Beyond borders: biotechnology industry report 2013

A bold move in diabetes

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A bold move in diabetes, by Orlan Boston, Partner, EY

Orlan Boston, Partner, EY

Diabetes populations are growing at an explosive rate and are on track to fuel a global crisis. With 336 million adult diabetes patients worldwide in 2011 and 10 million newly diagnosed cases annually, the economic impact in the US alone is estimated at over US$465 billion — 11% of the nation’s adult health care expenditures.

These trends create an urgent need for pharmaceutical companies to fill, and AstraZeneca (AZ) and Bristol-Myers Squibb (BMS) answered the call in 2007 by pooling their commercial diabetes assets in a global alliance centered on two products: a DPP-4 inhibitor (Onglyza/Kombiglyze XR) and an SGLT-2 inhibitor (Forxiga).

But while the companies had a foothold in the market and their alliance enabled significant knowledge sharing, their diabetes pipeline prospects were still in an early stage of development, and most of their competitors were racing to enter and/or expand their diabetes franchises. As such, it was clear that AZ and BMS needed a bolder move to capture the rapid growth opportunities in this market and position the alliance as a leader in diabetes. However, both firms also face patent expirations that reduce their ability to make big investments individually.

The solution to this challenge came in the form of the largest biotech deal of 2012 and perhaps one of the most complex in recent memory, a novel acquisition involving four parties.

Under the deal terms, AZ and BMS would jointly purchase Amylin Pharmaceuticals — a San Diego-based biotech company focused on diabetes — along with rights from Eli Lilly and Company to commercialize Amylin products globally. BMS served as the primary acquirer in this US$7 billion deal (US$5.3 billion in equity, US$1.7 billion of assumed debt including amounts due to Lilly).

AZ contributed half of this amount in cash to gain rights to half the profits from the Amylin products plus an additional US$135 million to acquire equal governance rights related to alliance strategy and financial decisions. Structuring the deal with a single acquirer (BMS) — something that was enabled by the trust built over the years the two companies spent as alliance partners — helped accelerate its closing.

The deal gives the alliance a portfolio of the three fastest-growing drug classes in diabetes. It gives them access to the GLP-1 agonist market, including Bydureon, the world’s first weekly GLP-1, and Amylin’s pipeline of product extensions already under way. The transaction also generates significant operational cost synergies — estimated at 30% of R&D and SG&A expenses in 2013. By pooling resources, AZ and BMS were able to make a bold move in the market and strengthen their relationship both financially and organizationally.

But as with any transaction this large, the deal comes with complexities. The global integration of the Amylin acquisition — by far the largest in recent history for both AZ and BMS — will be jointly managed across the more than 80 markets served by the two firms. To address this challenge, the companies are collaborating more closely and have even created a joint, co-located diabetes organization within the US.

The result: the companies’ global diabetes alliance is stronger than ever, positioning them to grow and innovate more quickly in a rapidly growing market.