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Why Bristol-Myers Squibb may be a merger target soon

January 18, 2017
Life sciences

Bristol-Myers Squibb (BMY) could be in play or targeted by an activist investor soon.

Insurgent fund manager Jana Partners’ Barry Rosenstein recently acquired a large stake in the New York-based pharmaceutical company, according to a person familiar with the situation. He noted that the investment, which is a top position for the fund, was disclosed privately to Rosenstein’s investors in a risk report. The report, however, didn’t provide any commentary on the position.

Nevertheless, Jana Partners frequently has launched campaigns and proxy contests, suggesting that one could be forthcoming, especially considering that Rosenstein hasn’t initiated a new campaign in several months. According to FactSet, Jana Partners has threatened proxy contests at nine companies, engaged in director-election battles at seven companies and launched 38 campaigns overall since 2001.

All that suggests Rosenstein, an early employer of the activist tactic, could launch a contest at Bristol-Myers to press for some strategic options, in advance of a Feb. 2 deadline to nominate dissident director candidates for the company’s 2017 annual meeting, expected in May.

There are a wide variety of strategic options available to Rosenstein and his team should they decide to agitate publicly or privately.

Steve Chesney, analyst at Atlantic Equities, said Rosenstein or another activist fund could take issue with what he sees as Bristol-Myers ‘s over-concentrated portfolio and its over-focus on one drug, blockbuster cancer therapy Opdivo. He suggested the company could be pressed to make acquisitions or invest more heavily in business development so it can become more diversified.

“Bristol is highly dependent on the outlook for one drug, Opdivo,” Chesney said. “To support its revenue base, given the risk of competition in the immuno-oncology space, the prudent strategy would be to expand by acquisitions or alliances and partnerships with mid-stage or later-stage therapeutic development candidates.”

Chesney estimates that roughly 30% of Bristol’s 2020 revenue base, unless changes are made, will be driven by Opdivo.

Kurt Kemper, analyst at Hillard Lyons, agrees. He notes Bristol-Myers has said it is seeking to maintain a diversified portfolio within and outside of the immune-oncology space as part of its key strategies going forward. Nevertheless, Kemper suggests that Bristol-Myers should consider diversifying through acquisitions to help reduce its risk profile, given its heavy reliance on Opdivo.

He added that the drug company could make smaller acquisitions in the immuno-oncology space or even a larger transformative type deal outside of that space.

“We believe success in diversification outside of immuno-oncology is important for the company’s risk profile, given the increasing competitiveness in the area,” Kemper said.

Activists often pressure companies to be sold too. As a result, Jana Partners or another activist also could pressure Bristol to be acquired by another drug company. The pharmaceutical space is expected to see high levels of M&A activity in 2017, especially with the election of Donald Trump clearing away a lot of the regulatory hurdles to mega-drug sector M&A.

David Katz, founder of $760 million value investment firm $760 million Matrix Asset Advisors, said he expects a lot of M&A in the drug company and health care space in 2017. Katz, who is a contributor to Real Money, noted Pfizer (PFE) , Merck (MRK) , Johnson & Johnson (JNJ) or Novartis (NVS) are all capable of acquiring Bristol-Myers. He added that Bristol-Myers’s large immune-oncology drug portfolio, led by Opdivo, could make it an attractive candidate to any of the largest global pharmaceutical companies. “There are only a few companies big enough that would be capable of making an acquisition of Bristol,” he said.

Last week, for instance, Pfizer CFO Frank D’Amelio told a J.P. Morgan Healthcare conference that he expects more tuck-in and bolt-on acquisitions for the overall industry, adding that he thought large-scale M&A was possible.

Chesney also acknowledged that there has been “persistent chatter, given some of the excitement around the world of immuno-oncology,” that Bristol-Myers Squibb could become a target for acquisition.

However, he suggested that the most capable buyers may not be interested. Johnson & Johnson hasn’t pursued large scale commercial transactions in the pharmaceutical space and is already quite diversified in with operations involving drugs, medical devices and consumer products. He added that Johnson & Johnson is more focused on make smaller development stage asset acquisitions, suggesting it wouldn’t want to make the kind of transformative acquisition a Bristol purchase would entail.

Chesney added that he thought it was unlikely that Merck, the closest competitor to Bristol in the oncology business, would have any interest, largely because the two companies already overlap significantly.

The most widely speculated potential buyer for Bristol-Myers is Pfizer – many analysts and investors contend that the New York based company would see more of a benefit in acquiring Bristol.

Chesney contends that while Pfizer has clearly expressed interest in similar assets in the past, its willingness to enter into a significant transaction for Bristol-Myers could be limited by the shifting sands in the immuno-oncology space as well as Pfizer’s own efforts to develop an in-house program, including a partnership with German-based Merck KGaA.

For now, expect Bristol-Myers to be on the lookout for a possible Jana Partners escalation.

By Ronald Orol

Source: The Street

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