Bristol-Myers Squibb Co. is a tasty morsel among pharma companies. It has a large number of drugs in development, many in profitable areas such as oncology. None of its major drugs are expected to go off patent before 2011. Its boss, James Cornelius, is nearing retirement. He also sold the last company he ran. And in the past two weeks the two biggest roadblocks to a sale—the government’s oversight of Bristol’s operations and a patent challenge to its best-selling blood thinner Plavix—have been pushed side.
Indeed, the US group’s market capitalization has risen by a third in the past year on speculation that Sanofi-Aventis, GlaxoSmithKline, Pfizer or Novartis will snap it up. Despite the rise, Bristol isn’t out of reach—the numbers still stack up for all the potential acquirers if one assumes typical savings associated with pharma mergers.
Bristol’s market cap is currently $62 billion (Rs2.54 trillion). But this includes a speculative premium that the company will be acquired.
Bristol was trading around $47 billion last year, before merger talk heated up. But that figure needs to be adjusted. Just two weeks ago, the company won a patent case that eliminates a threat to its profitable Plavix line. This is worth at least $5 billion. So, its current fair value might be$52 billion. Assume shareholders will demand at least a 30% premium, which is about average for the sector, and the starting price for serious negotiations appears to be at least $67 billion.
That doesn’t appear prohibitive. The average pharma merger over the past decade has resulted in cuts of more than 10% in general costs and R&D of the combined company. Some, such as Sanofi’s purchase of Aventis, have generated more.
Bristol has already been cutting. So assume its savings are limited to 10%.
Among the four big potential acquirers, the after-tax value of the synergies would range from $18 billion for Sanofi to $23 billion for Pfizer. In other words, the potential synergies cover both Bristol’s fair value and a 30% takeover premium.
Whether the savings would cover a premium resulting from a heated auction is another matter.
And there’s a good chance one could erupt. Attractive pharma assets such as Bristol come on the market rarely. There’s a good chance other big drug companies would compete to snap it up.