Bristol-Myers Squibb Co. (BMY) announced its decision to acquire ZymoGenetics Inc. (ZGEN) for $9.75 per share in cash. The offer price represents a premium of approximately 84% over ZymoGenetics’ closing price of $5.30 on Sep 7, 2010. Bristol-Myers aims to bolster its pipeline, especially for hepatitis C, through this acquisition. The merger has been approved by the boards of both companies.
The deal, which is expected to hurt Bristol-Myers’ 2010 and 2011 earnings by 3 cents and 7 cents respectively, has an aggregate purchase price of about $885 million or nearly $735 million excluding ZymoGenetics’ cash on hand. The deal is expected to be financed by Bristol-Myers’ existing cash balance.
Under the terms of the agreement, Bristol-Myers will initiate a cash tender offer on or around Sep 9, to buy all the outstanding shares of ZymoGenetics at $9.75 per share. The closure of the offer is subject to the customary terms and conditions which include tendering of approximately 56% of shares outstanding as of Aug 31, 2010. The offer is expected to close within a month of its commencement. Currently, stockholders owning about 37 % of ZymoGenetics have agreed to support the deal and tender their shares in the offer.
The merger will add ZymoGenetics’ bleeding control product, Recothrom, to Bristol-Myers’ portfolio. Furthermore, the deal boosts the drug giant’s pipeline significantly. Most significantly, the acquisition, on materializing, would provide Bristol-Myers full ownership of pegylated-interferon lambda (formerly known as IL-29), which is currently being co-developed by the two companies for treating patients suffering from hepatitis C virus (HCV).
PEG-Interferon lambda is a novel type III interferon being developed for treating HCV patients. The native human protein interferon lambda is generated by the immune system in response to viral infection.
PEG-Interferon lambda should augment BMY’s top line
The HCV market is lucrative with a huge unmet need. Chronic HCV infection is a leading cause of cirrhosis, liver failure and hepatocellular carcinoma across the globe. Furthermore, HCV is the main reason behind liver transplantation.
According to estimates from the World Health Organization, HCV infection is responsible for more than 50% of all liver cancer cases and two-thirds of all liver transplants in the developed world. According to a 2010 report released by the institute of medicine, up to 3.9 million people in the US are infected with chronic HCV and 75% of them are unaware of their disease. We believe that the successful development and commercialization of the candidate should further boost the top line at Bristol-Myers.
Merger- another move by BMY to counter genericization of key drugs
We believe that the impending acquisition of ZymoGenetics is another move by Bristol-Myers to counter the loss of revenues resulting from the genericization of its key drugs. The company, which has lost patent protection on products worth about $4 billion over the past few years, has already taken measures like the extension of the Abilify agreement with Otsuka and the acquisition of Medarex to prepare for the loss of exclusivity its key drugs, including Plavix.
The move by Bristol-Myers comes close on the heels of another pharma giant, with a high exposure to generic risk, Sanofi-Aventis’ (SNY) $18.5 billion bid to acquire Genzyme Corp. (GENZ). However, Genzyme rejected the offer as inadequate.
Neutral on Bristol-Myers & ZymoGenetics
We currently have a Neutral recommendation on Bristol-Myers, which is supported by a Zacks #3 Rank (short-term Hold rating). Our biggest concern for the company is the high exposure to generic risk on many of its leading franchises. We expect the company to look to grow revenue through partnering deals and acquisitions.
We are also Neutral on ZymoGenetics, which is supported by a Zacks #3 Rank (short-term Hold rating).