(Corrects to say Merck KGaA sells Erbitux outside the U.S. in 12th paragraph.)

Oct. 6 (Bloomberg) -- Eli Lilly & Co. agreed to buy ImClone Systems Inc., the biotechnology company controlled by billionaire Carl Icahn, for $6.5 billion in cash, topping Bristol-Myers Squibb Co.'s hostile bid of $62 a share.

Investors in New York-based ImClone will get $70 a share, both companies said today in a statement. That's a 51 percent premium over ImClone's share price on July 30, the day before Bristol-Myers announced its offer.

Lilly, based in Indianapolis, has been looking for acquisitions to generate new revenue as its $4.76 billion-a-year seller, the antipsychotic Zyprexa, faces competition from generic copies in 2011. The purchase will give Lilly ImClone's only product, the cancer drug Erbitux, which had $1.3 billion in sales last year. The medicine is sold in the U.S. with Bristol- Myers, which owns 17 percent of ImClone's shares.

``This is an act of desperation on the part of Eli Lilly,'' said David Moskowitz, an analyst for Caris & Co. in Washington, in a telephone interview today. ``Lilly will drain substantially all of its cash on the deal. Lilly is already bidding outside the range of what you think would be rational, but these companies are losing big products early next decade.''

Colorful History

The acquisition will end one of the most colorful chapters in biotech corporate history, featuring a 2002 insider trading scandal that led to jail time for ImClone chief executive officer Sam Waksal and his friend, homemaking guru Martha Stewart. Erbitux, once doubted to ever reach the market, is approved for both colon cancer and head and neck tumors.

Icahn, ImClone's chairman, is the second-biggest shareholder at 13 percent. Icahn engineered his election as chairman of ImClone in October 2006, after doubling his holdings. Now he is pushing for a sale that may bring him and the hedge funds he manages at least $815 million in proceeds, based on the $70-a-share offer.

Icahn didn't immediately return a telephone call to his office. In a statement distributed by Business Wire, he said the Lilly deal ``vindicates our decision to oppose in 2006 a potential transaction in which the company would have been sold at approximately $36 per share which the prior board favored.''

ImClone shares rose 4.2 percent to $67.71 at 9:56 a.m. in Nasdaq Stock Market trading, the biggest gain since Oct. 1. Lilly fell $1.81, or 4.4 percent, to $39.50 in New York Stock Exchange composite trading and Bristol-Myers fell 43 cents, or 2.1 percent, to $20.

The deal is expected to close in the fourth quarter of 2008 or the first quarter of 2009.

U.S. Regulators

Lilly has two late-stage compounds that could have difficulty getting past U.S. regulators, Caris & Co.'s Moskowitz said. Effient, or prasugrel, is a blood-thinner with a substantial bleeding risk; a long-acting version of Byetta could be hobbled by the likelihood of pancreatitis seen in the original, he said.

Lilly isn't deterred by ImClone's entanglements with Bristol-Myers, Lilly Chief Executive Officer John Lechleiter said today in an interview with Bloomberg television. German drugmaker Merck KGaA markets the product outside the U.S.

``We look forward to partnering with Bristol-Myers,'' Lechleiter said. ``We think the combination of Bristol Myers and Lilly promoting Erbitux is going to make a big difference in the history of this product.''

He described Erbitux as ``an oncology blockbuster'' and said its sales will continue to grow.

Lilly's Biggest

The acquisition will be Lilly's biggest, and will add to earnings in 2013, the company said. Lilly had $5.17 billion in cash and marketable securities in June, according to regulatory filings. That's $1.33 billion less than the $6.5 billion offer for ImClone.

Lilly is ``very confident in our ability to finance this deal'' Lechleiter said in an interview on CNBC.

ImClone is developing five new cancer medicines, including a successor to Erbitux that has been the center of a dispute between the biotechnology company and its marketing partner Bristol-Myers.

Icahn on Sept. 10 disclosed an offer of $70 a share from a bidder he declined to identify. He rejected an initial $60-a- share unsolicited offer from Bristol-Myers, ImClone's biggest shareholder and marketing partner for Erbitux. Bristol-Myers on Sept. 22 boosted its offer to $62 a share and said it will take the $4.7 billion bid directly to shareholders.

ImClone spokeswoman Tracy Henrikson immediately returned calls for comment.

Lilly's Drugs

Lilly has cancer drugs Alimta, with $854 million in worldwide sales last year, and Gemzar, which generated $1.6 billion revenue. In June, the company purchased SGX Pharmaceuticals Inc., a maker of experimental cancer drugs, for $64 million.

Sam Waksal, who received a Ph.D. in immunology from Ohio State University in 1974, founded ImClone in 1984 with his brother, Harlan. Their goal was to develop new cancer treatments. Waksal took the company public in 1991 and served as CEO until May 2002, after the U.S. Food and Drug administration initially refused to review the initial Erbitux application.

Insider-Trading Scandal

The FDA refused to review ImClone's original application to sell Erbitux in 2001 because of issues with the filing. The FDA rejection triggered an insider-trading scandal that led to the imprisonment of Waksal and his friend, Stewart, the founder of Martha Stewart Living Omnimedia, who had sold ImClone shares before the FDA action became public.

Waksal received a seven-year prison sentence and a $3 million fine after pleading guilty to charges of insider trading. Stewart served a five-month prison sentence for lying to prosecutors.

Icahn, who is a friend of Sam Waksal, was a major driver in the sale process. Since he took control of the board in October 2006, ImClone shares have more than doubled.

To contact the reporter on this story: Angela Zimm in Boston azimm@bloomberg.net.

Last Updated: October 6, 2008 11:35 EDT