Amylin Bows Out Gracefully

| About: Bristol-Myers Squibb (BMY)

The long drama around the Amylin Pharmaceuticals (AMLN) looks like it has reached its end - Bristol-Myers Squibb (NYSE:BMY) announced the acquisition of Amylin late Friday night in a deal that will pay Amylin shareholders $31 per share in cash. While some sources have reported the size of the deal as $5.3 billion, it's actually larger than that (about $7 billion) as Bristol-Myers will also be taking on over half a billion in Amylin debt and over $1 billion in financial obligations to Lilly (NYSE:LLY).

Bristol-Myers is also bringing a partner into this deal. While it technically won't take place until the Bristol-Amylin merger closes, AstraZeneca (NYSE:AZN) will be buying in as part of the existing diabetes drug partnership between the two companies. For $3.4 billion, AstraZeneca will be getting a 50% interest in Amylin's products and the option to chip in another $135 million for the right to equal say in the management and strategic planning of the collaboration.

A Reasonable Deal For All Involved

I have been writing for some time now that I thought Amylin's stand-alone value maxed out somewhere in the low-to-mid $20s, as the launch of Bydureon has been underwhelming due to insufficient marketing resources at Amylin and the lack of a European partner. What's more, Novo Nordisk (NYSE:NVO) remains a strong rival with its once-daily Victoza, while companies like Lilly and Sanofi (NYSE:SNY) hope to break into the market soon with their own GLP-1 drugs.

To a larger partner, though, I thought fair value on Amylin shares could, and should, exceed $30 a share. Along those lines, $31 is not a bad price - especially as the recent IMS prescription data on Bydureon has not been especially encouraging (Bydureon continues to lag the prior launch trajectories of Byetta and Victoza, and by a meaningful amount). What's more, Amylin has seen some recent negative news regarding delays in the dual-chamber Bydureon pen, delays with its lipodystrophy drug, and accusations that the company hid a negative heart safety study on Byetta.

This is also a logical deal for both Bristol-Myers and AstraZeneca. After a series of missteps and bad outcomes, AstraZeneca badly needs to refill its pipeline, and this deal gives it access to a drug that is already approved and ready for wider marketing support. Bristol-Myers started this all along with its initial rumored bid of $22 back in late March, and the addition of a good GLP-1 drug fills an obvious gap in Bristol-Myers' diabetes drug platform.

Have We Heard The Last?

While the deal between Amylin and Bristol-Myers requires that Amylin not solicit any competing bids, that doesn't mean that this is the end of the story. I have long believed that Sanofi was the most logical potential acquirer of Amylin from an operational synergy perspective, and I still believe that to be true. It would not be unthinkable, then, for Sanofi to contemplate a higher bid.

While possible, I don't think this is likely. Sanofi's management is pretty disciplined and there would be quite a bit of incremental risk in winning Amylin through a higher hostile bid. What's more, while the structure of the Bristol-Myers is intriguing, it's worth pointing out that neither wanted to take 100% of the risk of buying this company - though it's also fair to rebut that by saying that the preservation and continuation of the preexisting Bristol-Myers-AstraZeneca diabetes partnership probably required this sort of structured deal.

The Bottom Line

Nothing's over until it's over, but I do believe that Amylin shareholders should look at this $31 all-cash bid as the beginning of the end. It may seem like a poor final outcome for a stock that once traded above $50, but it's a fair price. And yes, I know there are Amylin bulls out there who believe that Bydureon was going to become a category-killing super drug, that the lipodystrophy drug was going to be a very successful orphan drug, and that the company was somehow going to figure out a workable obesity drug. Suffice it to say, I think those are unrealistically bullish views, and I'm glad that Amylin management didn't ruin a reasonable takeout bid by trying to get a buyer to go along with that.

With Amylin now more or less gone, there's surprising little out there in the diabetes drug space. There are companies like MannKind (NASDAQ:MNKD) and Biodel (BIOD) trying to make a go of it, and there are companies like Halozyme (NASDAQ:HALO) and Isis (ISIS) with diabetes drugs in the pipeline, but it's slim pickings otherwise in biopharmaceuticals. Of course, there are also device-oriented stocks like DexCom (NASDAQ:DXCM) and Insulet (NASDAQ:PODD).

Sooner or later, it's likely that the size of the market will bring a few new ideas and companies into the market. In the meantime though, while Amylin shareholders may want to wait a week or two to see if there's any competing bid, it's probably time to start thinking about the next idea.

Disclosure: I am long AMLN.