Replies to post #31985 on Biotech Values

[DewDiligence]

It sounds like there may have been two Plavix settlements between BMY, SNY, and Apotex: a fake one for consumption by the FTC (and the general public) and a real one known only to the parties themselves.

[Cougar3]

Lehman Bros. on BMY/Plavix Settlement
(Note: I have excerpted portions of the entire report)


July 27, 2006

BMY learned yesterday that the Antitrust Division of the UnitedStates DOJ is conducting a criminal investigation regarding the proposed settlement of the Apotex litigation described above.

Importantly, BMY stated that they had no specific information on the "basis for (the DOJ investigation)" or "investigation of (particular line of inquiry)"; for this investigation.

According to the DOJ, "we (DOJ) have a clearance protocol with theFTC to determine which agency will investigate a particular civil matter. That determination is based primarily on which agency has the greater expertise in the product market as a result of recent antitrust investigations conducted by that agency. The clearance protocol enables the two agencies to make the most effective use of
enforcement resources, as well as to avoid duplicative investigatory requests on private parties. Under this clearance protocol, the FTC has handled recent civil investigations involving patent disputes
and the delay of generic competition in the pharmaceutical industry.

However, because the Division has sole responsibility for criminal antitrust enforcement, if the FTC were to uncover evidence of a potential criminal violation relating to the pharmaceutical industry, under our clearance protocol the FTC would be required to refer that evidence to us for criminal investigation. Likewise, if at the outset of an investigation, the evidence suggested a potential criminal violation, the Division would investigate the
matter, regardless of which agency had greater expertise in the product market…"

Upon conferring with our legal consultant on this matter:

* BMY's legal representation is excellent and exceedingly
knowledgeable about FTC, DOJ, and state antitrust matters;

* BMY and their counsel were most likely genuinely surprised by this communication from the DOJ, and all parties involved—even if not implicated as the offending party—would probably be contacted (we know SNY was, and Apotex is a privately held
organization so they are not obliged to comment);

* It is possible that there is only one offending party;

* It is somewhat probable that the DOJ found something in the
materials being reviewed by the state attorney generals and FTC that warranted further review in a criminal context;

* It is also probable that the DOJ would not proceed with a criminal investigation if they did not perceive that the evidence they were presented with was not relatively convincing;

* The risk associated with possible negative interpretations
regarding the proposed settlement from the state attorney generals' offices in the near future is somewhat likely;

* The DOJ will most likely continue with their investigation
regardless of the actions taken by BMY, SNY, and Apotex in the
interim;

* Review and action from the DOJ will take time on the order of several months to year(s).

Taking the caliber of legal representation obtained for this matter by BMY, BMY's stated confidence in the validity of their patent, and suggestion that Apotex was in fact approaching wholesalers to garner interest in an at risk product and changed legal counsel immediately preceding this proposed settlement (to a firm reputed to take a certain subset of cases) we believe the probability that BMY engaged
in criminal activities is quite low, although this possibility
cannot be completely excluded. Furthermore, it is our belief that the Plavix composition of matter patent is indeed valid, and that if the settlement proposal is viewed as not in the best interest of consumers, that BMY will return to court to vigorously defend the 2nd largest pharmaceutical entity in the world. We continue to believe that BMY has a number of different legal avenues with which to pursue closure of this issue, and that they will exhaust these options until resolution is achieved. At this time, according to
BMY, terms relating to the provision made in 1Q for the Plavix
settlement have not changed. Nonetheless, we see the uncertainty surrounding the aforementioned issue pressuring the stock until more color around the nature of the criminal investigation comes to light, but to us the compelling underlying fundamentals have notappreciably changed.

Our Thoughts
EQUITY RESEARCH
For 2Q06, Bristol-Myers Squibb (BMY) reported non-GAAP EPS of $0.35, which was higher than both consensus-$0.32-and Lehman estimates- $0.32. Revenues were $4,871 M (decrease of < 1.0% YoY), which was above the consensus, $4,763 M, and Lehman estimate of $4,717 M. BMY reaffirmed its FY06 guidance of $1.15-$1.25 and stated that "GM is expected to stabilize," and "earnings will be adversely affected by investment in the development of additional new compounds…". US net
sales were up 5% YoY, roughly $2.8 B, while ex-US sales showed a 7% decrease to approximately $2.1 B. The marketing component of SG&A decreased 7% and the advertising component decreased 4% YoY. Of note, BMY noted that these observed reductions were in part due to "reclassification of certain costs from marketing, selling and administrative expenses to cost of products sold and lower sales force expenses resulting from the previously announced restructuring
of the US primary care sales organization that became effective (G&A should be allocated to COGS, and there was a catch up in the 2Q06 that, according to BMY "will be worked out by 2007")" this March. R&D costs jumped approximately 14% YoY to $739 M for 2Q06, and BMY attributed this hefty increase to "continued investments in late-stage compounds."

Importantly, it was disclosed that "the company (BMY) learned
yesterday that the Antitrust Division of the United States
Department of Justice is conducting a criminal investigation
regarding the proposed settlement of the Apotex litigation…". BMY clearly stated they possesno specific information on the "basis for (the investigation)" or "investigation of (particular issues the DOJ is examining)"; with this investigation—BMY is unaware that the DOJ has investigated any patent defense/agreement. One should consider
that the "worst case" is the DOJ takes a long time to investigate. Does that really matter? We believe the key is whether or not Plavix is a brand product. At a minimum, BMY and Apotex would go back to court and BMY/SNY would defend the composition of matter patent for Plavix, which is due to expire in 2011.

Do the fundamentals change because of the investigation? Unlikely, in our opinion. We view BMY's 2Q06 performance as a potential leading indicator of the growth forecast for 2007 and beyond, while we harbor measured concern over the latent risk this latest twist in the Plavix settlement presents. It is our belief that the key point is our expectation that as Pravachol expiry annualizes (~ Q207), one should see accelerating revenue growth. We think gross margins can
possibly improve above expectations, and thus "E" as a part of P/E may currently be too low. Consequently, our rating on BMY remains 1-Overweight.

[DewDiligence]

States Reject Bristol-Myers Plavix Deal

[Because of a prior consent decree, without approval from the state attorneys general, there is no deal.]

http://yahoo.reuters.com/news/articlehybrid.aspx?storyID=urn:newsml:reuters.com:20060728:MTFH79053_2...

>>
Fri Jul 28, 2006 5:32 PM ET
By Ransdell Pierson

NEW YORK, July 28 (Reuters) - Bristol-Myers Squibb Co. <BMY> was dealt a setback in its bid to block a generic form of its biggest product, the anti-clotting drug Plavix, when a group of state attorneys general on Friday rejected a proposed settlement with a generic drugmaker.

Bristol-Myers shares fell almost 2 percent in after-hours trade on uncertainty over the continued exclusivity of Plavix. The drug generates more than $4 billion in annual sales for Bristol-Myers, or 30 percent of company profit.

Bristol-Myers and its partner Sanofi-Aventis <SNY> had been locked in a high-stakes U.S. patent battle with generic drugmaker Apotex, which hopes to soon launch a cheaper generic form of Plavix, the world's second-biggest selling drug.

A Bristol-Myers spokesman declined to comment on the rejection.

"This could be a show stopper for Sanofi and Bristol's agreement with Apotex," said Morningstar analyst Tom D'Amore.

Under the proposed settlement, Apotex, based in Canada, had agreed not to begin selling its copycat drug until June 2011, in return for undisclosed compensation from Bristol-Myers.

The deal, which had eased investor concerns about Bristol's financial future, has been under review by the U.S. Federal Trade Commission (FTC).

Bristol disclosed on Thursday that the anti-trust division of the Department of Justice had begun a criminal investigation of the settlement. FBI agents seized documents on Wednesday from the office of Bristol-Myers Chief Executive Officer Peter Dolan as part of that probe.

In a letter addressed to Bristol-Myers lawyers, Meredyth Smith Andrus, an assistant attorney general for the state of Maryland, on Friday said the various states ruling on the matter "object to and will not approve" the settlement.

"Regardless of what the Federal Trade Commission says, if the states as a group think it violates antitrust, then it's problematic for the agreement," said analyst D'Amore.

However, he said it was uncertain how soon generics of Plavix would reach the market because the next steps in the legal process are unclear, as is how long it will take for Apotex to get up to speed in producing the drug.

In 2003, Bristol reached an agreement with the U.S. Federal Trade Commission requiring the drugmaker under a 10-year consent decree to stop misusing patent laws to block generics. It requires Bristol to get approval from the states when entering into settlement agreements with generic drugmakers. The states, through the attorneys general, have now formally rejected the proposed settlement.

Settlements by drugmakers to delay the sale of generic forms of their medicines are coming under increased scrutiny from U.S. regulators and lawmakers, who fear that consumers are being denied access to less-expensive medicines.

Industry analysts have said that a rejection by the states of the Plavix deal could force Bristol, Sanofi and Apotex to amend their agreement in a more acceptable way to states -- and therefore to consumers.

"Because of previous transgressions, these companies are under the government's thumb for a few more years, so any deal they reach will get tougher scrutiny," said Ira Loss, analyst at Washington Analysis.

He said the consent decree gives federal authorities the leverage to work out a deal that is more to their liking.

Under another possible scenario, without a settlement, Bristol and Sanofi could now resume their court patent battle to keep the Apotex generic off the market, alleging it would infringe their patents.
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