, burnt by recent compound failures and an increasingly arbitrary regulatory environment, are spreading risk by sharing projects.

Consider, for example, GlaxoSmithKline PLC's (GSK) partnership with Synta Pharmaceuticals Corp. (SNTA), signed in 2007. Like J&J, Glaxo committed about a billion dollars to an oncology product entering Phase III, with a sizeable potential market, but its monetary commitment was performance-based and back-end loaded.

For the right to sell Synta's elesclomol, a treatment for metastatic melanoma, Glaxo paid Synta $80 million up front, and offered development and commercialization milestone payments totaling up to $885 million, along with an ongoing commercial royalty after launch.

Like abiraterone, elesclomol had very strong Phase II results. Indeed, the Phase II study was placebo-controlled and randomized - which is very rare in oncology.

What each company bought is different, of course. J&J gets the two other products Cougar has in the clinic, as well as the talents of the Cougar personnel it can retain. It also won't have to pay Cougar a sales royalty (although it will pay royalties to the companies from which Cougar had initially licensed).

Before deciding which deal has the better structure, consider how things played out for GSK. The elesclomol Phase III melanoma trial was stopped earlier this year when more patients died in the treatment arm than in the placebo arm. The drug may yet make it to market, but Glaxo's business development executives are surely relieved that they didn't buy Synta outright.

There are plenty of possible explanations for why J&J bucked the industry trend, and bought all of Cougar's risk and all its potential returns. Perhaps Cougar refused to partner, or the J&J team saw things during due diligence that gave them particular confidence.

Whatever the explanation, J&J's willingness to act boldly is rare in today's pharmaceuticals industry. Whether J&J will win this bet, only time will tell.

(Robert Armstrong is a senior columnist with Dow Jones Newswires. Prior to joining, he was a hedge fund analyst covering the pharmaceutical and telecom industries. He can be reached at 201-938-2319 or by email at robert.armstrong@dowjones.com. Dow Jones Newswires is enhancing its news, commentary and analysis for the investment banking community, and is providing it on this service temporarily. To ensure continued access to the best of Dow Jones news and opinion on companies, sectors and deals for bankers and research analysts, please contact investmentbanker@dowjones.com.)

(TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.)