Never Say Never: Why Taking Out Bristol-Myers Squibb Could Boost Pfizer's Value by $5 Billion

March 28, 2017
By Mark Terry, BioSpace.com Breaking News Staff

There has been speculation for a couple years that some company should acquire Bristol-Myers Squibb . In August 2015, Bloomberg Intelligence analyst Asthika Goonewardene argued that Gilead Sciences should go for the buyout.

Now the focus is on Pfizer taking a shot at BMS. The impetus this time is a note to investors by Credit Suisse analyst Vamil Divan from HOLT, Credit Suisse’s research and analytics platform.

Divan wrote, “Overall, HOLT suggests that an acquisition of Bristol-Myers Squibb by Pfizer would have a positive impact on Pfizer’s return on capital profile when assuming industry average synergies for a deal of this nature. An all-cash deal (assuming Pfizer pays a 25 percent premium and can extract synergies of 30 percent of Bristol-Myers Squibb’s operating expenses) would lead to about $5 billion or approximately $0.80 per share in value creation, according to HOLT. If instead of an all-cash deal, Pfizer issues shares to pay for a portion, dilution from issuing ‘undervalued’ shares will offset the initial value creation. A deal partially financed with an 18 percent stock issuance would be a break-even for Pfizer shareholders.”

Another stimulus for the rumors—aside from a general belief that Pfizer isn’t yet done with larger mergers—is a recent investor meeting between Credit Suisse and Pfizer’s management team. That meeting included Pfizer’s Albert Bouria, group president, Innovative Health; Mace Rothenberg, senior vice president and chief development officer, Oncology; and Chris Boshoff, vice president, Early Development, Translational and Immuno-Oncology. Much of the meeting focused on Pfizer’s oncology portfolio, but drug pricing and M&A plans were also discussed.

At that time, Credit Suisse expressed doubts about any future mega-deal on the part of Pfizer, even though the management team indicates that its ability to close a big deal is a competitive advantage. Credit Suisse wrote then, “There may be higher sensitivity now for issues such as trying to extract synergies from a larger deal by reducing U.S. jobs, but it does not appear that this alone would keep the company from pursuing a larger deal if they viewed the deal overall as creating shareholder value.”

It’s not entirely clear what is making Credit Suisse shift toward a bigger deal like Bristol-Myers Squibb, although a likely factor is reports that activist investor Carl Icahn took a stake in BMS in February. And another activist investor, Jana Partners, acquired a stake in the fourth quarter.

Allison Gatlin, writing for Investor’s Business Daily, noted, “That, compounded with added pressure from the likes of Merck and Roche are adding to macro uncertainties for Bristol-Myers. In February, Bristol lost share in the immuno-oncology market to Merck while Roche remained flat on a month-over-month basis.”

Jana bought up about $500 million to $1 billion of Bristol-Myers Squibb’s shares. Icahn’s investment isn’t known, but he typically invests over $1 billion.

The Wall Street Journal’s David Benoit said, "Could it be a deal? Bristol’s run into some issues with one of its key cancer treatments. Carl Icahn thinks it’s a great pipeline of drugs, could also maybe be a great takeover target. … Back in August, Bristol-Myers was trading at an all-time high and had this disappointing lung cancer study come out, and that kind of tanked the stock. They walked back, saying they were going to seek fast approval for it in another form, then they walked that back, and cut earnings guidance back, opening up to this kind of deal.”

Bristol-Myers Squibb’s potential price tag is around $100 billion, and there just aren’t very many companies that could afford it. Pfizer is one of a very short list.