Pharma M&A Fever: Is Bristol-Myers The Next Acquisition Target?

In the last 7 weeks, 3 major pharmaceutical mergers have been announced totaling $156 billion in value. In late January, Pfizer Ltd. (PFE) announced a $68 billion cash and stock bid for Wyeth (WYE). This week brought news that Merck & Co. (MRK) plans to buy Schering-Plough (SGP) and Roche will acquire the remainder of Genentech (DNA) that it does not already own. The $41 billion Merck/Schering deal will be financed with cash and stock while the $47 billion Roche/Genentech merger will be an all-cash deal financed through debt.

While the dollar figures are huge and the pace of activity has been rapid, the results are not surprising. Patent expirations of major drugs, depressed equity values, increased generic competition and fewer new drug approvals have all been major contributing factors to the recent substantial increase in merger activity. With a number of major pharmaceutical companies facing significant challenges to grow revenue in the near-to-medium term, we expect the deal-making to continue in 2009.

Although there are a few candidates in the Big Pharma space that are likely acquisition targets, we think Bristol-Myers Squibb (BMY) is the most likely to be taken out in the near future. The short-list of potential acquirers, in our opinion, is Sanofi-Aventis (SNY) and AstraZeneca (AZN).

While Bristol is faced with its own very significant patent expiration in late-2011 when Plavix will lose exclusivity, the company has been making very significant changes in anticipation to the influx of generic competition. The company has been rapidly shedding costs and underperforming businesses and reinvesting the proceeds in higher and longer-term growth potential areas.

Oncology, an area that the company already has a significant presence in, will be a major driver of future growth for the company and one in which management has recently made substantial investments.

Meanwhile, Sanofi will be growth-challenged over the next few years due to recent or near-term patent expirations on a number of its key drugs. The company is partnered with Bristol on the mega-blockbuster anti-clotting drug Plavix and, like Bristol, has a significant presence in the oncology field.

A merger with Bristol would also significantly increase and diversify the company’s geographical reach, something Sanofi’s new CEO, Chris Viehbacher, listed as one of his priorities for increasing growth. Roughly 60% of Bristol’s sales come from the U.S. market versus only 32% of Sanofi’s sales.

AstraZeneca (AZN) is one of the most growth-challenged companies in all of Big Pharma. We estimate the company has over $11 billion in sales exposed to patent expirations through the end of 2012, representing about 35% of the company’s expected revenue in 2009.

The company is partnered with Bristol on two very promising diabetes candidates (saxagliptin and dapagliflozin), both in phase III trials with one potentially launching in next 60 days.

AstraZeneca also has a number of cancer compounds on the market and under development. The company has been rapidly paying down debt, potentially to improve credit ratios in anticipation of raising financing in the near future. The company has also openly commented that it is looking for external growth opportunities.

While a Sanofi/Bristol merger makes a lot of sense in our opinion, we believe a deal with AstraZeneca is the most likely. AstraZeneca looks the most eager to find a catalyst to grow revenue, and while Sanofi is looking for growth through “disciplined acquisitions”, Mr. Viehbacher recently stated that he was only considering deal sizes in the $5 billion to $15 billion range. By definition this would rule out Bristol which would likely fetch $50 billion or more ($26+/share).

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