September 1, 2017
By Mark Terry, BioSpace.com Breaking News Staff
For a couple years, investors and analysts have made a hobby of speculating on who should buy Bristol-Myers Squibb . For example, in August 2015, Bloomberg Intelligence analyst Asthika Goonewardene made the case that Gilead Sciences should buy Bristol-Myers. Then, in March of this year, Credit Suisse analyst Vamil Divan, made the case that Pfizer (PFE) should buy Bristol-Myers. Now, Jonathan Weber, writing for Seeking Alpha, doubles down on Pfizer. Let’s take a look at why.
First up, Pfizer is no stranger to big acquisitions. Pfizer acquired Wyeth in 2009 for $68 billion. Then it took a shot at London-based AstraZeneca in 2014 for $118 billion, before the deal was scuttled by opposition from both the company and the U.S. and UK governments. Then in 2015 and 2016 Pfizer attempted to buy Dublin-based Allergan for $160 billion, but the U.S. Treasury Department rewrote rules concerning corporate inversions, and Pfizer walked away from the deal.
Weber cites three rationales for why Pfizer could—or should—buy Bristol-Myers Squibb.
1. Pfizer revenues would benefit. He notes, “the company could benefit from an acquisition that combines a growing top line and a strong pipeline.”
2. Pfizer can afford it. It has a strong cash flow and more than $20 billion in cash.
3. It has access to low-rate debt. Its bonds trade in the range of 2 percent to 3 percent yield.
“I believe that Bristol-Myers Squibb would be a good candidate for such an acquisition, as the company combines several things that Pfizer would benefit from,” writes Weber. “Bristol-Myers Squibb’s top line has been growing steadily over the last couple of quarters, and the company’s sales are poised to grow further in 2018 as well as in 2019 (analysts estimate that the company’s sales will rise by 13 percent over the next two years). Pfizer would benefit from a drug portfolio that includes many drugs that still show solid growth, and Pfizer would also get access to a deep pipeline.”
Bristol-Myers has 33 compounds in its pipeline, many for multiple indications. It is primarily focused on oncology, where Pfizer is interested in expanding, as demonstrated by its acquisition of Medivation last year. In addition to its pipeline, it would acquire Yervoy and Opdivo, the top competitors for Merck ’s Keytruda.
Bristol-Myers has a market cap of about $97 billion, so with a 25 percent premium, it would likely go for about $120 billion, which few companies could afford, although Pfizer was offering up $160 billion for Allergan.
Pfizer would have to take on about $100 billion in new debt, which Weber notes with an average interest rate of 3.5 percent, “(which is significantly more than what Pfizer is paying right now), the after-tax cost of that additional debt would be $2.9 billion (using Pfizer’s ttm tax rate of 17 percent).”
The result, however, would be an additional $6.5 billion in yearly cash flow for the price of $3 billion in additional net interest expenses.
Will it happen? Who knows. Maybe. Unlike the AstraZeneca and Allergan deals, Bristol-Myers Squibb is an American company based in New York City—no tax inversion deal, which Pfizer has wanted so badly in the past, but which has also been an insurmountable obstacle for the U.S. government. Under the Trump administration, predictability isn’t on the table, but it seems unlikely it would get in the way of a Pfizer-Bristol-Myers Squibb deal (unless one of the company’s chief executives publicly criticized President Trump, in which case, who knows?).
Weber writes, “It is not possible to know whether Pfizer will make that acquisition (without insider knowledge), but investors who like either Pfizer and/or Bristol-Myers Squibb should be happy about a possible catalyst that would likely drive share price gains for both companies if Pfizer wants to make that move.”
