The Health Care M&A Monthly: Bristol-Myers Buys Medarex--

Pays Big Premium For Antibody Technology

Toward the end of July, Bristol-Myers Squibb (NYSE: BMY) and Medarex (NASDAQ: MEDX) announced that they had agreed to a merger in which BMY would acquire MEDX and its antibody-based therapeutics platform for $2.4 billion. No matter how you slice it, this deal is a rich one, offering MEDX shareholders a 90% premium to the stock’s prior-day price and a price to revenue multiple of 47.1x. While such heady acquisition multiples and premiums are not unknown in the Biotechnology sector, we suspect that, as worthy a takeover candidate as Medarex is, other strategic factors have influenced the pricing of this deal, not the least of which are for BMY to establish itself in biologics and to recapture its pre-eminence in the oncology market.

New York-based Bristol-Myers produces and distributes consumer medicines, pharmaceuticals, nutritionals, medical devices and beauty care products. On a trailing 12-month basis, it generated revenue of $20.9 billion, EBITDA of $6.0 billion and net income of $3.4 billion. Like many other big pharma companies, BMY has been eager to establish itself in the Biotechnology sector to find new and profitable therapeutics which can replace the revenues of branded drugs that are facing that looming patent cliff. In particular, BMY is confronting the loss of patent protection in 2011 for its bestselling Plavix blood-thinner. To concentrate on developing new drugs and to break into biotechnology, BMY has over the past two years sold off its ConveTec wound care business, its imaging business and its North African and Middle Eastern drug business.

Princeton, New Jersey-based Medarex appears to fill the bill for BMY, both because of its biologics technology platform and because the two companies have collaborated before. MEDX is involved in the development of human antibody-based therapeutic products to treat cancer, inflammation, autoimmune disorders, as well as other life-threatening and debilitating diseases. BMY already owns a tiny 2% stake in MEDX.

The company’s current product pipeline includes ipilimumab, a Phase III clinical trial product in development with BMY for the treatment of metastatic melanoma and other cancers. MEDX also has numerous Phase II clinical trial products; one of MEDX’s partners is AstraZeneca (NYSE: AZN), which acquired the partnership when it bought MedImmune in 2007 for $15.2 billion.

Medarex’s UltiMAb antibody platform has already been formally validated following regulatory approval of three antibodies which use this technology, developed by MEDX’s partners: Johnson & Johnson’s (NYSE: JNJ) Stelara and Simponi and Novartis’ (NYSE: NVS) Ilaris. On a trailing 12-month basis, MEDX generated revenue of $51.1 million and a net loss of $190.4 million. Despite these losses, the company has about $300.0 million in cash on hand to help see it through late-stage clinical trials.

Under terms of the deal, BMY is offering to pay $16.00 in cash for each share of MEDX common stock, or approximately $2.4 billion. As noted above, this bid offers MEDX shareholders a 90% premium to the stocks’ prior-day price, which in the current environment must strike some observers as very generous indeed. Taking into account the cash that MEDX has on hand, the effective purchase price would fall to $2.1 billion. BMY plans to finance the deal from its existing cash resources.

There appears to be a strategic reason behind Bristol-Myer’s willingness to pay so dearly for Medarex. The company’s road to biotech has not been a smooth one. Readers will recall that last year BMY and Eli Lilly & Co. (NYSE: LLY) fought a bidding war over ImClone Systems, one that LLY ultimately won. After LLY made its initial approach, BMY entered the fray as a hostile bidder offering $62.00 per share only to be trumped by LLY’s superior bid of $70.00 per share (a 51% premium for ImClone shareholders).

BMY doubtless smarted from the loss of this chance to buy its way back into the forefront of the cancer therapeutics market, so this time it is taking no chances that an interloper will snatch MEDX out of its grasp. Part of that high premium, we suspect, was meant to secure an agreement from MEDX not to solicit any competing bids for the company. Even so, in the grand scheme of things, a $2.4 billion price tag is modest when compared with the prices paid in other pharma and biotech mega-mergers. It’s not petty cash, but it won’t break the bank either.

Premiums aside, much else about the deal recommends itself. A positive outcome on the ipilimumab trials would undoubtedly push the price for MEDX even higher. A consensus analyst forecast projects ipilimumab sales of about $300.0 million by 2014, which would bring a combined BMY and MEDX nearly $1.5 billion in potential sales of the drug. BMY also gets rights to 10 other drug candidates in clinical trials in such areas as immunology, inflammatory disease and infectious diseases.

But the real centerpiece of this deal must be MEDX’s UltiMAb antibody platform, which has already proven itself in the drugs that were developed in collaboration with JNJ and NVS. Naturally, post-merger BMY will receive royalties from the sale of drugs developed with this platform.

Despite last year’s thwarted attempt to buy ImClone, Bristol-Myers appears to be most comfortable when it focuses on a strategy of bolt-on acquisitions, eschewing the mega-mergers that many of the other big pharma companies have undertaken. With nearly $8.1 billion in cash and cash equivalents at midyear, not to mention the $1.0 billion it got from the sale of its stake in ImClone last year, BMY’s war chest is well stocked for a variety of follow-on acquisitions.

JPMorgan Securities is providing BMY financial advice on this transaction while Goldman, Sachs & Co. is providing Medarex with similar advice.