INHX Inhibitex, Inc. (MM)

The spate of acquisitions in the pharma industry continues in 2012 with Bristol-Myers Squibb Company (BMY) announcing the first major deal of the new year. Major merger and acquisition (M&A) deals have taken place in the pharma sector over the last couple of years.

With most of the big pharma players already facing or likely to face generic threats to their key products, the companies are resorting to M&As and in-licensing deals to counter the loss of revenues that will arise following the genericization of its key drugs. Pharma major Bristol-Myers is no exception as the generic threat looms over many of its key drugs, including the blockbuster blood-thinner Plavix, co-developed with Sanofi (SNY).

Bristol-Myers is looking to combat the generic threat through partnering deals and acquisitions, and is introducing new products to augment its product portfolio. The announcement of the $2.5 billion deal to acquire biopharmaceutical company Inhibitex, Inc. (INHX) is a step in that direction. Over the weekend, Bristol-Myers and Inhibitex entered into a definitive merger agreement whereby the former decided to acquire the latter at $26.00 per share.

Offer Price Represents Huge Premium

The offer price represents a premium of 163% on Inhibitex’s closing price as of January 6, 2012. The Boards of both companies have approved the deal, which is expected to hurt Bristol-Myers’ earnings until 2016. The company expects the deal to negatively impact its 2012 and 2013 earnings per share by approximately $0.04 and $0.05, respectively. The pharma major intends to finance the deal through its available cash balance.

Deal Targets Lucrative HCV Market

By inking this deal, Bristol-Myers has made it clear that it wants a piece of the hepatitis C virus (HCV) market pie. The deal will bolster Bristol-Myers’ pipeline significantly with the major attraction being HCV candidate INX-189 (phase II). We note that this is the second deal in successive months inked by Bristol-Myers targeting the HCV market.

In December 2011, Bristol-Myers and Tibotec Pharmaceuticals, a unit of Johnson & Johnson (JNJ), announced their decision to join forces for the development of Bristol-Myers’ daclatasvir (BMS-790052) in combination with Tibotec’s TMC435, for the treatment of chronic HCV. What the partners are aiming to do is create an oral once-daily interferon-free cocktail treatment for HCV patients.

We note that other major companies are also targeting the HCV market. In November 2011, Gilead Sciences, Inc. (GILD) announced an $11 billion deal to buy Pharmasset, Inc. (VRUS), a company focused on developing HCV treatments. Gilead intends to further strengthen its HCV pipeline through this deal.

Why Is the HCV Market So Attractive?

The market is characterized by a significant unmet need. It is estimated that approximately 170 million people suffer from HCV infection across the world. However, the treated population is much lower. This leaves the field open for new treatments.

Secondly, the current standard of care comes with several side effects which make it difficult for patients to remain on treatment. A 48-week course of both peg-interferon (peg-INF - weekly injections) and ribavirin (RBV - oral drug), are the standard treatment for genotype 1 HCV infection.

Vertex Pharmaceuticals’ (VRTX) Incivek and Merck’s (MRK) Victrelis (both approved last year in the US) are examples of the changing treatment regimen in the HCV market. Both are protease inhibitors which when added to the standard of care reduce the treatment period and also improve the treatment outcome. These factors have made the HCV market an attractive commercial opportunity for pharma and biotech companies.

Our Take

We believe that the announcement of the deal with Inhibitex offers twin advantages to Bristol-Myers. The deal, on completion, will not only provide Bristol-Myers the opportunity to be a lead player in the lucrative HCV market but also allow it to combat the significant loss of revenues due to the impending genericization of key drugs particularly Plavix.

We believe that Bristol-Myers will continue signing deals and making acquisitions throughout 2012 to strengthen its portfolio thereby minimizing the impact of genericization.

We prefer to remain on the sidelines with a long-term Neutral view on the stock. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

 
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PHARMASSET INC (VRUS): Free Stock Analysis Report
 
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