Bristol-Myers' Cheap Pipeline Bet

Big pharmaceuticals often overpay to acquire untested drug technology. Fortunately for its shareholders, Bristol-Myers Squibb (NYSE:BMY) paid a far more modest sum for its own recent purchase.

Yesterday, Bristol-Myers announced that it was acquiring development-stage drugmaker Kosan Biosciences (NASDAQ:KOSN) for a net price of $190 million in cash. While the 233% premium ($5.50 a share) to Kosan's Wednesday closing share price represents a pretty nice gain to any recent investor, it's still small potatoes for a company like Bristol-Myers, which had free cash flow of $2.3 billion last year.

Bristol-Myers will be getting several drug candidates with "novel mechanisms of action" -- code for, "We're not sure how well this works yet" -- with its proposed acquisition. Kosan's lead drug, Tanespimycin, is a heat shock protein inhibitor, in phase 3 testing as a treatment for multiple myeloma in combination with Takeda's Velcade. Kosan also has several earlier-stage compounds for various other types of cancer, along with an early-stage compound to treat gastrointestinal issues, partnered with Pfizer (NYSE:PFE).

So far this year, Bristol-Myers has had to write down $300 million worth of its former cash equivalent auction-rate securities because of turmoil in the credit markets. I've previously lamented  all the small development-stage drugmakers or drugs it could have acquired with this sort of cash. Even if the Kosan acquisition doesn't produce any blockbuster billion-dollar drug candidates, at least Bristol-Myers will have spent some of its cash in a manner that may materially improve its pharmaceutical operations, rather than wasting it on financial instruments in a futile attempt to wring out a few extra basis points' worth of interest on its balance sheet.