Bristol-Myers Squibb and Japanese partner Otsuka Pharmaceuticals have entered into a two-part deal that extends their 10-year-old collaboration to sell the blockbuster psychiatric drug Abilify (aripiprazole) in the U.S. and also gives Otsuka a presence in oncology in the U.S., Europe and Japan.

BMS and Otsuka have had an agreement since 1999 entitling BMS to commercialize Abilify for 10 years post launch-which would be November 2012 in the U.S. and June 2014 in Europe. Under the revised terms, which both firms announced April 6, BMS' rights in the U.S. will now extend until April 2015, when Abilify's chief patent expires. The European portion of the arrangement was not affected.

The companies also modified the terms: while BMS currently receives 65 percent of U.S. net sales for Abilify and pays all commercialization expenses, beginning in 2010 Otsuka will pick up a percentage of the cost of selling the drug in exchange for a greater cut of the revenues.

In addition, beginning in 2010, Otsuka and BMS will collaborate in the U.S., Japan, and Europe on two of BMS' oncology drugs, Sprycel (dasatinib), which is indicated for a variety of leukemias, and Ixempra (ixabepilone), for advanced breast cancer.

For BMS, the move is largely aimed at addressing the company's massive patent cliff in 2012, when Plavix (clopidagrel) and Avapro (irbesartan), which represent about 40 percent of its revenues, lose protection. The deal does this by smoothing out BMS' earnings through 2013, essentially diluting BMS earnings between 2010 and 2012, and increasing earnings beginning the next year.

On a conference call announcing the news, BMS executives noted that the rejiggered deal will enable the company to resume growth by 2014. "This agreement replaces an anticipated period of financial volatility with financial stability while maintaining our strong balance sheet supporting the execution of our 'String of Pearls' strategy," said Chairman and CEO Jim Cornelius. "By removing the pressures of a near-term financial challenge we are now better able to shift our strategic and operational focus to our longer-term growth." The reference to 'String of Pearls' refers to a plan BMS has put forth for building on a series of R&D partnerships that it hopes will provide for long-term growth.

As part of the deal, BMS has agreed to give up a percentage of its cut in Abilify sales, which currently amounts to 65% of net sales. In 2010, BMS' percentage of sales drops to 58 percent, and in 2012 and 2013 it will fall further to 51.5 percent and 50 percent, respectively. In exchange, between 2010 and 2012, Otsuka will pay for 30 percent of commercialization expenses for Abilify, and beginning in 2013 through the end of the agreement, it will pay 50 percent. In short, BMY will get more financial and commercial support from Otsuka, while Otsuka will get a stronger presence in the U.S.

BMS would not discuss how much it currently spends on commercializing Abilify, Sprycel or Ixempra, so determining exactly how much help Otsuka would provide is difficult. But it did say in the investor call that the deal would add $0.30 cents to earnings per share in 2013 and 2014. Leerink Swann estimated that amounts to annual net income of $600 million. Demand for Abilify is strong, despite the entry of generic risperdal into the same therapeutic class in early 2008; Abilify captured a 19 percent share of the total prescriptions for atypical psychiatric drugs in the U.S. in 2008, up almost 4 percent year on year, said Lamberto Andreotti, BMS' president.

Smoothing out earnings to alleviate 2013 concerns

Analysts greeted the deals positively, although they noted it would not likely impact their opinions about BMS. Because it smooths out earnings, the deal arguably could make BMS more attractive as an acquisition target, said UBS analyst Roopesh Patel.

"This arrangement makes strategic and financial sense given its ability to mitigate the brand erosion in 2013 and 2014 associated with the $7.5 billion revenue loss of Plavix and Avapro,' noted Catherine Arnold of Credit Suisse in a note. Without the extension, Abilify global revenues would have peaked in 2012 at $2.7 billion, before falling to $1.8 billion in 2013, she noted. As of Monday afternoon, she had not yet updated her projections for Abilify or BMS as a result of this deal.

As part of the terms of the deal, the privately-held Otsuka will pay for some of the expenses for commercializing Sprycel and Ixempra in exchange for a collaboration fee based on net sales. Otsuka does not currently have an oncology business, but it has indicated interest in building its U.S. presence. Otsuka executives weren't available for comment Monday, but all Japanese pharma companies are facing increasing pricing pressure in the domestic market. Some companies have responded by moving into global oncology, notably Eisai's $3.9 billion purchase of MGI Pharma in December 2007 (¹ Also see "Eisai Strengthens Oncology Position With $3.9 Billion MGI Pharma Acquisition" - Pink Sheet, 10 December, 2007.) and Takeda's $8.8 billion purchase in 2008 of Millennium Pharmaceuticals (² Also see "After Combining Assets, Takeda/Millennium Outline Oncology Strategy" - Pink Sheet, 27 March, 2009.).

In February, Otsuka announced the appointment of Mark Altmeyer as president and chief executive officer; Altmeyer, who was not available for comment, previously had spent 16 years at BMS, most recently as SVP, global commercialization for oncology.

The deal essentially gives Otsuka access to two niche drugs; Sprycel, indicated for a variety of leukemias, had sales of $310 million in 2008, while Ixempra, which received FDA approval in November 2007, is indicated for advanced breast cancer and achieved revenues of $101 million in 2008. The collaboration is more extensive for Sprycel, which Otsuka will be able to co-promote in the U.S., Japan, and top five European markets. The partners are still working on support plans for Ixempra, a BMS spokesman said.

In exchange for the new alliances, BMS also agreed to pay Otsuka an upfront cash fee $400 million. That money should enable Otsuka to ramp up its U.S. presence without spending much, Leerink Swann's Seamus Fernandez wrote in a note. The deal also reduces the risk that the end of deal with BMS would hurt Abilify sales, he noted.

During its investor call, BMS executives mapped out broadly other parts of the company's plans for getting over the investor hump. It sought to reassure investors that its earnings would be predictable by confirming earlier guidance that it would achieve a 15 percent compounded annual earnings growth rate between 2007 and 2010-despite the $400 million upfront payment it agreed to make to Otsuka.

Key drivers are growth of existing products, cost cutting, and the launch of new products, such as saxagliptin, a diabetes drug that cleared a key regulatory hurdle on April 1, when an FDA advisory committee said its cardiovascular profile was safe (³ Also see "Bristol/AZ Saxagliptin Clears Cardiovascular Safety Hurdle; Approval Timing Still Uncertain" - Pink Sheet, 1 April, 2009.). The company also confirmed non-GAAP EPS of between $1.85 and $2 in 2009.

The company also recently spun out a portion of its nutritional business Mead Johnson, in an IPO, raising $760 million. It has $9 billion in cash and cash equivalents, giving it financial flexibility it will need for business development, said CFO Jean-Marc Huet (⁴ Also see "Mead Johnson Set Loose To Navigate Market, Shifting Economic Winds" - Pink Sheet, 18 February, 2009.).

By 2014, the company said, it expects to return to implementing its long-term growth strategy, backed by seven major deals it has enacted since the fourth quarter of 2007 (⁵ Also see "Bristol Reports Strong 2008 Earnings But Sharp Patent Cliffs Loom" - Pink Sheet, 27 January, 2009.).

- Wendy Diller (w.diller@elsevier.com)

BMS &amp; Otsuka Expand Their Abilify Deal, Enter into New Oncology Co-Promotion

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