Image Source: Steve Davis
Could activist investors force Bristol-Myers to break apart? Let’s walk through a potential scenario that could drive Bristol’s share price to new heights.
Alexander J. Poulos
We are pleased with the recent announcement of a $2 billion dollar accelerated share repurchase (ASR) program. In addition to the ASR, three new directors proposed by Jana Partners will be added to Bristol-Myers Squibb’s (BMY) board. The recent transactions by the famed activist investor have led many to believe the company is “in play” with a takeout potentially imminent. The article below will explore the potential along with our preferred solution.
Oncology Franchise
The crown jewel of Bristol’s product line-up remains Opdivo the programmed death receptor-1 (PD-1) blocking antibody that aids the body in fighting off cancer. The PD-1 protein in layman’s terms acts as a “clocking mechanisms” that allows cancer to invade detection in the host body. The goal of Opdivo and others in the class is to block this protein, thus allowing the cancerous cells to be “detected” by the body and an immune response to be initiated to eliminate the cancerous cells.
Having generated $3.8 billion in sales in 2016, Opdivo has notched an impressive string of success with approvals to treat:
BRAF V600 wild-type unresectable or metastatic melanoma, as a single agent. (1.1) • BRAF V600 mutation-positive unresectable or metastatic melanoma, as a single agent. This indication is approved under accelerated approval based on progression-free survival. Continued approval for this indication may be contingent upon verification and description of clinical benefit in the confirmatory trials. (1.1)
Unresectable or metastatic melanoma, in combination with ipilimumab. This indication is approved under accelerated approval based on progression-free survival. Continued approval for this indication may be contingent upon verification and description of clinical benefit in the confirmatory trials. (1.1
Metastatic non-small cell lung cancer and progression on or after platinum-based chemotherapy. Patients with EGFR or ALK genomic tumor aberrations should have disease progression on FDA-approved therapy for these aberrations prior to receiving OPDIVO. (1.2)
Advanced renal cell carcinoma who have received prior anti-angiogenic therapy. (1.3) • Classical Hodgkin lymphoma that has relapsed or progressed after autologous hematopoietic stem cell transplantation (HSCT) and post-transplantation brentuximab vedotin. This indication is approved under accelerated approval based on overall response rate. Continued approval for this indication may be contingent upon verification and description of clinical benefit in confirmatory trials. (1.4)
Recurrent or metastatic squamous cell carcinoma of the head and neck with disease progression on or after a platinum-based therapy. (1.5)
Locally advanced or metastatic urothelial carcinoma who: • have disease progression during or following platinum-containing chemotherapy • have disease progression within 12 months of neoadjuvant or adjuvant treatment with platinum-containing chemotherapy
Source: Opdivo Prescribing Info
The highlighted portion discussing Opdivo’s use in non-small cell lung cancer is the nexus of the dilemma that has bedeviled Bristol’s share price over the past nine months. Opdivo is approved for second line use in NSCLC with hopes running high the product would be granted first line status in one of the largest oncology markets around. The product failed to achieve its primary endpoint and in a real surprise failed to post superior outcomes to standard chemotherapy. The revelation of inferiority versus chemo galvanized another leg down in the share price this past fall.
Subsequent to that, optimism had ran high for a first line designation in NSCLC, this time with a combination product utilizing Opdivo as the clinical backbone. The analyst community was expecting Bristol to file for an accelerated review. The company declined, however; instead, Bristol will continue to gather additional data. The news did not go over well with the Street, paving the way for another steep share-price plunge. Such events now in the rear-view mirror bring us to today.
Activists Have Stepped In
Two notable activists, Jana Partners and Carl Icahn, are now involved in Bristol. We view the push by Jana to have three new board members as a positive sign the company is looking to shake up the corporate culture and make some bold moves.
The most logical response bandied about by most is for the company to auction itself off to the highest bidder. Normally we would be on board with such an exercise, but with Bristol’s market cap over $90 billion dollars, we do not foresee a reasonable outcome where the company would be acquired in its current state.
Bristol’s Potential Breakup Scenario
Bristol is transforming itself from a traditional pharma company with multiple divisions to a more biotech-oriented play. The issue that continues to muddy the transition is its current product lineup. Bristol has many oncology assets, and traditional pharma products such as Eliquis are still huge contributors, generating over $3.3 billion in sales for 2016, for example.
We suspect the most probable outcome from activist activity may be a break up of the company with traditional pharma assets such as Eliquis and the virology franchise that houses top sellers such as Baraclude ($1.2 billion in sales in 2016) will be housed in a new entity that will keep the Bristol-Myers name. Let’s call this new entity “New Bristol.”
The remaining entity would be an oncology “pure play,” with top-selling assets such as Opdivo and Sprycel ($1.8 billion in sales in 2016) that would be spun out to existing shareholders. The “Spinco,” or so we’ll call it, would be able to focus on funding the numerous costly clinical trials necessary to realize the full potential of these products. To broaden the label of Opdivo to cover various forms of cancer, a clinical trial is required to show superiority over existing treatments.
Unlocking “Value” in Giving Investors Choices
Bristol-Myers’ consolidated balance sheet today carries a net cash position of $2.36 billion at the end of 2016. The split-off into two different entities would allow the oncology-focused “Spinco” to “go off into the wild” with a potentially clean, debt-free balance sheet with the “New Bristol” more than capable of carrying the debt burden, about $5.7 billion in long-term debt at the end of 2016, thanks to the cash flow generated from established products.
Also, the dividend, which is cherished by many income-seeking investors, would become the responsibility of the “New Bristol.” The profile of the “New Bristol” would be a slower-growth entity with a mature product line that generates an abundance of cash. The lack of growth coupled with a strong cash flow argues for an attractive dividend with annual hikes above the rate of inflation to generate investor enthusiasm.
Unshackled by the need to pay a dividend, the oncology-focused “SpinCo” would be able to fund an abundance of clinical trials to harness the full potential of its oncology pipeline. SpinCo’s focus should not solely rely on internally-generated compounds; strategic partnerships should be welcomed as well. We believe the overall valuation of Bristol under its current configuration suppresses the actual potential of the company’s oncology pipeline.
Similar to what happened with the Yum! Brands (YUM) spin off of its China assets, this potential break-up scenario with Bristol would also give investors more choices – either an established income play or an exciting oncology-focused biotech with great promise. Given its tremendous potential, we believe an oncology pure play would be warmly welcomed by investors and may push Bristol’s consolidated valuation to the higher end of our published fair value range.