Analysts: Lilly setbacks might spur shopping spree

October 22, 2010
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Eli Lilly and Co., under pressure to gain new products after setbacks this week with two diabetes drugs, may try to acquire its partner Amylin Pharmaceuticals Inc. or covet companies with more approved products.

With Amylin, Lilly would gain full control of the diabetes drug Byetta and a longer-acting version called Bydureon delayed this week by U.S. regulators, said Seamus Fernandez, a Leerink Swann & Co. analyst. Lilly might try to acquire Cephalon Inc. or Endo Pharmaceuticals Inc. to expand its painkiller business, said Bill Tanner, an analyst at Lazard Capital Markets.

By 2013, Lilly loses patents on medicines responsible for almost half its revenue. The Bydureon rejection, which stalled a new revenue source for at least two years, was compounded Wednesday when the company halted tests on a second experimental diabetes medicine because it wasn’t effective. Lilly Chief Executive Officer John Lechleiter on Thursday ruled out “large-scale combinations” while expressing interest in smaller deals.

“An outright acquisition of Amylin certainly could make sense” if Lilly thinks Bydureon will be approved, Fernandez said in a telephone interview from Boston. Amylin, based in San Diego, lost half its market value on Wednesday after the Food and Drug Administration requested a study of Bydureon’s effect on heart rhythm.

Amylin shares increased 45 cents, or 4.1 percent, to close at $11.48 on Thursday in Nasdaq Stock Market composite trading, after a 46 percent plunge on Wednesday. Indianapolis-based Lilly fell 51 cents, or 1.4 percent to close at $35.50 on the New York Stock Exchange.

The average premium paid in the last 12 months for acquisitions of U.S. medical and biotechnology companies was 40 percent, according to data compiled by Bloomberg. That suggests Amylin may have cost $2.3 billion Thursday, excluding debt, compared with $3.4 billion before shares plunged this week. Lilly had $5.16 billion in cash to make deals as of June.

Other diabetes-drug developers led by Pfizer Inc. and Sanofi-Aventis SA may also pursue Amylin at its bargain price, Fernandez said. Ray Kerins, a spokesman for New York-based Pfizer, the world’s largest drugmaker, didn’t return calls for comment. Jean-Marc Podvin, a spokesman for Paris-based Sanofi, said he doesn’t comment on market rumors.

“We are very satisfied with our current relationship with Amylin and their management team,” Mark Taylor, a Lilly spokesman, said yesterday in an e-mail.

“Executing our current business strategy, including working with the FDA to bring Bydureon to patients as quickly as possible, is the best way to increase value for our shareholders,” said Alice Izzo, an Amylin spokeswoman, in an e- mail.

While there is risk Amylin may be the target of an opportunistic acquirer, it’s not likely the company would solicit offers, said Howard E. Greene Jr., a co-founder who resigned from the board last year, in a Wednesday telephone interview.

“Whenever the stock gets whacked, you have to assume that some people are going to sharpen their pencils,” Greene said. “Two things happen: Shareholders are mad, and companies with bundles of cash are standing on the sidelines, waiting for an opportunity.”

Lilly paid an undisclosed amount in July to buy closely held Alnara Pharmaceuticals Inc., the maker of a drug for pancreatic insufficiency. Lilly also said in March that it would pay an undisclosed amount to buy European rights to certain animal drugs from Pfizer and a manufacturing plant in Ireland.

“Our fundamental strategy remains intact,” Lechleiter said during a conference call Thursday. “We’re not interested in large-scale combinations. I think there are many other opportunities that I think we could consider along the lines of several that we have done this year.”

Lechleiter’s plan to stick to small purchases or licensing deals won’t give investors much confidence, said Barbara Ryan, an analyst with Deutsche Bank in New York, in a telephone interview.

“A lot of those companies will just be adding to the pipeline and they’re not going to be something that the market will accrue much value to on Lilly,” Ryan said.

United Therapeutics Corp. may also be a good fit because Lilly has an 11 percent stake and the two companies are partnered on Adcirca, a lung treatment made from the ingredient in Lilly’s impotence pill Cialis, according to Fernandez. Forest Laboratories Inc. would be another option to complement Lilly’s research in antidepressants and arthritis medicines, he said.

“It is not our expectation that we’re an imminent takeover target for Eli Lilly,” said Andrew Fisher, a spokesman for Silver Spring, Md.-based United Therapeutics, in a telephone interview. The 2008 Cialis marketing agreement prevents Lilly from attempting a takeover before 2014, he said.

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