Jenks Healthcare Business Report June 2002

In the June 2002 issue:

Going, Going....Gone? The Saga Continues

The news does not get any better for the Bristol-Myers Squibb/ImClone Systems saga. Among allegations of insider trading, resignations and arrests, there still may be a decent cancer drug waiting in the wings. But Bristol-Myers may not be around to see it. That, however, is not a likely conclusion to this sorry story.
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Public Equity Market

Three secondaries and two IPOs were priced, but these all were completed before the market began selling off in late May...again. One IPO for Altus Medical was pulled, but there are seven others that may be priced in the next few weeks, including Medco Health Solutions.
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Venture Capital Market

Another blockbuster month for health care venture capital investments. More than 20 companies raised in excess of $400 million in the past month, with six companies raising $20 million or more each.
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Acquisition Market

The M&A market is showing signs of softening, but 25% of last month’s deals involved a foreign company as either the buyer or seller.
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Jenks Healthcare Business Report

Going, Going....Gone? The Saga Continues

It seems that everywhere one turns, there is bad news in the business of health care, which may not be too unusual given that the business world in general has not been the bearer of much good news of late. A sampling of some of the headlines includes, but is certainly not limited to, the following: "Schering Plough Stock Plunges," "Pfizer Under Investigation," "U.S Group Urges Criminal Charges Against Abbott" and "DOJ Joins Suit vs. HealthSouth." But none of these comes close to matching the headlines, and problems, surrounding the Bristol-Myers Squibb (NYSE: BMY) and ImClone Systems (NASDAQ: IMCL) saga.

But BMY’s problems are now known even by K-Mart shoppers, ever since it was revealed that Martha Stewart is under investigation for selling a few thousand shares of ImClone common stock the day before the announcement that the FDA would reject the company’s Erbitux application. Since she had a sell order in place, and losing money, on what for her is a relatively small investment, should be no big deal, it is inconceivable that Ms. Stewart would risk so much for so little return. Unfortunately, it wouldn’t be the first time someone went astray. As the CEO of a public company, she certainly is aware of insider trading rules, and no one has accused her of being barefoot and pregnant in the kitchen, although a picture of that would surely make it on the cover of some magazine.

Talk about a bad week. Not only did ImClone see its CEO resign in disgrace, but ImClone’s shares continued to decline after its cancer drug, Erbitux, failed a clinical trial involving 120 head and neck cancer patients. Given to patients who had been treated with a chemotherapy drug, the 50% who received Erbitux showed no statistically significant improvement compared to those receiving a placebo. So now, the ImClone Bristol-Myers partnership will begin new clinical trials for Erbitux in patients with cancers of the colon, head and neck, lung and pancreas.

Meanwhile, Merck KGaA of Germany turned away ImClone’s request to expand a major European trial for Erbitux so the data could be used with the FDA. One can only imagine the expression on BMY’s CEO Peter Dolan’s face when he watched the evening news showing the arrest of Sam Waksal, IMCL’s founder, for insider trading. He probably poured himself a stiff one, and we’re not talking about Pfizer’s (NYSE: PFE) blockbuster drug.

Everyone had figured out in the first few months of this year that Bristol-Myers’ management blew it on the due diligence last year for ImClone, especially for what became the largest pharmaceutical company investment ever for a single product. What is surprising is how much BMY did, in fact, know about the riskiness of the Erbitux product and how much they "assumed" that management at ImClone was following through on its clinical trials in a thorough, let alone responsible, manner. Given that apparent lapse in judgement, investors must wonder what else could be lurking at the floundering company.

This brings us to the future of Bristol-Myers. Less than 12 months ago, if anyone had declared that by the middle of 2002 Bristol-Myers would be directionless, its stock price under $30 per share, its embattled executives putting out one fire after another and the company would be the subject of takeover rumors, a 30-day visit to the local sanatorium would have been recommended. But this is precisely the environment, and now Goldman Sachs has apparently been retained to assist management in either a sale of the company, a merger with an equal partner, a purchase of a sizeable company or perhaps a major investment in a drug development company (did anyone say similar to the ImClone investment?). Let’s hope Goldman did not advise BMY on the ImClone purchase.

Before it was revealed that Goldman had been hired, some analysts and investors were saying that a buyer would have to pay at least a 30% premium above the market price, or at least $40 per share, to "snare" BMY. But that was when its shares were trading above $30, compared to just $26 per share today. Investors are focusing on the savings that would come with a merger, which may help earnings growth for a year or two (if the savings materialize quickly), but that is the wrong reason for a $75 billion merger anyway.

If the well is running dry at BMY, what exactly is the point of paying any premium at all, other than if you agree with the logic that the shares have been beaten too low already as a result of the recent mistakes? The company’s drug pipeline isn’t what it used to be (which was one of the reasons for the ImClone investment), and its second largest selling drug, Plavix (used for blood clots with first quarter sales of $400 million), is under pressure after a new study recently came out claiming the drug worked only slightly better than aspirin at preventing repeat heart attacks or strokes and wasn’t worth the extra cost. In BMY’s defense, some cardiologists disputed the interpretation of the test results because of differences in how Plavix is prescribed.

So what is Goldman Sachs going to advise BMY management to do? While a merger among equals may seem the easiest route to take, shareholders of the other entity may find BMY a difficult pill to swallow and send its own shares tumbling. GlaxoSmithKline Plc (ISEL: GSK) has been mentioned as the one company that already had preliminary talks with BMY, but other than increasing its size (and ego does control many of these decisions), there seems to be little merit, as GSK is facing similar drug pipeline problems itself. Besides, is BMY CEO Peter Dolan going to agree to a merger where he will most likely be out of a job?

Some analysts have raised the possibility of BMY buying the 80% of ImClone it doesn’t own, since the 80% is now worth less than what the company paid for its 20% stake last year. This maneuver makes little sense since BMY already has access, and revenues, from Erbitux if it ever gets approved, so why throw good money after questionable money when there is little economic benefit?

We hope that Goldman’s marching orders include a broad look at the company’s long-term future, and not just what would be best over the next year or two. This would include a product by product analysis, with comparisons to other pharmaceutical companies (including generics) as well as with other small, drug development companies. A $75 billion merger, if there are any takers, accomplishes little for the buyer or seller, other than passing off BMY’s problems to someone else. The best solution would be for BMY to sort out its problems, make some tactical acquisitions, divest assets that are not part of the future and second guess themselves all the way through the process.

Read the past headlines.