Joint-venture approach does little to hide risk of Amylin takeover

A takeover of Amylin Pharmaceuticals was always going to involve a bet on the GLP-1 agonist class, but the fact that Bristol-Myers Squibb and AstraZeneca are handing over a massive $7bn to get their hands on the company only underlines the risk - notwithstanding the deal being routed through a 50/50 joint venture.

While BMS and Astra were clearly the most logical buyers for Amylin, as previously pointed out by EP Vantage, it will take several years before it becomes clear whether what they have done amounts to a wild misjudgement or a stroke of genius. Rather, the takeover should be seen as a case of two big pharma companies planting their flag squarely in the diabetes space to answer growing concerns over generic competition, with the added benefit of cost savings and a nice tax advantage to boot.

BMS and Astra have an existing diabetes joint venture that focuses on two different mechanisms of action: the inhibition of DPP-4 and SGLT2. Adding Amylin’s GLP-1 approach into the mix was one reason for the takeover, and BMS executives on a call highlighted the promise of tackling diabetes – a huge market – with drugs that act differently and might be given sequentially or in combination.

But Amylin’s GLP-1 approach has so far failed to live up to expectations. In 2005 the company launched Byetta (exenatide), the first GLP-1 agonist, but links with pancreatitis derailed the product and handed the market to Novo Nordisk’s second entrant, Victoza. Bydureon, a once-weekly version of exenatide, was approved this year after two years of delays over heart abnormality concerns (Now Amylin must play catch-up following US Bydureon approval, January 30, 2012).

Analysts are still cautious regarding Bydureon’s prospects, and estimates for 2018 sales range from $900m to $1.6bn, with consensus sitting at $1.1bn. The 9,500-patient cardiovascular study, codenamed Exscel, could eventually provide comfort, but does not read out until 2017.

If safety concerns were not enough, the GLP-1 space is getting crowded: products from Sanofi/Zealand Pharma, GlaxoSmithKline/Human Genome Sciences and Lilly will be seeking to enter over the coming 18 months. The NPV of Bydureon to Amylin, based on consensus forecasts, is just $659m and all of the company's products combined are worth just $1.26bn, according to EvaluatePharma, underlining just how risky a bet a $7bn price tag represents.

No way to stay solo

Still, Amylin could hardly have continued to exist as a standalone entity, and a share price fall from over $50 five years ago to barely $10 at the end of 2011 called into serious doubt the credibility of its chief executive, Daniel Bradbury. After the company paid through the nose to end a long-standing diabetes tie-up with Lilly last November the writing was on the wall (Amylin takeout possible but high price hard to justify, March 29, 2012).

While most analysts agree that the BMS/Astra deal makes sense, Bernstein and ISI Group say the price – a meaty seven times forecast 2012 sales – is a concern. UBS suggest that the acquirers had to pay up for long-tailed assets.

Although BMS denies that any immediate sales force cuts are in the offing, stripping out central costs will be an important consideration, and other savings are possible if future tax payments can be offset against Amylin’s $1.5bn of historic losses.

The acquisition is structured as a $31-per-share takeover by BMS, followed by a $3.4bn payment by AstraZeneca to the buyer to secure joint-venture rights. An additional $1.7bn of debt and payment to buy out Lilly’s remaining European rights takes the aggregate price to $7bn.

BMS delivers on rumour

After an Amylin buyout at $22 a share was rumoured in March, only those investors who remember the heady days of 2007 might claim to have been short-changed by BMS’s $31.

It is possible that other companies had to be outbid, and the presence of the activist Carl Icahn – Amylin’s third-largest investor with an 8.8% stake - can only have helped drive up the cost.

BMS’s effective $3.5bn share of the purchase makes this its biggest deal since the $7.8bn acquisition of DuPont Pharmaceuticals in 2001, and comes shortly after the company handed over $2.5bn to buy Inhibitex. Amylin is dwarfed by Astra’s 2007, peak-of-the-market, $15.8bn purchase of MedImmune.

Diabetes franchise-building aside, Bristol-Myers Squibb and AstraZeneca are desperate to fill revenue holes, and are acquiring a company with difficulties of its own. They will now have to prove that combining three setback-laden businesses is the answer to their problems.

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