NEW YORK (
Bristol Myers Squibb
(BMY - Get Report)
has been a stock that Jim and I have owned in the past and have been watching it as one to possibly own again. This morning it announced a $7.1 billion deal to acquire
as it tries to expand its diabetes franchise with partner
(AZN - Get Report)
The deal is a smart one for many reasons - it expands its diabetes pipeline, shares the economic risk as AZN will payout $3.4 billion for a 50% share in the economics, and uses its cash ($8.6 billion in 1Q) wisely to build out its product franchise in the face of the Plavix patent cliff (which accounts for 30% of its revenues). Currently, BMY and AZN have a joint venture in diabetes with two drugs - Onglyza (which is on the market currently) and Dapagliflozin (yet to be approved by the FDA). The addition of Amylin's Byetta and Bydureon products could lead to an additional $1.5 billion in sales for this segment which could be as much as 12-20 cents accretive in 2016. It's not a layup to get to $1.5 billion in sales, but the growth in the diabetes market and the sales/marketing muscle behind BMY/AZN should make it doable.
We applaud management for building out its products and it now has one of the most diversified pipelines in the sector - cardiovascular diseases, virology, immunology, oncology, and central nervous system disorders. The only issue is that the stock is expensive - trading at 19x forward estimates which is a healthy premium to its 14x historical average and the 12.7x group average multiple. It has a great yield, a sizable buy back (it just announced a new $3 billion buy back last week) and is a defensive stock - which is attractive in this volatile macro environment. Usually when companies make acquisitions the acquirer shares typically fall - and sometimes an opportunity to buy. I doubt it will fall materially, but if it does, it's one on our radar to buy.
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