Bristol’s Buy of Inhibitex for Hepatitis Drug Won’t Be Last

Bristol-Myers Squibb Co. (BMY), the drugmaker that will lose patent protection for three of its top four drugs within three years, will follow its $2.5 billion Inhibitex Inc. (INHX) purchase with more deals as the company’s “string of pearls” acquisition strategy begins to pay off.

Bristol-Myers is satisfied the plan is working and is in “a very good financial position” to pursue it further, said Chief Financial Officer Charles Bancroft by telephone yesterday. The company had $8.2 billion in cash and equivalents in the third quarter of 2011, according to data compiled by Bloomberg.

Bristol-Myers’s Yervoy, an immune system drug that fights cancer, last year became the first product bought in as part of the company’s diversification plan to get U.S. approval. The Inhibitex agreement announced Jan. 7, the largest of 18 deals since 2007, gives the New York-based drugmaker two drugs that could enter a developing $20 billion hepatitis C market.

“The world is moving toward an all-oral regimen for hepatitis C, and Bristol-Myers, which is strong in antivirals, seems like it wants to be a part of that,” Les Funtleyder, a health-care strategist and portfolio manager with Miller Tabak & Co. in New York, wrote in an e-mail yesterday.

Hepatitis drugs now in use are given through injection, and can have side effects that are difficult to endure. The generation now in testing would be easier-to-use pills that may be more effective than their predecessors.

Consolidation Speculation

Idenix Pharmaceuticals Inc. and Achillion Pharmaceuticals Inc., other developers of hepatitis C drugs, rose in early trading on speculation they may follow Inhibitex and Pharmasset Inc. (VRUS), which reached an agreement announced Nov. 21 to be acquired by Gilead Sciences Inc. (GILD) for $10.8 billion, as acquisition targets.

Idenix, based in New Haven, Connecticut, rose 37 percent to $9.66 at 4 p.m. New York time, its biggest one-day gain since July 2004. Cambridge, Massachusetts-based Achillion gained 23 percent to $9.72, the most since (ACHN) December 2009. Bristol-Myers fell less than 1 percent to $33.91.

The agreement by New York-based Bristol-Myers to purchase Inhibitex for cash offers $26 per share, a price that more than doubles the Alpharetta, Georgia-based biotech company’s $9.87 closing price on Jan. 6. The transaction is expected to dilute earnings for Bristol-Myers through 2016, with an impact of about 4 cents per share in 2012 and 5 cents per share in 2013, according to the statement.

Inhibitex shares more than doubled to $23.89 in New York trading.

Loses Protection

Bristol-Myers’s $6.7 billion-a-year blood-thinner Plavix loses patent protection this year. The Sustiva HIV drug, with $1.4 billion in sales, and the antipsychotic Abilify, with $2.6 billion in revenue, faces generic competition in 2013 and 2015, respectively. The “string of pearls” strategy, designed to give the company a more diverse stable of products, was begun by now-chairman James Cornelius in 2007, when he was Bristol- Myers’s chief executive officer.

Bristol-Myers has the best pipeline among drugmakers, when measured against how much they spend on research and development, said John Boris, a Citigroup analyst based in New York, in a Jan. 6 note to clients. Prior to the announcement of the Inhibitex acquisition, Boris projected the Bristol-Myers pipeline would produce $4.62 billion in additional revenue by 2015.

Far Exceed

“We expect the company to far exceed its 2010 revenues by 2020 on the strength of its pipeline and recently launched opportunities,” he wrote in the note.

Inhibitex’s INX-189 is in the second stage of testing normally needed for U.S. regulatory approval. Pharmasset’s PSI- 7977 is in the third and final phase, and could draw $3 billion to $5 billion in revenue for Foster City, California-based Gilead, Michael Yee, an analyst with RBC Capital Markets in San Francisco, estimated in November.

The Inhibitex drug “is the best chance anyone has of competing with Gilead/Pharmasset,” Brian Skorney, an analyst with Brean Murray Carret & Co. in New York, wrote in an e-mail yesterday. “That explains the premium.”

The premium paid by Bristol, of about 126 percent of Inhibitex’s price over the previous 20 trading days, ranks as the second-largest on record for a biotechnology or pharmaceutical company worth more than $500 million, according to data compiled by Bloomberg since 1999. The record is Genzyme Corp.’s 2006 deal for AnorMed Inc. with a 162 percent premium.

“The deal seems a bit expensive for an early-stage compound, but there is scarcity value,” said Miller Tabak’s Funtleyder, whose fund holds Bristol shares.

Medarex Acquisition

Bristol-Myers’s biggest previous deal since 2007 was the acquisition of Medarex Inc. for $2.5 billion in 2009. That purchase gained the company its Yervoy cancer drug.

Bristol-Myers is already developing its own medicines for hepatitis C, including a collaboration with New Brunswick, New Jersey-based Johnson & Johnson (JNJ) on a combination therapy with one of its own experimental products.

“The addition of Inhibitex’s nucleotide polymerase inhibitor to our own promising portfolio, which includes other direct-acting antivirals, brings additional options to develop all-oral regimens with better cure rates, shorter duration of therapy and lower toxicity than the current standard of care,” said Elliott Sigal, Bristol-Myers’s head of research and development.

Growth Area

Hepatitis C is one of three major growth areas for Bristol- Myers, along with stroke and immuno-oncology, he said by telephone.

“The commercial opportunity is huge,” Sigal said. “Our goals are to be very competitive.”

Merck & Co. (MRK) and Vertex Pharmaceuticals Inc. (VRTX) last year won approval for the first new therapies for hepatitis C in almost a decade.

The market for medicines that work against the virus is about $3 billion worldwide, according to Andrew Berens, a senior health-care analyst with Bloomberg Industries, in Skillman, New Jersey. It may be worth $20 billion by 2020, said Michael Kishbauch, chief executive officer of Achillion (ACHN) Pharmaceuticals Inc., in a November interview.

Citigroup Inc. acted as financial adviser and Kirkland & Ellis LLP (1132L) as legal adviser to Bristol-Myers, the companies said in the statement. Credit Suisse Securities provided financial advice to Inhibitex, while Dechert LLP (1154L) gave legal counsel.

To contact the reporters on this story: Meg Tirrell in New York at mtirrell@bloomberg.net; Drew Armstrong in Washington at darmstrong17@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net.

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.