Bristol-Myers Squibb's Big Bet on ImClone

ImClone's pipeline of cancer-fighting compounds could fill a big gap in Bristol's portfolio after key drugs go off patent, say analysts

by David Bogoslaw

Drug giant Bristol-Myers Squibb's (BMY) $4.5 billion offer to acquire the 83% of ImClone Systems (IMCL) it doesn't already own brings the Big Pharma stalwart deeper into the biotech realm.

The offer, made in a letter Bristol's chairman and chief executive, James Cornelius, sent to ImClone's chairman and biggest shareholder, activist investor Carl Icahn—and supplemented by a voicemail message—had not drawn a response from Icahn by the end of Thursday's trading session.

For the 30% premium to ImClone's closing price on July 30 that it's offering to pay, Bristol would gain the full North American revenue from the colon cancer drug Erbitux, which it has been co-marketing with ImClone since 2001. An acquisition would eliminate the 39% royalty Bristol now pays ImClone, and Bristol would also get the royalty stream from German company Merck KGaA for Erbitux's sales outside of North America. Bristol would also inherit ImClone's product pipeline, which includes additional applications for Erbitux and five other oncology products now in clinical trials, as well as ImClone's biologic manufacturing facilities.

ImClone shares jumped 37.7% to close at $63.93 on July 31, while Bristol shares finished 1% lower, at $21.29.

Enough Cash Flow

New York-based Bristol said its offer isn't contingent on financing or due diligence, given its confidence in ImClone's operations through its marketing collaboration with the smaller company over the past seven years. On a conference call to discuss the proposed deal with analysts on July 31, Cornelius said Bristol will use the $4.1 billion in proceeds it will soon receive from the pending sale of its nonpharmaceutical assets to pay for ImClone. He also said Bristol has sufficient cash flow from operations to continue to pursue other acquisitions.

In a July 31 research note, JPMorgan (JPM) analyst Christopher Schott wrote that given the impending proceeds from asset sales, it's not surprising to see Bristol step up its merger and acquisition efforts. (Schott has a neutral rating on Bristol. Note: JPMorgan either does business, or seeks to do so, with companies covered in its research reports.)

"We much prefer to see the acquisition of an in-market biologic franchise that the company is already familiar [with] as compared to a series of smaller, riskier assets," such as Kosan Biosciences and Adnexus Therapeutics, Schott said in his note. Bristol's $190 million acquisition of Kosan closed in late June, and its $430 million purchase of privately-held Adnexus was completed last year.

On a July 31 conference call with analysts, Jean-Marc Huet, Bristol's chief financial officer, said the acquisition wouldn't have any impact on the company's 2008 earnings outlook of $1.36 to $1.46 a share, which Bristol reaffirmed in May.

Higher Offers?

Given Icahn's reputation as a tough negotiator, ImClone's chairman is likely to hold out for a price higher than the $60 offer, says Howard Liang, an analyst at Leerink Swann & Co. in Boston who has an outperform rating on ImClone. And with the stock trading above the initial offer, the market is clearly anticipating a higher bid, he adds.