Tuesday, November 17, 2009

Bristol Says Buh-Bye to Formula for Stability, Hello to Buyback

It's no secret that Bristol-Myers Squibb has spent the last couple years solidifying its stance as a pure biopharma play. We've documented the moves as they've happened: spinning out orthopedics (Zimmer) in 2001, jettisoning OTC, medical imaging, and wound care (Convatec) in 2005, 2007, and 2008 respectively, and inking deals to divest variety of emerging markets businesses this year and last.

And we like a contrarian argument--BMS is zigging toward focus as the rest of the industry zags toward diversification. Is the company better positioning itself for sale? Going all in on the only thing it thinks it does well to try to stick it out for the long haul ahead of a monster patent cliff? Whatever, it's ballsy, and we think they're all the more interesting to watch because of it.

And we really thought Bristol was onto something interesting when they IPO'd Mead Johnson earlier this year. Back then they convinced us of the merits of offloading a smallish chunk of the nutritionals unit that it is now essentially using to fund a stock buyback. Let The Pink Sheet explain:

In the stock swap transaction, Bristol investors who choose to tender their shares will receive approximately $1.11 of Mead Johnson shares for every $1 of Bristol. Bristol won't receive cash for the deal, but the transaction will be accretive to earnings in 2010 by reducing the number of Bristol's shares outstanding, thus increasing earnings per share. The exchange offer will also be attractive to shareholders because it is expected to be tax free.
So Bristol's 170 million Mead Johnson shares, if all exchanged, would give the biopharma company a ten-cent pop in EPS next year. Plus with all those shares retired, the company will improve its cash flow by paying out $350 million less in dividends (er, that's provided it doesn't raise its dividend on the remaining shares). MJN shares are way up since the IPO, so why not take advantage of that valuation bump and allow management to focus on growing the core business and build on the 'string of pearls' strategy with the $10 billion it expects to have by year end?

Because with or without this buyback BMS has that $10 billion. And management focus was more or less guaranteed when it sold 13% of the company in February 2009. What BMS loses when it takes its Mead Johnson stake down below 50% is the ability to consolidate the unit's sales and earnings. It also loses a relatively strong emerging markets business (Mead's second largest market is China).

The move prioritizes short-term gain over long-term stability. Since BMS sold Zimmer in 2001 the orthopedics company's value has doubled while BMS's has more than halved. The IPO strategy would have worked well there--BMS could have held on to some of that value and cash flow--and it seemed to be working well with Mead Johnson. The cash flow gains from this buyback are a band-aid on the wounds inflicted by the loss of exclusivity on Plavix and Avapro (40% of 2008 revenues). Why not pursue some middle ground while keeping a majority stake in the company?

Back to the 'Sheet for Bristol CEO Jim Cornelius' answer:

"We've always said that one of the main considerations in retaining our ownership position in Mead would be our confidence in the strength and sustainability of our biopharma business in 2013 and beyond," Cornelius said. "The split is a sign of that confidence, as we have made excellent progress in advancing our biopharma business in addition to the new product portfolio."
We aren't arguing that his confidence is misplaced. But BMS could continue to strengthen its biopharma business even with Mead's as an outrigger.

image thanks to flickr user joel p under creative commons license

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