Bristol-Myers to Buy Amylin

In a bid to diversify its business to combat the generic threat and bolster its position in the lucrative diabetes market, Bristol-Myers Squibb Company ( BMY - Analyst Report ) recently announced that it will purchase biopharmaceutical company Amylin Pharmaceuticals, Inc. ( ) for $31.00 per share or approximately $5.3 billion in cash.

Moreover, the deal will see Bristol-Myers assuming Amylin’s net debt and making a contractual payment to Amylin’s former partner, Eli Lilly & Company ( LLY - Analyst Report ) . The total value of the deal will extend to $7 billion in that case. We remind investors that in November 2011, Amylin and Eli Lilly terminated their partnership for the worldwide development and commercialization of exenatide.

Bristol-Myers also announced that it will expand its partnership with AstraZeneca ( AZN - Analyst Report ) on diabetes drugs for developing and marketing Amylin's diabetes candidates/drugs following the closure of the Amylin deal. The expanded deal will see AstraZeneca making a payment of $3.4 billion in cash to Bristol-Myers.

This cash inflow will bolster Bristol-Myers’ balance sheet since the Amylin buy means it will shell out a significant amount. Bristol-Myers and AstraZeneca will share the profits and losses from the partnership equally.

Offer Price Represents Significant Premium

The offer price represents a premium of 10% on Amylin's closing price as of July 29, 2012. The Boards of both companies have approved the deal, which will close following a cash tender offer and second step merger. Amylin’s stockholders have been advised by the company’s board to tender their shares when Bristol-Myers launches the cash tender offer.

Deal is Mutually Beneficial

We believe that Bristol-Myers’ impending takeover of Amylin will benefit both companies. We note that following the termination of Amylin’s exenatide agreement with Eli Lilly in November 2011, Amylin has been considered to be a potential takeover candidate for companies with a focus on diabetes. Amylin’s exenatide franchise consists of Byetta and Bydureon (once-weekly exenatide).

While Byetta sales have been lagging expectations, Bydureon, which was launched earlier this year in the US, could very well be a blockbuster. Moreover, the deal is beneficial for Amylin’s stockholders as can be seen from the significant premium on the offer price. Amylin’s shares shot up significantly from the time acquisition rumors started in March 2012.

The Amylin acquisition is a smart, strategic move by Bristol-Myers since it already has a presence in the diabetes market (Onglyza and Kombiglyze). Moreover, the loss of exclusivity of its blockbuster blood-thinner Plavix on May 17, 2012 in the US is likely to result in substantial revenue losses for Bristol-Myers.

The Amylin buy, through which Bristol-Myers aims to expand its presence in the lucrative diabetes market, is an effort to combat the substantial revenue losses due to Plavix’s genericization in the US.

The announcement of the Amylin deal is the second major deal for Bristol-Myers this year. In February 2012, Bristol-Myers purchased Inhibitex, Inc., for $2.5 billion targeting the lucrative HCV market.

Neutral on Bristol-Myers, Amylin

We currently have a Neutral recommendation on Bristol-Myers. The stock carries a Zacks #3 Rank (Hold rating) in the short run. Our stance is similar on Amylin.