Bristol-Myers Squibb Bets Big on a Mouse

Bristol-Myers Squibb (BMY) has placed a very big bet on a mouse. On July 22, the New York pharmaceutical giant announced that it would buy Medarex (MEDX) for $2.4 billion—a 90% premium to its closing share price that day. Medarex's claim to fame is UltiMAb, a mouse with a human immune system, which allows it to produce disease-fighting antibodies in its cells. Those fully-human antibodies can be harvested and turned into experimental drugs.

More than 35 companies have partnered with Medarex on drug-discovery projects. Still, the Princeton (N.J.) company brought in only $52.3 million in revenues from those deals last year, and it lost $38.5 million. It has yet to get any of its own drugs on the market.

Hefty premium aside, this deal makes some sense. Medarex and Bristol have been co-developing a drug to treat melanoma, called ipilimumab. That medicine is currently in the final stages of testing. There have been a few snags—the companies delayed plans to file for Food & Drug Administration approval after results from one trial were disappointing—but if it works, it could be a blockbuster. The two companies are also working together on drugs to treat lung and prostate cancer. Buying Medarex gives Bristol full ownership over any successes that stem from those projects. And Bristol will earn royalties on the three finished products that have come out of UltiMAb mice so far: Johnson & Johnson's (JNJ) anti-inflammatory drugs Simponi and Stelara, and Novartis' Ilaris, used to treat a rare disease called Muckle-Wells.

Wall Street is focused not only on the potential for short-term gains, but also on the benefits Medarex's mouse may offer to Bristol's innovation efforts. Bristol, like most of its pharmaceutical peers, is struggling to churn out new drugs. But the need to improve R&D is especially urgent in Bristol's case: its $5.6-billion-a-year blood-thinning drug Plavix will lose its patent protection in 2012. Even if ipilimumab succeeds, the company will need a lot more hits to make up for the Plavix shortfall. And CEO James Cornelius has identified biotechnology as a key growth area for Bristol.

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Because UltiMAb mice are so human in their cellular makeup, scientists who use them can skip over many steps they would normally have to take to "humanize" molecules before testing them in people. That can speed up the process of identifying the most promising biotech drug candidates. During Bristol's second-quarter earnings call on July 23, Bristol's chief scientific officer, Dr. Elliott Sigal, said the Medarex acquisition "will have a very significant [impact] on the development of our pipeline as it will double the proportion of biologics from 17% to 35%." Improving the efficiency of R&D could bring down the average $1 billion cost of developing a new biotech drug because it will help Bristol quickly identify the remedies that are most likely to work in humans. Medarex's human-like mouse, Sigal told analysts, "provides us with the flexibility to choose the right approach for a given target."

This is not the first time a company has made a mighty bet on a mouse. In 2005, biotech giant Amgen (AMGN) spent $2.2 billion to acquire Abgenix, a Medarex rival that developed its own brand of humanized mouse. In 2006, the FDA approved the Amgen/Abgenix colon cancer drug Vectibix, and the product brought in $153 million in sales for Amgen last year.

Bristol, for its part, is holding up fairly well through the recession. Sales for the first six months of the year rose 3% from the same period last year to $10.4 billion. Net earnings in the second quarter jumped 36% to 49¢ per share. The company reported double-digit sales increases on Plavix and several other products, though much of the earnings improvement came from cost-cutting efforts it has made over the past two years. Cornelius knows cost-cutting will get him only so far. That's why he continues to look for "pearls," like Medarex, that he believes will bolster Bristol's chances of surviving the downturn as a viable standalone company. "As we've said before," he told analysts Thursday, "the 'string of pearls' is an important part of our business-development strategy to deliver sustainable long-term growth." Investors hope he's right: Medarex's stock jumped 89% to 15.86 on the deal news. Bristol's inched up 3% to 21.

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