PARIS - Novartis has taken an exclusive option to develop Transgene's cancer vaccine TG4010, but the deal fell short of investors' hopes, pulling the shares in the French biotechnology company down 12 percent.

If all goes well, Transgene could be in line for milestones payments of up to 700 million euros ($950 million), in addition to a non-refundable $10 million option fee.

However, the optional nature of the deal, announced on Wednesday, means there are two more years of uncertainty during which Transgene will continue to foot the bill for developing the product.

The Novartis deal comes after Transgene told Reuters in December it was nearing a partnership for the vaccine that could also target other cancer types and turn into a blockbuster. [ID:nGEE5B60AF]

We view today's option announcement as slightly underwhelming, given that the ongoing burden of funding remains with Transgene for another two years, said Nomura Code analyst Gary Waanders.

Novartis wants to see the outcome of a mid-stage Phase IIb clinical trial, due sometime in 2012, before exercising its option.

As a result, Waanders said he was reviewing his neutral rating and fair value estimate of 21.80 euros a share. The stock fell 2.59 euros to 19.70 by 1130 GMT.

ACCESS TO NOVARTIS KNOW-HOW

While the deal underlines interest in therapeutic cancer vaccines -- which work by stimulating the body's own immune system to attack cancer cells -- it also shows big drug companies are wary of the risks.

The field has seen a number of setbacks in the last several years. But the first product could soon be on the market, with the U.S. Food and Drug Administration set to decide by May 1 whether to approve Dendreon's (DNDN.O) Provenge for advanced prostate cancer.

Transgene's product is several years further behind and also faces more advanced rivals in its initial target treatment area of lung cancer. Britain's GlaxoSmithKline (GSK.L) and Germany's Merck KGaA (MRCG.DE) have lung cancer vaccines, known as MAGE-A3 and Stimuvax, respectively, in final testing.

Transgene will first fund and keep control over the Phase IIb/III development phases -- expected to begin at the end of this year and for which results should be available end 2013 -- but will get the costs back from Novartis if the deal goes ahead.

Chief Executive Philippe Archinard defended the nature of the deal, saying it meant Transgene kept control over its drug candidate, while also gaining access to Novartis's know-how in a number of fields through the creation of a joint working group.

This deal brings us more than cash alone, he said, as Transgene expected to benefit from Novartis' experience in drug development, dealing with regulatory procedures and marketing.

The agreement is coherent ... and transformational for our group, which in five years aims to become an integrated biopharma company with access to markets for our products, Archinard said, adding China was part of Transgene's expansion plans.

If TG4010 makes it to market, Transgene will receive royalties on global sales. It will retain co-promotion rights in countries such as France and China as well as primary manufacturing rights to supply Novartis' clinical and commercial needs. (Additional reporting by Ben Hirschler, editing by Will Waterman) ($1=.7369 Euro)

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