Eyegate Pharmaceuticals Inc (NASDAQ:EYEG) And Valeant Pharmaceuticals Intl Inc (NYSE:VRX): Here's Our Take

Eyegate Pharmaceuticals Inc (NASDAQ:EYEG) gained more than 125% this week, on the news that it has struck a deal with biotech giant Valeant Pharmaceuticals Intl Inc (NYSE:VRX). The deal, which is worth up to $103 million for the tiny ocular focus biotech, will see Valeant pick up the rights to Eyegate's lead development asset in a postoperative inflammation indication, and involves both an upfront payment and a raft of milestone rooted cash injections. Before the deal was announced, Eyegate commanded a market capitalization of just $15 million. The announcement has boosted this somewhat, and the company currently trades for a market capitalization of circa $35 million, but with the milestones on offer, this one could be just the beginning.Here is our take.First up, it's worth mentioning that this is not the first time the two companies have climbed into bed together. Valeant first struck a deal with Eyegate back in 2015, with the initial deal rooted in the same technology, but in a different (although linked) indication. Specifically, the first deal related to using Eyegate's asset, a proprietary delivery system called Eyegate II, and the development asset that combines with the delivery system, a drug called EGP-437, to treat uveitis.The latest deal involves the same combination of products, the delivery system and the drug, but the two will be targeting the treatment of postoperative inflammation and pain in patients that have undergone ocular surgery (read: cataract surgery).The current standard of care in these patients is a post operative eye drops regimen. However, due to the nature of the condition, many of the patients that undergo cataract surgery are elderly, and often struggle to follow a self administrative regimen. Eyegate's drug delivery system allows for the direct introduction of a pain and inflammation therapy into the eye, and – according to the company's hypothesis – negates the need for self administration eye drops.What are the terms of the deal?As mentioned, it is worth a total $103 million to Eyegate, and this $103 million is comprised of an upfront payment of $4 million, and up to $99 million in development and commercialization related milestones.There are also additional milestone payments based on the achievement of certain cumulative and annual sales milestones. Additionally, EyeGate will receive royalties on Valeant's net sales of the product. The milestones are heavily weighted towards development (as opposed to commercialization) and we see this as benefiting Eyegate, in the sense that it takes some of the pressure off a successful commercialization strategy, and focuses the quantitative implications of the deal on the science.To explain this a little further, with Valeant already having licensed this drug and delivery method in another indication, the follow-up license that the two companies just announced serves as a strong indication of the drugs efficacy. To explain this another way, Valeant wouldn't have committed $100 million to a product it didn't think worked, and it has had two years or more of product-in-hand time, suggesting it already knows it works.For us, this is the key to an investment thesis in Eyegate right now.So, what is next?The company has run up to the tune of the above-mentioned 125%, but we think this is purely based on the just discussed scientific validation element of the announcement, and doesn't yet price in the potential cash injection for Eyegate as and when the development pathway plays out. As such, it is said playing-out that we are watching as providing the major catalysts near to medium term.­Dilution shouldn't be a problem with the just discussed deal accounting for the majority of the development costs that would bring this asset to commercialization, and the deeper pipeline could also provide certain near-term catalysts as it matures. As such, this one looks to be a nice microcap play as things stand.We will be updating our subscribers as soon as we know more. For the latest updates on EYEG, sign up below!Disclosure: We have no position in EYEG and have not been compensated for this article.