Eli Lilly Acquires ImClone for US$6.5 bil.

Eli Lilly Makes Successful Bid

U.S. pharma major Eli Lilly brushed off rival Bristol-Myers Squibb to make the winning bid for ImClone System, a biotechnology firm with strengths in the oncology drugs sector. The deal was made at US$70 a share which estimates the total consideration for Eli Lilly at US$6.5 billion. Carl Icahn, chairman of ImClone and associated entities holding 14% in the firm, are to tender their shares in the offer. The boards of directors of the two firms have approved a "definitive merger agreement". The transaction will be subject to Hart-Scott-Rodino Anti-Trust Improvements Act and other regulatory approvals which are expected to be completed by the end of 2008 or early 2009. The company expects the transaction to be accretive to earnings on a cash basis in 2012 and on a GAAP basis in 2013.

So What Does Eli Lilly Get For Its Money?

In terms of benefits from the deal, Eli Lilly inherits ImClone's oncology drugs portfolio, biologics manufacturing and research facilities. Erbitux (cetuximab), the US$1.3 billion drug (2007 sales) of ImClone is the prized inheritance in the portfolio. The product has been approved as a treatment for squamous cell carcinoma of the head and neck and colorectal cancer. The addition bolsters Eli Lilly's own cancer portfolio consisting of Gemzar (gemcitabine) and Alimta (pemetrexed). The other benefits are the drugs under development under ImClone's oncology research that will further boost Eli Lilly's drug discovery pipeline. This includes new indications for Erbitux for early stage colorectal cancer, non small cell lung cancer and pancreatic cancer—all in late stage clinical developments. Also included is a potential follow-up drug to Erbitux—IMC-11F8—and a rival to Genentech's Avastin—IMC1121b—that are expected to progress to Phase III clinical trials next year (source: Wall Street Journal).

BMS Benefits From The Deal

After some contentious haggling over the price, BMS lost the bid to purchase ImClone. The U.S. pharma major expressed its intention to acquire the biotech earlier this year making an offer up to US$62 a share for an all-cash deal that was summarily rejected by the ImClone board. However, the firm has not lost out following the present transaction. For its 17% stake in ImClone amounting to 14 million shares, BMS will pocket close to US$1 billion at US$70 a share. The firm has indicated that it will not contest the new offer from Eli Lilly, a shift from its earlier decision to go to individual shareholders to approve its offer at US$62 a share once the board has rejected its offer. Reuters quoted BMS spokesman Brian Henry as stating that the cash injection of US$1 billion would enable the firm to evaluate other acquisition options. The company co markets Erbitux with ImClone and also has an interest in the development opportunities concerning other Erbitux indications.

Outlook and Implications

The deal signifies one of the biggest transactions in the biotechnology space and underscores the importance of the oncology drugs sector to Big Pharma. The acquisition will be perceived as generally positive for Eli Lilly primarily due to the inclusion of Erbitux and key drugs under development in the oncology therapy area. This complements very nicely Eli Lilly's own mid-stage stack of drugs under development, bringing to 16 the potential drugs that will be entering late stage or Phase III in the combined drug development portfolio of the two firms. The positives aside, Eli Lily will likely face some key questions on the deal itself in the short term. The primary one is the price it is paying for the transaction. At US$70 per share, the deal is automatically 13% higher than BMS offered and a whopping 51% from the share price before the first bid was submitted. Investors will be keen to evaluate the impact of the deal on Lilly's financials in the forthcoming quarters. However, the full realisation of the transaction will only be apparent if key products under development achieve commercialisation in the scale reminiscent of Erbitux signifying a medium to long term growth opportunity.

In the short term though, the question of Erbitux and BMS still lingers on. Despite BMS not contesting the offer, the firm's deep involvement in the development of Erbitux will remain a sore point that has the potential to be a point of friction between the two firms. The product is marketed by ImClone's two partners, Merck KGaA and BMS, and ImClone co-promotes Erbitux in North America together with BMS.

On the whole, the acquisition provides a ready portfolio in terms of future pipeline of drugs for Eli Lilly, particularly at a time when Big Pharma is facing regulatory and reimbursement pressures across major markets. Not to mention, patent expiries of key drugs which in Lilly's case would be the schizophrenia drug Zyprexa (olanzapine) that would be facing generic competition from the year 2011.

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• United States: 3 October 2008: Imclone Acquisition Drama Intensifies, Eli Lilly Emerges as Potential Bidder
• United States: 29 September 2008: ImClone Continues to Scout for Acquirer as Erbitux Payment Dispute Emerges
• United States: 24 September 2008: Icahn Rejects New BMS Offer
• United States: 23 September 2008: BMS Raises ImClone Offer, as Positive Erbitux Data Are Released