The Health Care M&A Monthly: CVS and Caremark Rx to Combine- Is This $21.0

Fifteen Deals Worth $7.8 Billion Announced in October
Email Editor
The month of October recorded a combined total of 15 mergers and acquisitions in the Biotechnology sector. This represents one-third of the 45 health care technology deals reported during the month, and the greatest amount of any single health care sector.
Based on revealed prices, a total of $7.8 billion was committed to fund the month’s activity. That amount accounts for 64% of the $12.1 billion committed to fund M&A activity in health care technology and 50% of all health care dollars committed during October.
The prices ranged from $2.5 billion to just under $500,000. Included among these 15 deals are three billion-dollar transactions. Among the top five buyers are three big pharma companies, one biotech and one biopharma firm.
The Pressure to Produce. The largest biotech deal of October involved Gilead Sciences’ (NASDAQ: GILD) $2.5 billion acquisition of Myogen (NASDAQ: MYOG), a company involved in developing and commercializing small-molecule therapeutics for cardiovascular disorders. Under terms of the agreement, GILD is offering to pay $52.20 per share for each share of MYOG common stock outstanding, a price that offers MYOG shareholders a 50% premium to the stock’s prior-day trading price. News of the deal sent MYOG’s stock up 48% to $52.06, effectively wiping out most of that premium.
To fill Gilead’s development pipeline, Myogen brings with it two promising drugs, ambrisentan to treat pulmonary arterial hypertension (PAH), and darusentan for high blood pressure. Preliminary estimates suggest that ambrisentan could generate over $1 billion in sales each year, elevating it to the ranks of a blockbuster drug.
The deal presents something of a risk since FDA approval for ambrisentan won’t come until next year; even so, some are already hailing it as a best-in-class agent. A related risk lies in potential competition from Encysive Pharmaceuticals (NASDAQ: ENCY), which has been developing its own candidate to treat PAH; however, a request from federal regulators in July for more information on its drug before approving it has dealt ENCY a sharp blow, lowering the threat of competition to ambrisentan.
This deal does depart from Gilead’s core competency in HIV treatments and infectious diseases, which is good if you’re a fan of diversification or bad if you’re not. But the hand-wringing may come too late since with its recent $365.0 million acquisition of Corus Pharma, which is developing a treatment for cystic fibrosis, GILD has opted for diversity. GILD also picks up MYOG’s existing alliance with GlaxoSmithKline (NYSE: GSK) through which MYOG markets Flolan, an intravenous treatment for primary pulmonary hypertension, in the United States.
Raising Revenues and … In the second-largest biotech deal, Eli Lilly & Co. (NYSE: LLY) is acquiring Icos Corporation (NASDAQ: ICOS) for $2.1 billion. Icos develops and commercializes a variety of therapeutic products. Importantly, it has had an established relationship with LLY since 1998, and the two have co-marketed Cialis for the treatment of erectile dysfunction ever since the drug was launched in 2003. It is that relationship that LLY wants to cement with this deal, so it will have full control over the impotence drug. The payoff is that sales of Cialis are projected to grow and surpass $1 billion in worldwide sales next year.
Lilly is offering $32.00 per share for each share of Icos common stock outstanding, which offers Icos shareholders a 32% premium over the stock’s prior-day price. Merrill Lynch & Co. served as Icos’ financial advisor in this transaction.
Silencing Genes. The third largest deal involves Merck & Co.’s (NYSE: MRK) proposed acquisition of Sirna Therapeutics (NASDAQ: RNAI) at $13.00 per share in cash, or a total value of $1.1 billion. That price offers RNAI shareholders a 101% premium over the stock’s prior-day price. However, on news of the deal, RNAI’s price shot up to $12.55, narrowing the acquisition premium to 4%.
With only $4 million in revenue and $28 million in losses for the 12-month trailing period, Sirna’s operating history is not what’s driving this deal. The company develops therapeutics based on RNA interference (RNAi), a natural cellular process that combats viral infections by degrading the viral genetic message before it can produce a protein. In essence, RNAi technology can “silence” a gene that can cause disease. This general technology has been in the news recently since this year’s Nobel Prize for medicine was awarded for its development in the 1990s.
Sirna’s platform technology focuses on short interfering RNA—siRNA for short. While RNAI’s current lead product, Sirna-072, is in Phase II trials for the treatment of certain forms age-related macular degeneration, the technology holds great promise in other areas such as hepatitis C, dermatology, asthma and Huntington’s disease. But the Holy Grail lies in its potential to treat cancer, and once MRK obtains that technology platform, it is likely to concentrate on the oncology pipeline.
Its technology is also complementary to the one that MRK acquired when it bought Rosetta Inpharmatics in 2001 for $620.0 million. The Sirna deal brings MRK into competition with Alnylam Pharmaceuticals, another specialist in RNAi technology, but since Alnylam is 20-percent-owned by Novartis (NYSE: NVS), it is unlikely to become another takeover candidate by MRK.
The real struggle all of them face, as noted by Nobel winner Andrew Fire of Stanford University, lies in the delivery of RNAi agents to diseased parts of the body. So far they are being carried in what Jonathan Aschoff, analyst for Brean Murray, Carret & Co., characterized as “unaddressed envelopes.” If that hurdle can be overcome—and we hope it won’t take another Nobel Prize-winning effort to do so—MRK could have cancer drugs in early stages of testing within two years.
In a transaction worth as much as $706.0 million, Roche Holding (SWX: ROCZ.S) is acquiring an exclusive, worldwide license to a drug candidate being developing by California’s Plexxikon. Roche will pay $40 million in an upfront licensing fee, and $6 million in research funding. Disbursements of up to $660 million in milestone payments and royalties are also contemplated under the terms of this deal. The candidate, which commands such a princely price, is an early-stage cancer therapy which inhibits B-RafV600E kinase, a genetic mutation that is found only in cancerous tumors. The mutation it inhibits appears in 70 percent of malignant melanomas and a large percentage of colorectal and thyroid cancers, as well as many other tumors.
Because Plexxikon expects to win orphan drug status for its orally-administered melanoma drug, it believes the treatment could reach market as early as 2010, if successful. Since this treatment is designed to work specifically on cancer cells, leaving healthy cells unharmed, its use might avoid the severe side effects often associated with other chemotherapeutic agents. Separately, Plexxikon and Roche Molecular Diagnostics will collaborate on developing an in-vitro assay to screen for the presence of B-RafV600E mutation in samples taken from patients, balancing diagnostics with treatment.
Genzyme Corp. (NASDAQ: GENZ) has returned to the table with a sweetened bid for AnorMED (NASDAQ: ANOR), a company that is focused on therapeutic products in the areas of hematology, HIV and oncology. This time GENZ is offering $13.50 per share, or $580.0 million. Readers will recall that GENZ’s original offer of $380.0 million was trumped by Millennium Pharmaceuticals’ (NASDAQ: MLNM) $515.0 million counteroffer. GENZ is sufficiently interested in ANOR’s pipeline to have raised the bid again, and is focused on Mozobil, a candidate in Phase III clinical trials for treating hematopoietic stem cell transplantation.
The drug, expected to launch in 2008, raises the number of stem cells in circulation in the blood, which is an important step in preparing the patient for a stem cell transplant. Mozobil can help patients who were previously ineligible meet target ranges for a transplant, and it can improve the viability of transplants in those who are eligible. Approximately 55,000 stem cell transplants are performed each year for multiple myeloma, non-Hodgkin’s lymphoma and certain other conditions. GENZ plans to commercialize ANOR’s drug through its existing global transplant business to hematologists and bone marrow transplant centers in over 50 countries.
Deal or No Deal? Early October saw a war of words erupt between ImClone Systems (NASDAQ: IMCL) and billionaire investor Carl Icahn, who owns a 14% stake in the biopharmaceutical company. In an SEC filing IMCL blamed Mr. Icahn for blocking a deal from a big pharmaceutical company that had offered $35.50 per share to take over the manufacturer of the cancer drug Erbitux, a price to which the financier objected. When the company declined that proposal in August, the suitor returned with an offer of $36.00, worth about $3.1 billion. IMCL suggests that when Mr. Icahn persisted in his objection to the revised deal, he was invited to make his own offer of $36.00 or better, but declined to do so. Though Mr. Icahn and three of his associates hold seats on the 12-member board, IMCL chairman David Kies was recently reelected to the board. While IMCL did not identify the potential bidder, it is suggestive that Bristol-Myers Squibb (NYSE: BMY) already holds a 17% stake in the company.
IMCL’s stock has been trading between $28.00 and $32.00 for the past three months, and a $36.00 offer represents a 20% premium to its average price, just what we have come to expect from acquisition premiums this year. Erbitux is projected to generate $1 billion in revenue this year, so a price of $3.1 billion, with a price to revenue multiple of 3.1x, would not be amiss in this market. But how IMCL is to be valued also hangs on the outcome of a Phase III clinical trial that begins shortly. Under the glass-is-half-empty theory, the board may believe that no better offer will come down the pike. On the half-full side, Mr. Icahn may be attempting to force the company to see this trial through to the end in the hope that a positive outcome will increase the value of his investment. The downside, of course, is that a contraindicated result would send the stock price plunging. Decisions, decisions.
 
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