Monday, June 02, 2008

Bristol-Myers Boosts Oncology Pipeline With Kosan Biosciences Purchase

Bristol - Myers Squibb Co (BMY-$22.79) said on Thursday it agreed to buy Kosan Biosciences Inc (KOSN-$5.42) for $5.50 a share in cash, or about $190 million. In looking to replace lost sales of Taxol to generics, some analysts believe BMY overpaid for the cancer therapeutucs company, offering a 230% premium (to its stock price prior to the merger).

BMY is buying a company with two novel asset classes: heat shock protein 90, or Hsp90, inhibitors, and epothilones.


Heat shock protein 90 (Hsp90) is a molecular chaperone whose association is required for the stability and function of multiple mutated and over-expressed signaling proteins that promote the growth and/or survival of cancer cells. By binding to cell-surface Hsp90 client proteins, including mutated p53 and HER2/Neu (ErbB2), Hsp90 inhibitors cause the destabilization and eventual degradation of Hsp90 client proteins, offering the potential to overcome resistance after chemotherapeutic relapse and to potentiate the intial activity of existing cancer therapies.

The Company’s first and second generation Hsp90 inhibitor product candidates have demonstrated antitumor activity in multiple indications in early clinical trials.

Tanespimycin, or KOS-953, is an injectable suspension formulation in a Phase 3 clinical trial in combination with Velcade (bortezomib) in first-relapse patients for multiple myeloma, as well as in a Phase 2 clinical trial in combination with Herceptin (trastuzumab) for HER2-positive metastatic breast cancer.

Tanespimycin is not without liabilities. After promising earlier results, Kosan discontinued development of tanespimycin in metastatic melanoma after observing: "Phase 2 trial did not observe sufficient clinical activity to warrant continued pursuit of this indication." Huh? The 10Q Detective is left to suppose that limited efficacy owed to patients enrolled in the trial whose tumors lacked specificity for an Hsp 90 inhibitor.

Epothilones inhibit microtubule function, possessing a mechanism of action similar to taxanes, including paclitaxel, marketed as Taxol by Bristol-Myers Squibb Company, and docetaxel, marketed as Taxotere by Sanofi-Aventis. In contrast to taxanes, however, epothilone analogs are cytotoxic for cells overexpressing P-glycoprotein, a characteristic that makes them potentially more active against multi-drug cancer cell lines.

KOS-1584 is the lead epothilone in development, with a
Phase 2 trial underway in patients with non-small cell lung cancer who have already received one prior chemotherapy regimen.

KOS-1584, an analog of epothilone D, complimenting BMY’s existing epothilone program, which includes recent-to-market
Ixempra (ixabepilone) for metatstatic breast cancer, an analog of epothilone B.

The 10Q Detective acknowledges that the competitive field is crowded with epothilone analogs, including Biogen Idec, which has Phase 1 and 2 clinical trials in solid tumors with its oral synthetic Hsp90 inhibitor; Bayer Schering Pharma AG, which is in Phase 2 clinical trials with sagopilone; and, Novartis AG, which is reported to be in Phase 3 clinical trials with patupilone.

Valuation Analysis

In terms of economics, we fail to understand how BMY overpaid for Kosan. BMS had signed a licensing agreement worth up to $400 million with respect to the company’s epothilone compounds, of which $150 million targeted KOS-1584 oncology milestones, including regulatory approval.

Lazard Frères performed an analysis of the net present value of projected operating free cash flows for 2008 to 2018, using discount rates ranging from 12% to 16 percent, derived from the weighted average cost of capital analysis that Lazard calculated for the company. Based on this analysis, Lazard arrived at an implied value per share range for the Company of $4.47 to $6.32 a share, consistent with the per share consideration of $5.50.

BMY, with about $2.64 billion in hand, could pay for this deal out of petty cash.

Editor David J. Phillips holds a financial interest in Bristol-Myers Squibb. The 10Q Detective has a Full Disclosure Policy.

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