By Toni Clarke and Jessica Hall
BOSTON (Reuters) - Eli Lilly and Co has agreed to acquire ImClone Systems Inc for $6.5 billion, outbidding Bristol-Myers Squibb Co and potentially bringing to a close one of the most colorful corporate sagas in biotech history.
The deal, announced on Monday, values ImClone at $70 per share, a premium of 51 percent to ImClone's closing price on July 30, the day before Bristol made an offer of $60 a share for the 83 percent of the company it does not already own.
Bristol said it will not raise its recently sweetened offer of $62 a share, and said that at the close of ImClone's agreement with Lilly, Bristol will receive $1 billion for its 17 percent stake in the company.
The agreement between ImClone and Lilly was greeted with muted enthusiasm by investors, who are concerned Lilly might have trouble financing the deal given the current turmoil in the credit markets. The company said on a conference call with investors it plans to take on $2 billion to $3 billion in debt to help finance the acquisition.
Lilly's shares fell more than 6 percent in midday trading; Bristol's shares fell 5 percent; and ImClone's shares rose 1.7 percent to $66.70.
Nervousness among investors about the ability to fund and close deals is particularly high following the announcement last week by tobacco company Altria Group Inc that it may hold off on closing its $10.4 billion purchase of smokeless tobacco-maker UST Inc until early January, at the request of its lenders.
"For a company the size of Lilly, this is a manageable deal, so there shouldn't be major concern, but the market is worried about any funding issues at the moment," said one trader who specializes in takeover stocks.
Lilly said it is "very comfortable" with its ability to finance the deal. Derica Rice, the company's chief financial officer, told analysts the company has $5 billion in backstop financing, having raised a committed $4 billion since the end of the second quarter.
The company said it will finance the remainder of the deal in cash. As of the end of June, Lilly had $2.9 billion in cash and cash equivalents and $2.3 billion in short-term investments.
VICTORY FOR ICAHN
The acquisition of ImClone will mark the end of a corporate soap opera that included the jailing of founder Samuel Waksal and style guru Martha Stewart in a stock trading scandal.
It also represents a satisfying victory for Carl Icahn, the billionaire investor and chairman of ImClone's board, who took control of ImClone in 2006 at a time many investors had written the company off and almost no analysts were recommending the stock.
For Lilly, the deal comes as it faces generic competition to some of its biggest drugs, including its schizophrenia blockbuster Zyprexa.
"An all-cash offer is going to significantly drain the company's cash position," said David Moskowitz, an analyst at Caris & Co. "I think it is a deal being done out of weakness."
Lilly said it will incur a one-time charge to its earnings, but it is premature to say what that charge will be. The company expects the transaction to be accretive to earnings on a cash basis in 2012 and on a net basis in 2013.
Cancer is one of the three main areas of research focus at Lilly, along with diabetes and neuroscience. But its main cancer drug, Gemzar, loses patent protection in 2012.
Erbitux, which is approved to treat colon cancer and head and neck cancer, is ImClone's only marketed product, and generated $1.3 billion in sales last year.
Part of the future value of ImClone may hinge on an experimental follow-on product to Erbitux, known as 11F8. Bristol-Myers has said, and reiterated on Monday, that it has the rights to that product, but ImClone disputes that.
Lilly Chief Executive John Lechleiter said the amount being paid by Lilly incorporates uncertainty over U.S. rights to 11F8.
"Our valuation of the deal took that uncertainty into account," he said in an interview.
The deal is expected to close in either the fourth quarter of 2008 or the first quarter of 2009, Lilly said.
ImClone markets Erbitux in the United States with Bristol and elsewhere in the world with Merck KGaA of Germany.
(Additional reporting by Lewis Krauskopf; Editing by Maureen Bavdek)