Lilly's Diabetes Setbacks May Spur Shopping Spree Beyond Amylin
Stock Chart for Eli Lilly & Co (LLY)
Eli Lilly & Co., under pressure to gain new products after setbacks this week with two diabetes drugs, may try to acquire its partner Amylin Pharmaceuticals Inc. or covet companies with more approved products.
With Amylin, Lilly would gain full control of the diabetes drug Byetta and a longer-acting version called Bydureon delayed Oct. 19 by U.S. regulators, said Seamus Fernandez, a Leerink Swann & Co. analyst. Lilly might try to acquire Cephalon Inc. or Endo Pharmaceuticals Inc. to expand its painkiller business, said Bill Tanner, an analyst at Lazard Capital Markets.
By 2013, Lilly loses patents on medicines responsible for almost half its revenue. The Bydureon rejection, which stalled a new revenue source for at least two years, was compounded Oct. 20 when the company halted tests on a second experimental diabetes medicine because it wasn’t effective. Lilly Chief Executive Officer John Lechleiter yesterday ruled out “large- scale combinations” while expressing interest in smaller deals.
“An outright acquisition of Amylin certainly could make sense” if Lilly thinks Bydureon will be approved, Fernandez said in a telephone interview from Boston. Amylin, based in San Diego, lost half its market value on Oct. 20 after the Food and Drug Administration requested a study of Bydureon’s effect on heart rhythm.
Amylin fell 18 cents, or 1.6 percent, to $11.30 at 4 p.m. in Nasdaq Stock Market composite trading, after a 46 percent plunge on Oct. 20. Indianapolis-based Lilly fell 10 cents to $35.40 in New York Stock Exchange composite trading.
40 Percent Premium
The average premium paid in the last 12 months for acquisitions of U.S. medical and biotechnology companies was 40 percent, according to data compiled by Bloomberg. That suggests Amylin may have cost $2.3 billion yesterday, excluding debt, compared with $3.4 billion before shares plunged this week. Lilly had $5.16 billion in cash to make deals as of June.
Other diabetes-drug developers led by Pfizer Inc. and Sanofi-Aventis SA, may also pursue Amylin at its bargain price, Fernandez said. Ray Kerins, a spokesman for New York-based Pfizer, the world’s largest drugmaker, didn’t return calls for comment. Jean-Marc Podvin, a spokesman for Paris-based Sanofi, said he doesn’t comment on market rumors.
“We are very satisfied with our current relationship with Amylin and their management team,” Mark Taylor, a Lilly spokesman, said yesterday in an e-mail.
“Executing our current business strategy, including working with the FDA to bring Bydureon to patients as quickly as possible, is the best way to increase value for our shareholders,” said Alice Izzo, an Amylin spokeswoman, in an e- mail.
While there is risk Amylin may be the target of an opportunistic acquirer, it’s not likely the company would solicit offers, said Howard E. Greene Jr., a co-founder who resigned from the board last year, in an Oct. 20 telephone interview.
“Whenever the stock gets whacked, you have to assume that some people are going to sharpen their pencils,” Greene said. “Two things happen: shareholders are mad, and companies with bundles of cash are standing on the sidelines, waiting for an opportunity.”
Lilly paid an undisclosed amount in July to buy closely held Alnara Pharmaceuticals Inc., the maker of a drug for pancreatic insufficiency. Lilly also said in March that it would pay an undisclosed amount to buy European rights to certain animal drugs from Pfizer and a manufacturing plant in Ireland.
“Our fundamental strategy remains intact,” Lechleiter said during a conference call yesterday. “We’re not interested in large-scale combinations. I think there are many other opportunities that I think we could consider along the lines of several that we have done this year.”
Lechleiter’s plan to stick to small purchases or licensing deals won’t give investors much confidence, said Barbara Ryan, an analyst with Deutsche Bank in New York, in a telephone interview.
“A lot of those companies will just be adding to the pipeline and they’re not going to be something that the market will accrue much value to on Lilly,” Ryan said.
United Therapeutics Corp. may also be a good fit because Lilly has an 11 percent stake and the two companies are partnered on Adcirca, a lung treatment made from the ingredient in Lilly’s impotence pill Cialis, according to Fernandez. Forest Laboratories Inc. would be another option to complement Lilly’s research in antidepressants and arthritis medicines, he said.
“It is not our expectation that we’re an imminent takeover target for Eli Lilly,” said Andrew Fisher, a spokesman for Silver Spring, Maryland-based United Therapeutics, in a telephone interview. The 2008 Cialis marketing agreement prevents Lilly from attempting a takeover before 2014, he said.
Cephalon doesn’t comment on rumor or speculation, said Candace Steele, a spokeswoman for the Frazer, Pennsylvania-based company. Kevin Wiggins, of Chadds Ford, Pennsylvania-based Endo, also declined to comment as a matter of company policy. Frank Murdolo, a spokesman for New York-based Forest, didn’t return a telephone message for comment.
The patent expires next year for Lilly’s top-selling antipsychotic Zyprexa, which brought in $4.92 billion last year. Generic copies of the antidepressant Cymbalta and insulin product Humalog may be introduced in 2013. Had Bydureon been approved this week, it could have generated sales of $420 million next year, said Phil Nadeau, an analyst with Cowen & Co. in New York.
Tanner, of Lazard, estimates a fair price for Amylin would be as much as $15 a share, or about $2.16 billion based on 143.7 million shares outstanding as of June. He said Bydureon sales will be limited because there are at least six competing diabetes drugs in development -- including one from Lilly -- as well as one approved product, Novo Nordisk S/A’s Victoza.
“The chances that this drug makes it to market are probably pretty high, but you’re looking at almost two years from now,” Tanner said. “If it didn’t make it, then somebody would have massively overpaid for Amylin.”
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