Small Acquisitions and the Road to Success

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Bristol-Myers Squibb (NYSE: BMY) is using some of its stash to boost its pipeline a little more, eschewing the recent megamergers in big pharma. This morning, the drugmaker said it had licensed a phase 2 rheumatoid arthritis drug, ALD518, from privately held Alder Biopharmaceuticals.

As usual for a mid-stage drug, the deal is fairly back-ended, with Bristol-Myers paying $85 million up front but on the hook for nearly $1 billion if everything goes as planned with regulatory approvals and sales of the drug. Also, Alder is due royalties on potential sales of ALD518.

Assuming ALD518 gets approved, it's a natural fit for Bristol-Myers, which already sells rheumatoid arthritis treatment Orencia. Bristol-Myers may also be setting itself up to buy Alder outright if the drug makes it through later-stage trials; Alder gets the option to require Bristol-Myers to invest $20 million in an initial public offering it may undertake.

ALD518 targets interleukin-6 (IL-6), a molecule that promotes inflammation in rheumatoid arthritis patients. The companies say that the drug has a "novel mechanism of action," but that's only because Roche's IL-6 targeting drug, Actemra, is still under review by the Food and Drug Administration. It's possible that all drugs that target the same molecule could become blockbusters: Abbott Labs' (NYSE: ABT) Humira, Johnson & Johnson (NYSE: JNJ) and Merck's (NYSE: MRK) Remicade, and Pfizer (NYSE: PFE) and Amgen's (Nasdaq: AMGN) Enbrel all target TNF-alpha and combined to bring in more than $16 billion last year.

But it won't be easy for ALD518, or Actemra for that matter, to break into the market. Humira, Remicade, and Enbrel have longer safety records, which will continue to make them the go-to drugs unless something comes along that knocks their socks off.

Fortunately, Bristol-Myers won't have to pay too much unless ALD518 is worthy of commercialization.