Bristol-Myers Pays Up To Patch A Gap

By Stephen D. Simpson, CFA | January 09, 2012 AAA

Companies developing treatments for Hepatitis C were the hottest story in biotech for 2011, and at least some of that momentum has spilled over into 2012. Bristol-Myers Squibb (NYSE:BMY) won a competitive bidding process for Inhibitex (Nasdaq:INHX) and will be acquiring this small early-stage biotech for $2.5 billion in cash.

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The Deal
The two companies announced this deal over the weekend, whereby Bristol-Myers will buy Inhibitex for $2.5 billion, or $26 per share, in cash. This valuation offers a 163% premium to Friday's close for Inhibitex shareholders and a close to an incredible run that began at less than 25 cents per share in early 2009. Although this offer is lower than Gilead's (Nasdaq:GILD) $11 billion bid for Pharmasset (Nasdaq:VRUS), Pharmasset has more drug candidates in its pipeline and is further along in clinical trials. (For related reading, see Biggest Merger And Acquisition Disasters.)

What Bristol-Myers Is Buying
In buying Inhibitex, Bristol-Myers is buying arguably one of the best un-partnered nucleoside polymerase inhibitors ("nukes") in clinical trials. INX-189 is in very early studies (a phase 2-b study is expected to begin this year), but initial results have been encouraging. Although this drug has an uncertain toxicity/safety profile at high doses (a similar drug, Pharmasset's PSI-938 was discontinued for safety concerns), it seems very effective in reducing viral load.

This deal isn't just about buying one potentially effective drug. Rather, Bristol-Myers has the same hope as Gilead and many other pharmaceutical companies - a comprehensive all-oral therapy regimen that can work in multiple Hepatitis C genotypes and offer a near-cure to the disease (significantly suppressing the viral load, but not curing the patient). More specifically, Bristol-Myers can look to combine this drug with its protease inhibitor candidate (BMS-650032) and its Phase 3 NS5A inhibitor BMS-790052 as a multi-class therapy.

It's also worth noting that Bristol-Myers is no stranger to virology and the company's Baraclude is a $1 billion-plus per year drug for Hepatitis A and B.

Why Pay So Much?
Some investors may be startled to see that Bristol-Myers was willing to pay so much for what is basically a one-drug company. Likewise, the fact that there was more than one party willing to pay a significant premium may also surprise some.

Here's why this happened. First, Inhibitex had one of only two "gettable" nukes left in the pipeline, and this drug class has shown impressive efficacy compared to rival classes like protease inhibitors and NS5A inhibitors. Second, virology drugs have relatively high success rates - drugs that show efficacy in early-stage studies tend to maintain that efficacy through to final pivotal studies. That de-risks this deal and makes a higher premium more economically viable.

The Bottom Line
With the spate of deals and partnerships in 2011, there are relatively few options left in the Hep C world. Attention will immediately go to Idenix (Nasdaq:IDIX) and its IDX-184 drug - a drug that is very similar to INX-189 in many fundamental respects. There could also be some interest in Achillion (Nasdaq:ACHN), which has a protease inhibitor in trials, and Medivir, which has a phase 3 protease inhibitor partnered with Johnson & Johnson (NYSE:JNJ). Larger pharmaceutical companies could also have interest in Vertex (Nasdaq:VRTX), a company with some pipeline prospects in Hep C as well as the (relatively) recently-approved Victrelis. (Investing in the biotech sector can involve both huge losses and major gains. For more, see A Primer On The Biotech Sector.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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