The impending acquisition of biotechnology firm ZymoGenetics Inc. (ZGEN) by Bristol-Myers Squibb Co. (BMY) moved forward another step with the pharma giant buying 94.9% (approximately 82.6 million shares) of ZymoGenetics in the cash tender offer that expired at midnight, New York City time, on October 7, 2010.
Bristol-Myers intends to seal the deal via a “short-form merger” (without a vote or meeting of the remaining ZymoGenetics stockholders). The cash tender offer to buy the entire outstanding shares of common stock of the acquired company for $9.75 per share was initiated on September 10, 2010 by Bristol-Myers. Each of the remaining ZymoGenetics shares will be converted into the right to receive $9.75 per share in cash.
The duration of the offer, initiated through Bristol-Myers’ wholly-owned subsidiary Zeus Acquisition Corporation, was not extended. Last month, one of the conditions of the cash tender offer was satisfied with the expiration of the mandatory Hart-Scott-Rodino waiting period. Bristol-Myers aims to bolster its pipeline — especially for hepatitis C — through this acquisition, which has been approved by the Boards of both companies.
At the time of announcing the deal, Bristol-Myers said that the transaction is expected to hurt its 2010 and 2011 earnings by 3 cents and 7 cents, respectively. The deal has an aggregate purchase price of about $885 million or nearly $735 million, excluding ZymoGenetics’ cash on hand. The transaction is expected to be financed by Bristol-Myers’ existing cash balance.
The merger will add ZymoGenetics’ bleeding control product, Recothrom, to Bristol-Myers’ portfolio. Furthermore, the deal boosts the drug giant’s pipeline significantly. Most significantly, the acquisition would provide Bristol-Myers with full ownership of pegylated-interferon lambda (formerly known as IL-29), which is currently being co-developed by the two companies for treating patients suffering from the hepatitis C virus (HCV). PEG-Interferon lambda is a novel type III interferon being developed for treating HCV patients.
PEG-Interferon lambda, once launched, should augment Bristol-Myers’ top line. The HCV market is lucrative with a huge unmet need. Chronic HCV infection is a leading cause of cirrhosis, liver failure and hepatocellular carcinoma across the globe. Furthermore, HCV is the main reason behind liver transplantation. We believe that the successful development and commercialization of the candidate should further boost the top line at Bristol-Myers.
Another Move by Bristol-Myers to Counter Genericization
We believe that the impending acquisition of ZymoGenetics is another move by Bristol-Myers to counter the loss of revenues resulting from the genericization of its key drugs. The company, which has lost patent protection on products worth about $4 billion over the past few years, has already taken measures like the extension of the Abilify agreement with Otsuka and the acquisition of Medarex to prepare for the loss of exclusivity on its key drugs, including Plavix.
Neutral on Bristol-Myers & ZymoGenetics
We currently have a Neutral recommendation on Bristol-Myers, which is supported by a Zacks #3 Rank (short-term Hold rating). Our biggest concern for the company is the high exposure to generic risk on many of its leading franchises. We expect the company to look to grow revenue through partnering deals and acquisitions.
We are also Neutral on ZymoGenetics, which is supported by a Zacks #3 Rank (short-term Hold rating).
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