Bristol-Myers Squibb (NYSE:BMY) may have the unfortunate distinction of being among the most highly-concentrated pharmaceutical companies in the U.S. (For a quick refresher on this, check out Top-Heavy Pharmaceuticals), but management is certainly looking to do something about that. After Monday's close, Bristol-Myers announced a friendly buyout of its partner ZymoGenetics (Nasdaq:ZGEN) in a deal that gives shareholders of this small biotech $9.75 a share in cash, or an 84% premium to the prior closing price.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

What is Bristol-Myers Buying?
ZymoGenetics actually has quite a lot going on, but Bristol-Myers is almost certainly buying the company in order to have 100% ownership of its PEG-Interferon lambda drug. This promising hepatitis C therapy is in Phase 2 testing, but could be a blockbuster ($1 billion or more in sales) in less than five years' time. Moreover, this drug could fit in nicely with Bristol-Myers' other clinical HCV candidates, and lead to a potential combination therapy. Just as Gilead (Nasdaq:GILD) has significantly changed the HIV treatment landscape with its combination therapies, Bristol-Myers could possibly do something similar in hepatitis C.

Beyond the HCV therapy, ZymoGenetics has an early-stage cancer drug, as well as some preclinical compounds. ZymoGenetics also has an approved drug on the market - Recothrom for the control of surgical bleeding. Though this drug has not been a great success so far, perhaps Bristol-Myers can do more with it.

Last and not at all least, ZymoGenetics has partnerships with Merck Serono (part of the "other" Merck, Merck KGaA) and Novo Nordisk (NYSE:NVO) whereby ZymoGenetics has out-licensed drug candidates for conditions like lupus and Factor XIII deficiency. In fact, Novo Nordisk owns about 26% of ZymoGenetics (ZymoGenetics was once part of Novo Nordisk), which it will be selling to Bristol-Myers. (For more, see The Wacky World Of Mergers And Acquisitions.)

A Concentrated Bet
If PEG-Interferon lambda is as good as hoped, this will be a solid acquisition for Bristol-Myers. After all, Bristol-Myers was on the hook for more than $900 million in potential milestone payments to ZymoGenetics, as well as royalties on sales. Moreover, given the exceptional profitability of chronic viral therapies, Bristol-Myers could find this deal paying for itself relatively quickly (to say nothing of the possibility of revenue streams from the partnerships and the oncology drug).

On the other hand, the hepatitis C market has plenty of competitors. Roche (Nasdaq:RHHBY) has sold Pegasys for years, and Merck (NYSE:MRK) offers PegIntron, as well. In the relatively near term, though, Merck hopes to bring a new drug to market (boceprevir), and there are several compounds in development at companies like InterMune (Nasdaq:ITMN), Pharmasset (Nasdaq:VRUS) and Achillion (Nasdaq:ACHN) - some of which have already been picked up by larger partners like Roche for further development.

More on the Way?
It seems like a reasonably good bet that there will be more big pharma-biotech deals in the future. There are several pharmaceutical companies facing serious patent-related revenue pressures, and there is ample cash on the balance sheets of many players in this industry. With the normal avenues of capital-raising (IPOs, venture financing etc.) still pretty tight, many biotechs may find it wiser to take a premium and bow out than continue to fight on as independent companies.

The Bottom Line
For Bristol-Myers, this is a deal that makes sense, and a price that does not break the bank. Here too, this may only be a part of a larger plan - though this deal will absorb a lot of Bristol-Myers' net cash, there is still plenty of room to do additional deals, and a need to replace a lot of revenue as Plavix goes away. (For more, see Stocks On Drugs: What It Takes To Get High.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  2. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  5. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  6. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  7. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  8. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  9. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  10. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Trading Center