Eli Lilly's Risky Gamble

It's official. Eli Lilly (NYSE: LLY) really was the mystery bidder for ImClone Systems (Nasdaq: IMCL).

At $6.5 billion ($70 per share), ImClone isn't coming all that cheap, but Eli Lilly really needs ImClone's Erbitux and pipeline and is clearly willing to pay for it.

Eli Lilly Drug	Patent Expiration	U.S. Sales, 2007 (in millions)
Zyprexa	2011	$2,236
Humalog	2013	$888
Cymbalta	2014	$1,836
Gemzar	2013	$670
Evista	2017	$706
Total		$6,336

Source: Eli Lilly's 10-K.

That's more than a third of Eli Lilly's sales that are going to vanish by 2017, if not sooner. Some of the patents are being challenged in court. While Eli Lilly has a decent pipeline -- it has 13 oncology drugs in development, not to mention its other fields -- pipeline boosting is needed, since most drugs fail in the clinic.

Biotech is the new black
Biopharma companies are going for a premium -- witness AstraZeneca's (NYSE: AZN) monstrous pickup of MedImmune -- because biotech drugs can't be challenged by generic competitors in the U.S. under current law. While that extended product lifecycle could be in jeopardy if Congress changes the rules, it'll likely be some time before the debate is over, and biologics will probably emerge with extended patent protection as a compromise for giving up their current protected status.

For Lilly, the pickup of Erbitux has the added bonus of potentially complementing its existing oncology drugs, Alimta and Gemzar. The company may be able to push up sales of all franchises if clinical trials testing the combination of Erbitux with Alimta or Gemzar show that the combination improves survival better than the drugs individually.

But Erbitux isn't worth $6.5 billion by itself, given that it only brought in $200 million in royalties during the first six months of the year. Eli Lilly is going to have to get some of ImClone's five monoclonal antibodies through clinical trials and onto the market to justify the hefty price tag.

Eli Lilly claims it needs to get just one drug through the FDA to justify the price, but I wouldn't pay $6.5 billion for an oncology company with one and a half drugs. Unless Eli Lilly is expecting that one new drug to have sales significantly higher than Erbitux's royalties (the "half"), I'd say it’s going to need to get at least two drugs through the clinic before it'll reap the benefits from its purchase.

Thanks for the cash
Bristol-Myers Squibb (NYSE: BMY), the only company that's expressed a public interest in ImClone, said it's not going to try and top Lilly's offer. Instead, it'll take the $1 billion in cash -- it owns more than 16% of ImClone -- and run.

Perhaps “run” is the wrong word. Bristol-Myers will still be marketing Erbitux in the U.S. and Canada, and it’s still claiming rights to IMC-11F8, ImClone's follow up to Erbitux and one of those five antibodies in the pipeline. Bristol-Myers isn't going anywhere -- except perhaps to court if Eli Lilly claims full rights to IMC-11F8.

Another company that’s sitting on a lot of cash, like Pfizer (NYSE: PFE) or Wyeth (NYSE: WYE), could try to top Eli Lilly's bid, but that's highly unlikely at this point. The bidding war -- if you can call it that -- started with Bristol-Myers’ $60-per-share offer more than two months ago. If another company was going to speak up, it would have done so by now.

For better or worse, Eli Lilly is likely stuck with ImClone. It is planning on closing the deal by the end of the year, but it will likely be years before its investors know if management's large gamble pays off.

More immediately though, investors should be wondering which company Carl Icahn will try to get sold next. Do you hear footsteps, Amylin Pharmaceuticals and Biogen Idec (Nasdaq: BIIB)?