Lilly would pile on debt to acquire Bristol-Myers-WEB ONLY

After two mega-mergers last week among pharma companies, the buzz grew deafening with speculation about future mergers, including the possibility of Eli Lilly and Co. linking up with Bristol-Myers Squibb Co.

Indianapolis-based Lilly has steadfastly said it’s not interested in big mergers. But even if Lilly wanted to merge, does it have the capital to be the acquirer? Or does its debt from the 2008 purchase of ImClone Systems Inc. render Lilly the hunted rather than the hunter?

Speculation spiked last week after two New Jersey companies – Merck & Co. and Schering-Plough Corp. – agreed to merge. Then the Swiss firm Roche Group finally convinced California-based Genentech Inc. to sell.

Those deals follow the earlier agreement by New York-based Pfizer Inc. to buy New Jersey-based Wyeth.

Merck’s deal to acquire Schering-Plough for $41 billion provides a good example for a potential Lilly deal. Merck financed the purchase with 24-percent cash, 21-percent debt and the balance with its own stock.

Recent pharma acquisitions have occurred at a purchase price at least 30-percent above the company’s market cap before the deal was announced. That means Lilly would have to pay $52 billion to acquire New York-based Bristol-Myers.

If it used the same financing scheme as Merck, Lilly would have to come up with $12.5 billion in cash, $11 billion in debt and hope shareholders would go along with its issuing $28.5 billion in stock to cover the rest.

Lilly likely could come up with the cash. It held nearly $6 billion at the end of 2008, compared with Merck’s $5.5 billion. Also, Lilly’s cash flow from operations has been better recently than Merck’s.

But Lilly also has more debt – $10.5 billion, compared with Merck’s $6.2 billion. Lilly could double its debt load if it acquires Bristol-Myers, something rating agencies certainly wouldn’t like.

Bristol has more resources to acquire a company: $9 billion in cash and about $7 billion in debt. But most analysts mention the company as a target, not a buyer.

Financial journalists, including Matthew Herper and Robert Langreth at Forbes, like the

idea of a Lilly-Bristol hookup. First, there’s the fact that Bristol is led by former Lilly Chief Financial Officer Jim Cornelius, who still calls Zionsville home. He and Lilly CEO John Lechleiter need no introduction to each other.

“Deals happen when the people on both sides of the table like each other,” added Dennis Kneale, CNBC’s media and technology editor, speculating about a Lilly-Bristol merger.

Besides the personal connection, Bristol and Lilly already work together to promote Erbitux, a cancer drug Lilly acquired with ImClone. And a merger of the companies would spare them a legal fight over who has rights to an experimental drug that is billed as new-and-improved Erbitux.

Also, Bristol has several promising diabetes drugs in its pipeline, compounds that could benefit from Lilly’s 85-year presence in that market.

But there are downsides too. Lilly and Bristol each have essentially the same problem: Both will lose roughly half their sales between 2011 and 2013 as aging blockbusters lose patent protection and face competition from cheap generic copies.

And then there’s the conviction of Lilly’s brass that its pipeline will eventually pay off – in spite of the fact that it hasn’t won approval for a new drug in four years.

Goldman Sachs analyst Jami Rubin wrote about Lilly on March 15: “We also believe that LLY is unlikely to be a participant in industry-wide consolidation and that it instead will cast its future almost entirely on what we view as potentially risky R&D projects.”