Can BMS Deliver on Innovation?

In December of 2007, Bristol-Myers announced its commitment to become a 'next-generation" biopharma company, with a focus on biologics and specialty drugs. That meant it would divest its non-core non-pharma assets, improve productivity, bolster R&D, and make sure its financing was in shape-even as its peers were taking the opposite approach. Two years later, it appears to be successfully executing on its objectives for the first two stages.

In 2007, when Jim Cornelius became interim CEO of Bristol-Myers Squibb Co., the company was at its nadir. The board, under pressure from a federal monitor, had fired the long-time CEO, Peter Dolan, and its general counsel, Richard Willward, because of a botched attempt to delay entry of a generic competitor to its best-selling anti-coagulant clopidogrel (Plavix). Analysts called the pharma "bloated" and "underachieving," especially since Plavix and other core products such as irbesartan (Avapro), were set to face generic competition beginning in 2012.

In December of that year, Bristol-Myers announced its commitment to become a 'next-generation" biopharma company, with a focus on biologics and specialty drugs. That meant it would divest its non-core non-pharma assets, improve productivity, bolster R&D, and make sure its financing was in shape—even as its peers were taking the opposite approach. (See "Why Doesn't Pharma Get Smaller?" IN VIVO, June 2009 (Also see "Why Doesn't Pharma Get Smaller?" - In Vivo, 1 Jun, 2009.).)

To reach these goals, management outlined the three stages the company would travel through over the next six years: in phase 1, from 2007 to 2010, the company would take steps to achieve a 15% compound annual growth rate; in the second phase, from 2011 to 2013, the drug maker's focus would be on managing the impact of patent expirations on key drugs; if BMS could achieve these basic goals, it would set the stage for the final phase, post-2013, when the pharma would again be in growth-mode.

Two years later, it appears to be successfully executing on its objectives for the first two stages—an accomplishment it is not shy about in talks with investors. It has sold most of its non-core non pharma assets, and spun off Mead Johnson Nutrition Co., into an independent company of which it owns nearly 85%, [See Deal] extended and amended a 10-year-old co-promotion with partner Otsuka Pharmaceutical Co. Ltd. to sell the popular anti-psychotic, aripiprazole (Abilify), and substantially cut costs. [See Deal] [See Deal]

Now it is working to build a pipeline of products necessary to ensure long-term growth—the stage 3 of its strategy--via its most recent acquisition of the biotech firm Medarex Inc. for $2.1 billion. [See Deal] The deal is the company's eighth and most resplendent jewel in the firm's series of ongoing business development transactions referred to internally as its "string of pearls."

The companies announced the deal on July 22, and as of August 28, 87.7% of Medarex shareholders had voted in its favor. (Holdouts have until August 31 to tender before the closing process begins.) (See "Bristol-Myers Squibb To Buy Medarex: Adds Eighth 'Pearl' to String," The Pink Sheet, July 2009 (Also see "Bristol-Myers Squibb Buys Medarex: Adds Eighth ‘Pearl' To String" - Pink Sheet, 27 Jul, 2009.).)

The deal gives Bristol full rights to the late-stage cancer drug ipilimumab, completing a co-development collaboration between the companies, which began in 2005. [See Deal] Additional assets include an array of proprietary technologies for developing humanized antibodies for immunological and oncologic diseases. In addition to an outstanding return—at $16 a share, it is nearly double the closing price of Medarex's stock as of July 22, when the deal was announced--the transaction also gives Medarex a Big Pharma parent's support. At the time of the deal, the biotech had three products in co-development, six unpartnered clinical programs, and it was preparing an IND. Although the company had insisted it could manage on its own, based on an extensive partnering strategy, some analysts thought otherwise.

Investors have generally greeted the deal favorably, although some were concerned about the high price tag. Catherine Arnold of Credit Suisse noted that "If BMY is successful with ipilimumab, criticism on price will quickly fade and royalties and access to humanized antibody technology provide a cushion for this valuation."

Bristol's top executives could not be reached for comment, and Medarex top executives also were unavailable for comment on the deal prior to its closing. However, a Bristol-Myers spokesman said in an email: the deal brings "a significant number of compounds, which would greatly increase our biologic leadership, a key part of our strategy. We believe integrating Medarex into BMY would strengthen our efforts in immunoscience, oncology, and biologics, in addition to creating a leadership position in the emerging field of immuno-oncology." Medarex's key product, the melanoma drug ipilimumab, "is in Phase III and could also be a contributor to our future growth should it be approved," he added.

The Medarex deal, however, is only one piece of Bristol's long-term strategy, following several difficult years. Bristol executives have clearly indicated that they could not have entered into the Medarex deal if the company had not first strengthened its asset base and financials and stabilized its cash flow to offset patent expirations of key drugs.

Now, its strong cash position—it sits on $9 billion in cash and marketable securities--enables it to pursue an aggressive business development strategy, which is key to reducing the high risk inherent in many of its R&D programs and to resuming growth post 2013. Bristol plans to pay for Medarex with its existing cash resources. And, in a further show of financial strength, the company says it will be able to maintain the 15% CAGR through 2010, despite dilution from that deal and other recent transactions. That's a significant turnaround for a company that had a net debt of $3.6 billion in 2007.

Among the company's key steps: strengthening its financials. In the past two years, the company has sold off non-pharma assets such as ConvaTec Inc. and its medical imaging businesses, [See Deal] netting a total of $4.6 billion ($4.1 billion from ConvaTec alone). Its February 2009 spin-off of Mead Johnson, its nutritional supplement business, into an initial public offering that allowed it to retain nearly 85% ownership, netted it $684 million. [See Deal] As of the second quarter, 86% of Bristol's revenues now come from pharma products, a notable change from 2006, when 77% of revenues came from pharma. "Part of that original strategy said that we did not have enough time, energy, talent, and focus to be in three or four different businesses," Cornelius told investors at the Sanford C. Bernstein Strategic Decisions Conference in May 2009. "We would be in one and subsequently, would monetize all non-Pharma assets."

In addition, a $1 billion break-up fee, which Bristol-Myers received from Eli Lilly & Co., after the ImClone debacle, added to the company's cash pile. [See Deal] (See "Lilly Snatches ImClone Away From Bristol," The Pink Sheet DAILY, October 2008 (Also see "Lilly Snatches ImClone Away From Bristol" - Pink Sheet, 6 Oct, 2008.); and "ImClone and Bristol: The Acquisition Fight Focuses on the Erbitux Successor," IN VIVO, September 2008 (Also see "ImClone and Bristol: The Acquisition Fight Focuses on the Erbitux Successor" - In Vivo, 1 Sep, 2008.).) A further sign of strength: total, available cash rose about $300 million between the end of the first and second quarters of 2009, even after a dividend payout of $600 million and a payment of $400 million to its neurology partner, Otsuka.

The Otsuka deal, completed in April, paved the way for Medarex because it helped to stabilize both Bristol's cash flow and its earnings base, mitigating the impact of anticipated exclusivity losses, Bristol executives have said; Plavix and irbesartan (Avapro), which lose patent protection in 2012, constituted approximately 40% of the pharma's revenues in 2008. The deal builds Otsuka's revenues and balance sheets as well, at a time when that privately held Japanese company is expanding aggressively into new geographic and therapeutic areas. (See "Bristol-Myers Squibb and Otsuka Stabilize Their Bases," IN VIVO, April 2009 (Also see "Bristol-Myers Squibb and Otsuka Stabilize Their Bases" - In Vivo, 1 Apr, 2009.).)

The company is also in the process of streamlining its manufacturing and supply chain operations, and has tightened its focus both geographically and therapeutically. Excluding Mead Johnson, the company now has 29,000 employees, down from 44,000 when Cornelius took over.

In the interim, the company has also set in place an in-house business development strategy centered on acquisitions and partnering deals focused on products, technologies, and companies with expertise in its 10 core therapeutic areas—a number that might still be too large, given the company's size and focus.

These deals—the company's widely publicized "string of pearls"--are key to getting the company back on track to growth post-2013, because, ultimately, proof that Bristol's strategy is working will lie in its ability to drum up innovative products. (See "Bristol Revs its R&D Engine: An Interview with Elliot Sigal and Francis Cuss," IN VIVO, November 2007 (Also see "Bristol Revs Its R&D Engine: An Interview with Elliott Sigal and Francis Cuss" - In Vivo, 1 Nov, 2007.).)

And that's where the Medarex deal will help. Products containing Medarex's innovative technologies are just beginning to hit the market –Johnson & Johnson's rheumatoid arthritis drug golimumab (Simponi), which the FDA approved in April, J&J's other auto-immune disorder therapy, ustekinumab (Stelara), which is waiting for FDA approval but is available in Europe, and Novartis AG's canakinumab (Ilarix), which just received FDA clearance for use in people with a rare disorder, cryopyrin-associated periodic syndromes. Because these three drugs were created using Medarex antibody technologies, the biotech—and now Bristol—stand to receive a royalty stream totaling several hundred million dollars over the next few years. Although that's a nice sum, it's only a modest return on Bristol's huge investment in Medarex. More importantly, this string of approvals shows that Medarex's technology can be embedded in successful products. It's the successful approval and then sale of drugs currently in Medarex's pipeline that will ultimately justify the deal's hefty price tag.

Of greatest importance: the success of ipilimumab,a cancer immunotherapy targeting the CTLA-4 receptor, which Bristol and Medarex have been co-developing for melanoma, and prostate and lung cancers since 2005. It is a gamble—cancer immunotherapy is an unproven approach to treatment and melanoma is a particularly tough cancer to treat. But if it succeeds, the $2.1 billion price tag may seem like a bargain. Medarex presented at ASCO this spring positive results from four Phase II trials using ipilimumab—three in metastatic melanoma and one in metastatic prostate cancer. Phase III data on the melanoma trial could be available in the second half of 2010, Bristol-Myers says.

Meanwhile, the company is waiting for approval of some key products, which will help it grow beginning in 2013. If all goes according to plan, Bristol could introduce six new products through 2012, including saxagliptin (Onglyza), which the FDA just approved and which has a positive opinion in the European Union for treatment of type 2 diabetes in adults as add-on therapy with established therapies. The drug is a latecomer in a crowded market, but Bristol is partnering with AstraZeneca PLC globally to sell the medicine. [See Deal] Other important products include belatacept, a kidney transplant drug, a new area for Bristol. Analysts expect a fair amount of data on these products in the second half of 2009.

At the Sanford C. Bernstein strategic decisions conference in May, Cornelius recalled he initially planned to be Bristol's interim CEO for three months. Now, with more than two years under his belt, the company has a clear focus and message: its value lies in being an innovative biopharma company. Medarex could be an important link in that chain.

--Wendy Diller