Lilly shares tumbled 5 percent today to less than $40 a share-a new 52-week low. One analyst called Lilly's deal "an act of desperation" as the company struggles to find new drugs to replace several that will face competition from cheaper, generic copies beginning in 2011.
Of course, Wall Street isn't embracing much of anything today. The Dow Jones industrial average plunged more than 400 points this morning.
But investors and analysts questioned how Lilly would finance its biggest acquisition ever and whether New York-based ImClone would bring enough benefit to justify the price.
Lilly agreed to pay $70 in cash per share for ImClone. New York-based Bristol-Myers Squibb Co. over the summer bid $60 a share, and later raised its offer to $62. Lilly's bid is 13 percent above Bristol-Myers' high bid.
Both were rejected by ImClone chairman and corporate raider Carl Icahn. And Bristol issued a statement today saying it would not offer another bid for ImClone.
ImClone has just one marketed product, Erbitux, but it's a blockbuster. Sales grew 18 percent last year, to $1.3 billion. Erbitux, which treats colon, head and neck cancers, is most famous for its role at the center of the Martha Stewart insider trading trial in 2002.
Several Wall Street analysts questioned how Lilly would derive $6.5 billion in value from ImClone.
"Lilly will drain substantially all of its cash on the deal. Lilly is already bidding outside the range of what you think would be rational," David Moskowitz, an analyst at Caris & Co., told Bloomberg News. He added, "This is an act of desperation on the part of Eli Lilly."
But Lilly Chief Financial Officer Derica Rice defended the deal. He said Lilly has more than $6 billion in cash and short-term investments. And Lilly recently raised its amount of so-called "backstop financing" to more than $5 billion.
Backstop financing is an agreement by a financier to buy corporate bonds at a pre-set rate if the company issuing the bonds cannot sell all of them to other investors. Rice said Lilly expects to use about $2 billion to $3 billion in debt to help pay for ImClone.
Also, Wall Street isn't giving enough credit to the products in ImClone's pipeline and to its biotech manufacturing plant, located in New Jersey, said Lilly spokesman Mark Taylor.
"We don't feel the investment community, the markets, are fully valuing the pipeline that has progressed lately," he said in an interview.
ImClone has five experimental cancer drugs in some stage of development. One just entered Phase 3 trials. Two others could enter Phase 3 testing next year.
But one compound, called 11F8, caused analysts concern. 11F8, like Erbitux, is designed to treat colon cancer.
But ImClone and Bristol are in a dispute over which company has the rights to the drug in the United States. ImClone has exclusive rights outside this country.
"Obviously, we are struggling to understand the purchase price with respect to uncertainty around 11F8," said Jami Rubin, an analyst for Goldman Sachs & Co.
ImClone's five experimental cancer drugs add to 13 cancer drugs Lilly is currently developing. Lilly only sells two cancer drugs, Gemzar and Alimta. Together, they generated nearly $2.5 billion in sales last year.
Lilly has been racing to replace the $4.8 billion a year in revenue it gets from the antipsychotic Zyprexa, its bestseller, which will lose patent exclusivity in 2011. Also, Lilly will lose patent protection on four other drugs by 2014. In all, those five drugs account for 60 percent of the company's revenue.
Lilly has 50 experimental molecules in clinical testing. One-third of those are biotech compounds.
Lilly hopes it can use ImClone's New Jersey plant to produce some of its experimental biotech drugs, including an Alzheimer's compound, called an amyloid beta antibody.
"ImClone brings a significant amount of world-class biologic development and manufacturing capacity that will enable Lily to efficiently commercialize the combined companies biologic pipelines," Lechleiter said on a conference call today.
Zyprexa accounted for more than one-quarter of Lilly's $18.6 billion in sales last year, and some analysts estimate the drug accounted for half of Lilly's $3 billion in profit.
Last year, ImClone generated $40 million in profit on $590 million in revenue. Some of the revenue from Erbitux goes to Bristol and Germany-based Merck KGaA, which handle the marketing of the product.
The ImClone deal is Lilly's first multi-billion-dollar acquisition since October 2006, when it announced it would pay $2.3 billion for Washington-based Icos Corp., the inventor of the impotence pill Cialis.
Moody's Investors Service put Lilly's long-term debt rating under review for a possible downgrade following this morning's announcement.