Icahn’s latest target, Bristol-Myers, may play hard-to-get; unless Pfizer comes a courting

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The News:

Activist investor Carl Icahn just announced his latest target: Bristol-Myers Squibb Co., reports the Wall Street Journal. Bristol-Myers has been the focus of several activist investors in recent months and on Tuesday (February 21, 2017) the company shook up its board to satisfy other activist investors. Now, the pharmaceutical giant has to deal with a new formidable force, Carl Icahn. Since he announced his position, speculation has spread that the company may be split up and/or sold.

@BMSnews has to deal with a new formidable force, @Carl_C_Icahn Click To Tweet

For decades, Carl Icahn has mastered the skill of shaking up companies and extracting value for himself and other shareholders, Forbes points out. Arguably, Carl Icahn is the best activist investor in history. Bristol-Myers executives are on notice and clearly this will be the topic of water cooler buzz in the company for weeks to come.

Jana Partners LLC, and other large investors, are also involved in the company. Bristol Myers has been working hard to develop the next big cancer treatment. Due to pressure from Jana and other investors, Bristol-Myers just announced it would add three directors to its board and repurchase $2 billion in stock.

The company is working tirelessly to develop new treatments to combat cancer. Icahn may help breakup the company or try to sell it. Either way, if he does anything big, it could reshape the landscape among a group of companies racing to attack, and ultimately cure, cancer. If the company does sell out, it would probably fetch over $100 billion. Bristol-Myers currently has a market value of more than $90 billion.

Steve’s Take:

The vultures are circling.

One failed clinical trial and–BAM! A 100-billion dollar, 130-year-old Pharma icon is transformed into just a target for the next big megamerger. Did I say icon? I meant Icahn. You know. As in Carl, the corporate raider?

After Bristol-Myers’ immunotherapy Opdivo fell short in a key lung cancer study last fall, the company’s shares plummeted, analysts cut their sales forecasts by billions, and buyout rumors started surfacing.

Now, activist investors (I just love that nonsensical metaphor) are swooping in.

None other than Carl Icahn disclosed a stake in Bristol-Myers Tuesday, the same day the company announced a board shake-up prompted by negotiations with another activist, the hedge fund Jana Partners.

Could Bristol-Myers really go on the block? Icahn has a history of pushing drugmakers to make big changes–and that often includes putting themselves on the block.

A sale wouldn’t be surprising to some investors and analysts, who’ve been abuzz about a potential megamerger pairing Bristol-Myers with one of its Big Pharma peers. Last week, unnamed sources told Street Insider that Pfizer, Roche and Novartis were all weighing offers.

Given the fact that those pharmas are among the very few that could afford a Bristol-Myers purchase, they are the obvious names that would surface in the likes of Wall Street watering holes such as Ulysses Folk House and Dead Rabbit. Pfizer, with its proven appetite for megamergers, easily lends itself to big-deal chatter, says FiercePharma. Plus, Pfizer in particular could soon have a much bigger war chest for acquisitions if President Donald Trump’s proposals for a repatriation tax holiday come to fruition.

Talk, however, is cheap. With the activist in the mix, the prospect of a sale–or pressure for a sale–suddenly seems more real. Investors certainly thought so; when the WSJ reported Icahn’s stake just before Tuesday’s market close, shares shot up to $55.35 at close Wednesday.

That puts Bristol-Myers’ current market cap at about $92 billion, according to Yahoo Finance, and despite the price tag that number would put on a deal, Leerink Partners analyst Seamus Fernandez wrote last month that the company’s assets could be worth the cost.

“[W]e believe Opdivo, Yervoy, and the burgeoning immuno-oncology pipeline at BMS is a high-value industry asset that cannot be ignored,” Fernandez wrote at the time.

That’s even after the failed lung cancer trial. Last August, Bristol-Myers reported that Opdivo hadn’t met its goals in a study in previously untreated lung cancer patients. That trial was widely expected to lead to a new FDA approval—and a big boost in sales as the drug became a first-line treatment.

The famed investor, who just turned 81, has a history with Bristol-Myers. In 2008, Icahn was a large shareholder in ImClone Systems and helped rebuff Bristol-Myers’ attempt to buy the company, its partner on an important cancer drug, for $4.7 billion. Instead, Mr. Icahn supported Eli Lilly & Co. when it swooped in to buy ImClone for $6.5 billion.

In 2012, Icahn took a stake in Amylin Pharmaceuticals and persuaded the company to explore a sale after it had chucked a bid from Bristol-Myers. After the diabetes-treatment maker ran a sales process, it agreed to a higher bid, valued at $5.3 billion, from Bristol-Myers.

Earlier on Tuesday (February 21, 2017), Bristol-Myers announced it recruited former senior executives for their Board from Bausch & Lomb and Vertex PharmaceuticalsRobert Bertolini and Matthew Emmens, respectively, along with Theodore Samuels, who currently sits on the boards of Perrigo Company and Stamps.com.

Zero Hedge reminds us it was Icahn’s planting of a former Bausch & Lomb executive on the Forest Labs board that allowed a series of transactions including an eventual takeover of the company by Actavis, and subsequently Allergan, before ultimately the government had to intervene and block the merger between Allergan and Pfizer.

Bristol’s best hope in the near term is to combine Opdivo with another immune-boosting (IO) drug called Yervoy to reach a broader set of patients, says Max Nisen at Bloomberg. Most of its combo trials focus on this duo. But it has given up on seeking quick FDA approval for that combo in treating newly diagnosed lung cancer. AstraZeneca, meanwhile, recently delayed trial data for an IO combination similar to Bristol’s. Both setbacks raise questions about the effectiveness of this approach.

Merck, on the other hand, may get a possibly safer and cheaper combination of Keytruda and chemotherapy to the market to treat lung cancer as soon as this spring. That could be devastating to Opdivo’s sales potential.

Gauging the longer view, Bristol is exploring other combos and IO drugs. So is everyone else, according to a Bloomberg Intelligence analysis. There are many overlapping trials, and not everyone can win.

The future of IO is likely to be untidy, with different combinations treating particular cancers and no single drug dominating. For big markets with multiple entrants, pricing pressure is all but inevitable, given that the list price for combo therapy can exceed $200,000 per year.

Bristol’s $90 billion market cap is another sizable deal barrier, particularly after adding a compelling premium. Among those with the financial firepower to make a bid conceivable, Roche and Merck are out of the running, given the amount they’ve invested in their own IO drugs.

There are other potential suitors, including Sanofi, Johnson & Johnson, Gilead Sciences, and Novartis. But this deal would be a financial stretch for just about any firm. And despite its recent troubles, Bristol trades at a notably high multiple relative to other large US pharma companies.

Then there’s Pfizer.

Considering the top dog’s dealmaking track record, it’s likely some new acquisitions will bolster its 2017 revenue guidance before the year is out–especially with CEO Ian Read insisting that the company won’t put its M&A activities on hold to wait for changes to the US tax code. And some analysts, says FiercePharma, are wondering whether a hot immuno-oncology pickup could be simmering. Anyone know of such a target?

Steve's Take: Could @BMSnews be on @Pfizer's acquisition radar? Click To Tweet

As Bernstein’s Tim Anderson pointed out last month to clients, without a “backbone” PD-1/PD-L1 therapy to call its own–à la Merck’s Keytruda or Bristol-Myers’ Opdivo–it’s unclear whether Pfizer can be a leader in the “next wave of therapeutics,” as the company has said it’s hell-bent to be.

So why doesn’t the pharma titan just gobble up Bristol-Myers, whose shares have been languishing on the Opdivo setbacks? Why wait to see if chemo combos reign supreme?

“Having the value of the target change materially for the worse could make management look bad,” Anderson wrote, adding, “This is a conundrum.”

Yeah, no kidding.

The IO market may be too unstable and crowded right now to justify what might be the biggest pharma deal in history, says FiercePharma. And no buyer is likely to jump in without waiting to see how the landscape shapes up, or whether they can get a cheaper deal, Nisen believes.

Finally, back to Icahn. If he succeeds in pushing Bristol-Myers toward a megamerger, it would be the first such deal since 2009, when Pfizer bought Wyeth, Merck bought Schering-Plough and Roche picked up the share of Genentech it didn’t already own.

Pfizer might have added another to its series of big buys in 2014, when it tried but failed to buy AstraZeneca for more than $100 billion, or last year, when tax inversion crackdown wrecked its $160 billion Allergan buyout.

Then again, Icahn could raise a ruckus and campaign for other changes–asset sales or swaps along the lines of Sanofi and Boehringer Ingelheim or GlaxoSmithKline and Novartis. Or he might simply push for board representation, at least for now.

No matter the eventual outcome, I’d be feeling pretty smug as a BMS stockholder right now. Especially if I got in recently at what could prove to be the very, very bottom of a long downhill slide and wind up with a sweet cash-out in the not too distant future.

Hey, BMS. Who’s your friendly old neighbor there in NYC? The one that doesn’t have quite the IO promise at the cash register you clearly have? You know who I mean. What’s $100+ billion between friends, anyway?

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