Wednesday, February 11, 2009

Investors Dig Baby Formula, Not Yet Ready for Solid Foods

Against the odds and a miserable market Bristol-Myers Squibb milked investors for $720 million yesterday. According to Reuters, BMS sold 30 million shares in Mead Johnson Nutritionals at the top end of its previously announced $21-24 range.

MJN, which begins trading on the NYSE today, only feels like the first IPO in about seventeen years. But it is the first health care IPO in the US since 2007. Still, nobody seems to be kidding themselves that Mead Johnson's introduction to the public markets means anything for the rest of the industry's IPO hopefuls.

But the deal is huge for BMS, which has continued to execute on its specialization strategy designed to remake the company as a pure play biopharma. Now, to paraphrase the old chestnut, BMS gets to have its baby formula and drink it too.

As we wrote last September, by maintaining an 85% stake in Mead Johnson as well as the lion's share of voting rights in the company, BMS gets to achieve its sought-after managerial focus while at the same time clinging onto the benefits of owning a diversified portfolio of assets.

As long as it keeps more than half of the Mead Johnson shares, it will be able to consolidate Mead's top and bottom lines, subtracting the proportion of net income attributable to the minority shareholders only at the very bottom of the P&L, in minority interests.

"I recognize that the drug industry is more uncertain today than 15 years ago," BMS CFO Jean-Marc Huet told IN VIVO last year. And that the outlook for Mead Johnson's industry "is far more stable." (The nutritionals company is expected to grow faster than BMS's core drug business.) But in spinning off those MJN shares, "we haven't increased Bristol's risk profile since we still consolidate its sales and earnings," he said. Likewise, it can even take its pro-rata share of Mead Johnson's cash flow--so won't face the same criticism Pfizer has with the sale of its OTC business to Johnson & Johnson in 2006, or even Bristol itself with the spin-off its orthopedics group Zimmer Holdings in 2001. (Zimmer shares have appreciated significantly since then, while BMS's have been roughly halved.)

Meanwhile, Bristol's managers can focus 100% of their attention on the pharma business and dealing with the 2011 patent expirations of both Plavix and Avapro. Freed from the other businesses, Bristol managers won't get clouded with their issues. And with Mead Johnson traded separately, followed by a different group of analysts, it should get the benefit of their attention, rather than being ignored by drug-stock researchers.

Could other Big Pharma benefit from a similar strategy? Novartis is well on its way to achieving a similar arrangement with Alcon (a deal we spent considerable time analyzing as part of our DOTY competition). Pfizer seemed headed towards a more concrete restructuring when it split out its various business units last year. Now that it plans to add Wyeth's consumer and vaccines businesses to the mix (presumably Wyeths biologics and small molecule drugs will get lumped in with Pfizer's pre-existing business units) perhaps a similar argument can be made there.

It could surely use the proceeds to pay down that expensive debt.

image by flickr user nerissa's ring used under a creative commons license

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