This week, the pharmaceutical industry consolidated further after Bristol-Myers Squibb (BMY: Charts, News) announced a $5.3 billion deal to acquire diabetes drug manufacturer Amylin Pharmaceuticals AMLN (AMLN: Charts, News). New York-based Bristol acquired San Diego, California-based Amylin for $31 per share, a 10% premium to its June 29 closing price. Bristol had made a previous attempt to acquire Amylin in February for $22 per share.
Rival drugmaker AstraZeneca (AZN: Charts, News) also announced that it will pay Bristol $3.4 billion to help develop Amylin’s drug pipeline. In exchange, AstraZeneca will reap the benefits and share the risks of the joint venture. Bristol reportedly outbid AztraZeneca, Sanofi (SAN: Charts, News) and Merck (MRK: Charts, News) to gain control of Amylin.
From the deal, Bristol gains Amylin’s two U.S. approved diabetes drugs – a twice-daily injection medication called Byetta, and a longer-acting, once-a-week medication named Bydureon. Byetta notably generated $518 million in sales last year, while Bydureon, still new to the market, has been forecast to become a $2 billion product in the coming year. The acquisition of Amylin fills a noticeable void in Bristol’s drug portfolio. This January, Bristol’s own diabetes product, dapagliflozin, was rejected by the Food and Drug Administration. Diabetes has become a top priority for the major pharmaceutical players. With 346 million global patients, the World Health Organization estimates fatalities may double within the next two decades, making effective diabetes medication a high priority.
Analysts believe that Bristol needs a new source of strong revenue after its top product of 2011, the blood-thinner Plavix, came under heavy generic competition in May. Plavix accounted for $7.1 billion of Bristol’s annual sales last year. To shield itself from the threat of patent expirations – which wiped out an estimated $34 billion in annual sales across the pharmaceutical industry – Bristol has been on an acquisition spree this year, concluding five acquisitions worth over $1 billion each so far. In the previous two years, Bristol had only acquired three companies exceeding the billion dollar mark.
Analysts believe that the losses across the industry due to the loss of patent protection will rise to $147 billion by 2015, which explains Bristol’s urgency in acquiring new patents through costly takeovers. Seamus Fernandez, an analyst at Leerink Swann & Co., believes that this is only the beginning of industry consolidation. “We are on the cusp of the next consolidation wave,” Fernandez stated. “There just isn’t enough top-line growth in the industry.” Analysts believe that Bristol’s major rivals – Pfizer (PFE: Charts, News), AstraZeneca and Merck – will also evolve into major players in the scramble for revenue growth.
The consolidation has been particularly noticeable over the past year. Bristol acquired Inhibitex in January for $2.5 billion to gain its experimental hepatitis C medication. Meanwhile, AstraZeneca acquired Ardea Biosciences in April for $1.26 billion to add experimental gout and cancer treatments to its drug portfolio. GlaxoSmithKline (GSK: Charts, News) is still attempting to conclude its $2.6 billion hostile offer for Human Genome Sciences Inc., to gain access to approved lupus medication as well as experimental treatments for diabetes and cardiovascular disease.
Shares of Bristol have risen 15% over the past twelve months. The stock trades at 19 times forward earnings, but has a heavy 5-year PEG ratio of 12.5. This signifies that although the stock remains cheap, its growth potential is fairly limited, due to the necessity of spending heavily to increase its top line growth. However, like other big pharmaceutical companies, Bristol pays a healthy quarterly dividend of 34 cents – a 3.8% yield at current prices, and has a low beta of 0.47.
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