(Updates share prices; recasts)
By Toni Clarke and Jessica Hall
BOSTON/PHILADELPHIA, Oct 6 (Reuters) - Eli Lilly and Co(LLY.N) has agreed to acquire ImClone Systems Inc IMCL.O for $6.5 billion, outbidding Bristol-Myers Squibb Co (BMY.N) and potentially bringing to a close one of the most colorful corporate sagas in biotech history.
The acquisition would give Lilly ImClone's cancer drug Erbitux and five experimental products that, if successful, could help offset the impact of generic competition to Lilly's blockbuster schizophrenia drug Zyprexa.
The deal would also mark the end of a corporate soap opera spanning more than a decade that included the jailing of ImClone's founder Samuel Waksal and style guru Martha Stewart in a stock trading scandal.
And it would represent a satisfying victory for Carl Icahn, the billionaire investor and chairman of ImClone's board, who took control of the company in 2006 at a time when many investors had written it off and almost no analysts were recommending the stock.
The deal, announced on Monday, values ImClone at $70 per share, a premium of 51 percent to ImClone's closing price on July 30, the day before Bristol made an offer of $60 a share for the 83 percent of the company it does not already own.
Bristol said it will not raise its recently sweetened offer of $62 a share, and said that at the close of ImClone's agreement with Lilly, Bristol would receive $1 billion for its 17 percent stake in the company.
The agreement between New York-based ImClone and Indianapolis-based Lilly was greeted with muted enthusiasm by investors, who are concerned that Lilly might have trouble financing the deal given the current turmoil in the credit markets.
"For a company the size of Lilly, this is a manageable deal, so there shouldn't be major concern; but the market is worried about any funding issues at the moment," said one trader who specializes in takeover stocks.
Lilly's shares were down nearly 10 percent in afternoon trading; Bristol's shares fell 7 percent; and ImClone's shares rose 1.7 percent to $66.06 in a sharply lower U.S. stock market.
Lilly plans to take on $2 billion to $3 billion in debt to help finance the acquisition, prompting Moody's Investors Service to place Lilly's Aa3 long-term debt under review for a possible downgrade.
Nervousness among investors about the ability to fund and close deals is particularly high following the announcement last week by tobacco company Altria Group Inc (MO.N) that it might hold off on closing its $10.4 billion purchase of smokeless tobacco-maker UST Inc UST.N until early January, at the request of its lenders.
But Derica Rice, Lilly's chief financial officer, told analysts the company has $5 billion in backstop financing, having raised a committed $4 billion since the end of the second quarter.
The company said it would finance the remainder of the deal in cash. As of the end of June, Lilly had $2.9 billion in cash and cash equivalents and $2.3 billion in short-term investments.
"This is classic Carl," said Mark Stevens, author of an unauthorized biography of Icahn called "King Icahn" and chief executive officer of management consulting firm MSCO. "He is like a Chinese water torturer. He has great patience. And he is always 10 steps ahead of everyone else."
In outmaneuvering Bristol, and eliciting a relatively high price from Lilly, which is desperate for new drugs to fill its pipeline, Icahn has done what he loves to do most, Stevens said.
"His goal, even more than making money, is to humiliate CEOs of big lumbering companies, to pour vinegar in their martinis and break their golf clubs."
For Lilly, the deal comes as it faces generic competition to some of its biggest drugs.
"An all-cash offer is going to significantly drain the company's cash position," said David Moskowitz, an analyst at Caris & Co. "I think it is a deal being done out of weakness."
Lilly said it would incur a one-time charge to its earnings, but it is premature to say what that charge would be. The company expects the transaction to be accretive to earnings on a cash basis in 2012 and on a net basis in 2013.
Cancer is one of the three main areas of research focus at Lilly, along with diabetes and neuroscience. But its main cancer drug, Gemzar, loses patent protection in 2012.
Erbitux, which is approved to treat colon cancer and head and neck cancer, is ImClone's only marketed product, and generated $1.3 billion in sales last year.
Part of the future value of ImClone may hinge on an experimental follow-on product to Erbitux, known as 11F8. Bristol-Myers has said, and reiterated on Monday, that it has the rights to that product; but ImClone disputes that.
Lilly Chief Executive John Lechleiter said the amount being paid by Lilly reflects the uncertainty over U.S. rights to 11F8. The company expects to close the deal in either the fourth quarter of 2008 or the first quarter of 2009, Lilly said.
ImClone markets Erbitux in the United States with Bristol and elsewhere in the world with Merck KGaA (MRCG.DE) of Germany, and those relationships won't change, Lilly said.
As ImClone prepares to be sold, Icahn paid tribute to Sam Waksal, whose social climbing, aggressive promotion of Erbitux in the early years, and friendship with celebrities such as Martha Stewart made his fall from grace all the more dramatic.
"While it is easy to hurl stones, all stockholders owe a debt of gratitude to Sam Waksal, without whose dedication and perseverance neither Erbitux nor our great pipeline would exist." (Additional reporting by Lewis Krauskopf; Editing by Brad Dorfman and Gerald E. McCormick)