Diabetes Partners Going Their Separate Ways

"It's not you; it's me."

That's basically what Bristol-Myers Squibb (NYSE: BMY  ) said to AstraZeneca (NYSE: AZN  ) as it ended their nearly seven-year marriage in diabetes.

In addition to developing drugs as part of the joint venture, the two companies bought an entire company, Amylin Pharmaceuticals, together. Apparently keeping the union together for the kids wasn't an option. The companies seem to have different priorities.

Given the choice, Bristol-Myers would rather sell a billion-dollar cancer drug than a billion-dollar diabetes drug because the margins are much higher with the cancer drug.

AstraZeneca is already heavily focused on primary-care doctors with drugs like its cholesterol drug Crestor. Economies of scale make the lower margins more tolerable.

The deal
AstraZeneca will pay Bristol-Myers $2.7 billion upfront for the full rights to the joint venture, and there's potential for another quick $700 million if AstraZeneca gets regulatory approvals for Forxiga in the first quarter of next year. Bristol-Myers is eligible for another $700 million in undisclosed regulatory- and sales-based milestone payments and royalties on sales through 2015. There's also $225 million for additional assets that may be subsequently transferred to AstraZeneca.

Bristol-Myers' share of the cost to purchase Amylin was a little more than $3 billion, so the company is essentially just getting its money back. The good news is the cash influx will be tax free. The bad news is that it's counting on AstraZeneca's ability to sell the drugs to get those royalties and sales milestones. While that's not as ideal as having control of your own destiny, at least Bristol-Myers has inside knowledge of how AstraZeneca operates.

There goes my prediction?
I've previously pointed out that the Bristol-Myers-Squibb-AstraZeneca diabetes partnership would be a good fit for MannKind's (NASDAQ: MNKD  ) inhaled insulin Afreza. The market for the drug is uncertain because there hasn't been anything like it before, and sharing that risk among two pharmas made a lot of sense. Now, not only would AstraZeneca have to take on all the risk, but I doubt it would want to add a drug while it was in the transition of taking full control of the joint venture.

There are certainly other possible large pharma partners that MannKind could team up with; Eli Lilly (NYSE: LLY  ) and Boehringer Ingelheim have a diabetes joint venture, although it's hard to see Eli Lilly jumping into inhaled insulin after dropping its own program. But clearly today's deal is a net negative for MannKind assuming it has one less potential partner to do a deal with.

Let the predictions begin
Bristol-Myers won't sit on the cash it's getting from AstraZeneca. Dividends and share repurchases were mentioned on the conference call today, but the pharma has been very active with its "string of pearls" strategy of adding drugs through acquisitions. With a more focused specialty pharma, more additions seem like a foregone conclusion.

Who do you think Bristol-Myers could target? Sound off in the comment box below.

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