RPT-ANALYSIS-ImClone deal is latest bold move by new Lilly CEO

Tag : Organic Intermediate
United States - (Repeats to additional subscribers)
By Lewis Krauskopf and Ransdell Pierson
NEW YORK (Reuters) - Eli Lilly and Co (nyse: LLY - news - people )'s $6.5 billion acquisition of ImClone Systems Inc (nasdaq: IMCL - news - people ) is the boldest move by new CEO John Lechleiter as he readies thedrug maker for a huge potential revenue drop, but the deal may havebeen borne of dire need.
In only six months at Lilly's helm, Lechleiter sealed the largestdeal in the Indianapolis-based drug maker's 132-year history inagreeing to buy cancer specialist ImClone. In doing so, he outbid Bristol-Myers Squibb Co (nyse: BMY - news - people ), ImClone's partner on the cancer drug Erbitux.
Viren Mehta, a principal at research and advisory firm MehtaPartners, praised Lechleiter's active round of deal-making sincetaking the reins at Lilly.
"He is doing what all (drug) companies and all management need todo," Mehta said. "He is taking charge and taking advantage of afresh point of view."
But some analysts and investors said the acquisition smacks ofdesperation and will not be enough to make up for revenue lost whenpatents expire on its blockbuster schizophrenia drug Zyprexa andother medicines.
"I think it's a deal that is being done out of weakness," Caris &Co analyst David Moskowitz said.
Lilly has $7.5 billion in annual sales that face genericcompetition over the next five years, according to JP Morgananalysts.
Sanford C. Bernstein analyst Tim Anderson said Lilly should be ableto increase earnings per share by about 10 percent between now and2010.
"Until investors gain more comfort about the company's growthprospects beyond this period, however, its earnings performance inthe intermediate-term may not matter much," Anderson said in aresearch note.
One way Lilly has hoped to soothe shareholders is with anexperimental blood-clot treatment, prasugrel, which is seen as apossible blockbuster and is under review by U.S. regulators. Butsome analysts worried Lilly's move to buy ImClone may hint atLilly's own pessimism about prasugrel's prospects.
"To me, this is a very dubious signal on prasugrel," said MikeKrensavage, principal at Krensavage Asset Management. He predictedthe drug will not be approved until it undergoes a time-consumingnew clinical trial.

CANCER PIPELINE INJECTION
Lechleiter said in an interview that the ImClone acquisition bringsLilly three experimental cancer drugs poised to be in late-stagedevelopment next year, putting them on pace to hit the market whenLilly faces the brunt of its patent expirations.
He said the company will continue to focus on moving forward withdrugs developed in its own labs.
"The challenges we face in the next decade with patent expirationsare going to be solved through a variety of actions, includingcontinued focus on our own internal pipeline," said Lechleiter, whojoined Lilly 29 years ago as a senior organic chemist.
Lilly is far from alone in the drug industry in facing patentexpirations to major products that will cripple revenues in thenext few years. But in his short time as CEO, Lechleiter hasarguably taken more daring steps than chiefs at his rivals who havebeen on the job for longer periods.
In July, Lilly announced a risk-sharing deal in which it willreceive funding for its two lead experimental medicines forAlzheimer's disease from hedge fund TPG-Axon and Quintiles, apharmaceutical service firm.
The following month, Lilly unveiled a 10-year, $1.6 billion labservices deal with testing company Covance Inc (nyse: CVD - news - people ) in a bid to cut costs.
The ImClone deal would eclipse Lilly's $4.3 billion deal forpharmacy benefit manager PCS about 14 years ago, and its $2.3billion acquisition of drug maker ICOS Corp last year.
In addition to strengthening Lilly's franchise in oncology -- oneof its three main areas of research focus -- it will gain ImClone'smanufacturing facility that will improve Lilly's ability to makecomplex biotechnology medicines, Lilly said.
"There's a feeling that biotech is where we're seeing potential fornew blockbuster drugs and big pharma needs to get biotechdevelopment under their own wing," said Janna Sampson, co-chiefinvestment officer with Oakbrook Investments.
But, Sampson said of the deal: "It has to be desperation. Lilly hasproducts going off patent in the next few years and needs newbiotech development under its own banner." (Editing by RichardChang) Copyright 2008 Reuters, Click for Restriction
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