It turns out Carl Icahn wasn’t bluffing after all. He really did have an offer of $70 a share for ImClone, (IMCL) the developer of biologic drugs to fight cancer.
That became apparent when Icahn, who owns 14% of ImClone, watched Eli Lilly & Co. (LLY) offer $70 a share for ImClone early last week.
Lilly’s offer trumped the $60-a-share buyout offer Bristol-Myers Squibb (BMY) made in July.
Bristol had hoped to acquire the 83% of ImClone it didn’t already own. But Icahn said Bristol’s offer was too low, given the success of ImClone’s anti-cancer biologic drug Erbitux and the firm’s expanding pipeline.
Many observers thought Icahn was trying to scare Bristol into raising its offer. In the end, he knew a better deal was out there.
The Lilly announcement might have made page one had last week been normal, but it got submerged in the deluge of market misery.
Bristol-Myers, which said it won’t bid against Lilly, will walk away with $1 billion in cash for its 17% of ImClone.
“And it will continue to enjoy the fruits of North American sales of Erbitux,” said David Moskowitz, analyst with Caris & Co.
Bristol has North American marketing rights for ImClone. Germany’s Merck KgA sells the drug abroad. Merck KgA is not affiliated with Whitehouse Station, N.J.-based drug maker Merck & Co. (MRK)
Gutsy Move
Lilly’s $6.5 billion all-cash deal is not only a dramatic event in its own right. It’s also a harbinger for Big Pharma in general, says Damien Conover, senior pharmaceutical stock analyst for Morningstar.
The deal reflects Lilly’s urgent need to make itself a stronger company, he says. “Outbidding Bristol- Myers takes guts. I really did think Icahn was bluffing.”
In Lilly Chief Executive John Lechleiter, Icahn found a CEO who wanted “to make a statement,” says Les Funtleyder, an analyst with Miller Tabak and author of the forthcoming book “Health Care Investing: Profiting from the New World of Pharma, Biotech, and Health Care Services.”
“I didn’t think there was another bidder,” Funtleyder said. “Count me as one of those with egg on my face.”
Like most big drug makers, Lilly faces patent expirations of its blockbusters in the next few years.
Zyprexa, its $4.8 billion-a-year antipsychotic drug, loses patent protection in 2011. Zyprexa accounts for about 25% of Lilly’s $19 billion in yearly sales.
Lilly’s Gemzar cancer drug, with $1.6 billion in annual worldwide sales, goes off-patent in 2012. Cymbalta ($2 billion worldwide) will go off-patent in 2013.
The company had to take drastic steps, Moskowitz says, because it “was looking into the abyss.”
Buying ImClone will offset some of the lost sales, but not all of it. Lilly also will depend on ImClone’s pipeline to help fill in some of the gap. Meanwhile, ImClone is seeking regulatory approval for wider uses for Erbitux.
Pfizer Watch
Lilly could be a model for Big Pharma as a whole. Many companies will lose patents on their key drugs in the next few years.
All eyes are on Pfizer, (PFE) which loses patent protection for Lipitor in 2011. The cholesterol-fighting drug has annual sales of $14 billion worldwide, about 30% of Pfizer’s overall revenue.
So far, most of Big Pharma’s buys have been of small biotechs or in-licensing of technologies.
Lilly’s ImClone deal is different, Moskowitz says. It’s buying an operating firm — not a biotech with a speculative drug in costly development.
Lilly was also willing to accept two years of dilution and take on as much as $3 billion in debt. There is the risk that things won’t turn out as planned, however.
“The deal will be successful only if ImClone’s pipeline succeeds,” Moskowitz said.
That pipeline includes IMC11F8, Lilly’s intended successor to Erbitux. It’s possible that Bristol could have a claim to the drug in the North American market, Moscowitz says.
“The dispute would be over intellectual property and commonalities between Erbitux and elements of the 11F8 antibody,” he said.
ImClone isn’t Lilly’s only bridge over the abyss. The company has taken two other innovative steps this year, Conover says.
In August it signed over its labs and researchers in Greenfield, Ind., to contract researcher Covance (CVD) for a mere $50 million. It guaranteed Covance 10 years of outsourced research work.
In terms of value, Covance paid pennies on the dollar. Lilly’s goal was to cut its costs, Conover says.
Most Big Pharmas are taking big steps to bring down costs. Some have cut their sales staffs. Others, like Lilly, have divested an operating unit.
They’ll outsource anything that results in lower costs, Conover says. “Even the sacred cows of research and development will be outsourced, as we saw with Lilly.”
Business Innovators
Lilly also took the unusual step of forming a drug development deal with a private equity firm.
In September it signed a deal with TPG-Axon Capital to share in phase three development of two molecules to treat Alzheimer’s disease.
Another partner is the NovaQuest unit of privately held contract research firm Quintiles Transnational.
The deal includes success-based milestone payments and royalties for TPG-Axon and NovaQuest in return for funding of phase three trials.
“There’s a lot of innovation in financing at Lilly,” Conover said.
Other Big Pharmas will need to show similar creativity, he says.
Source: INVESTORS.com
Popularity: 71% [?]
