Bristol-Myers Squibb made an offer today to purchase Imclone Systems for $60 per share or $4.5 billion in cash. Bristol already owns about 17 percent of Imclone so today’s offer values Imclone at $5.2 billion.

The offer was a 30 percent premium over Wednesday’s closing price of $46.44 per share. Shares of Imclone closed at $63.93, up 38 percent and almost $4 higher than Bristol’s offering price, reflecting investor expectations that Bristol would ante up more for the company. Shares of Bristol closed down about 2 percent on the news.

Although I stated in a previous post that I would not bother writing the same information that readers could get from press articles, today’s announcement is relevant to my overall thesis on biotech and big pharma and therefore worth discussing. Bristol’s acquisition announcement is the second occurrence over the past two weeks in which big pharma has demonstrated their appetite for biotech products, Roche’s offer for Genentech being the first (see previous post on this). More importantly though, is what I stated about which side investors might consider placing their bets in order to capitalize on these events.

Today’s event further demonstrates which side has the leverage in terms of negotiating. Bristol’s stock price closed down 2 percent, while Imclone stock closed up 38 percent. It seems quit obvious as to which side gets the better end of the deal.

Here are few statements made by Bristol-Meyer’s CEO, James Cornelius that are worth noting:

  • The acquisition should boost Bristol’s financial performance by around 2012-2013, when the company expects big decreases in sales of its blockbuster Plavix.
  • The acquisition is meant to build value for shareholders by getting approvals to sell Erbitux (Imclone’s main product) for other types of cancer.
  • “Should we not be successful on this one, we will move on to the next one (acquisition target) on the list”, noting that Bristol remains committed to acquiring more biotech companies.

These statements are nothing more than your classical CEO responses to shareholders upon acquisition announcements. Talking about additional approvals in the future for Erbitux, and improving financial performance by 2012-2013 somehow doesn’t come across as a very good argument for staying invested in Bristol. Essentially, Bristol purchased one drug as the remainder of Imclone’s pipeline is either in early or mid-stage of development.

What else would you expect a CEO to tell it’s shareholders other than the acquisition was meant to create value? This is exactly the predicament that big pharma is currently in. Biotech acquisitions are mandatory in order for big pharma to stay afloat. Forget about internal/organic growth strategies at this point of the game. Their are no blockbuster drugs coming out of the pipeline coming to market anytime soon. Besides, the “one drug fits all” mentality is history. The future is about smaller niche markets, targeted therapies and the development of personalized medicine through molecular-based drugs designed for specific genetic profiles. This technology and existing drugs in the pipeline are being developed by the biotech industry.

So if you are thinking that big pharma is a value play because the majority of companies are trading near their five-year lows, you might want to think again. Not a day goes by that I don’t listen to some large fund manager giving his two cents worth about how cheap big pharm is. In my opinion (my two cents worth) the industry is going through a transition period that will take years to resolve. Considering the pace at which drug development takes place, I’m thinking another decade.

If you’re happy with a 5 percent dividend payout by some of the big pharma companies, then you can ignore much of what I’ve discussed here. In defense of big pharma valuations, the negative events that the industry is facing appear to have already been priced into the stocks. Any downside on holding equity positions seems to be limited at this point, as much of the damage has already occurred.

Disclosure:

I am not invested or hold any positions in either BMY or IMCL