By Elliott Gue, Personal Finance

To overcome patent expirations, the drug firm is actively pursing acquisitions to strengthen its drug pipeline.

Last month, Bristol-Myers Squibb (BMY) announced that it will buy biotech company Inhibitex for $2.5 billion. The deal will give the pharmaceutical giant a beachhead in the rapidly growing market for hepatitis C virus (HCV) treatments, once regulatory and shareholder approvals are received later this year.

The $26-per-share offer represents a 163 percent premium to Inhibitex’s closing price and is expected to dilute Bristol Myers’ earnings per share by $0.04 in 2012, $0.05 in 2013 and a couple more pennies in 2014-15.

But far more important, this deal dramatically strengthens the company’s long-term pipeline of products as it faces a “patent cliff.”

The Inhibitex acquisition is the largest of Bristol-Myers Squibb’s 18 deals since 2007, when it inaugurated its “string of pearls” strategy to offset the loss of patent exclusivity on several key drugs.

The pharmaceutical industry faces a wave of looming patent expirations. Bloomberg estimates the pharmaceutical industry will lose $21 billion worth of sales in 2011 and 2012 as blockbuster drugs go off-patent and competition from generic drugmakers heats up.

The consensus forecast calls for “nominal” average industry sales growth and a 2 percent drop in average EPS.

Bristol-Myers Squibb’s biggest loss will be blood thinner Plavix in May 2012. The good news is that a string of acquisitions have insulated earnings and will maintain the company’s financial strength and dividend—even as the company continues to invest in newer and better drugs for a wide range of ailments.

The current pipeline includes full ownership rights to melanoma treatment Yervoy, which Bristol-Myers Squibb added to its portfolio after the 2009 acquisition of Medarex for $2.5 billion. Yervoy alone is expected to add $403.6 million in incremental sales in 2012.

Even without the Inhibitex acquisition, Bristol-Myers Squibb’s pipeline should deliver $4.62 billion in additional revenue by 2015.

Inhibitex’s crown jewel is an oral HCV treatment known as INHX-189, which remains in Phase II trials. The World Health Organization estimates that roughly 170 million people are infected with the hepatitis C virus, with 3 million to 4 million cases added annually.

At present the HCV market stands at $3 billion, but analysts expect it to grow to $20 billion by 2020. With its financial power funding Inhibitex’s proprietary processes,

BMY may capture the lion’s share of this market and extend its lead in the race to dominate the market for future drug treatments. This deal and the dividend boost make BMY a buy up to $34.

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