Bristol Flying Solo As A Pure Biopharma After Mead Johnson Spin Out

Decision to split off the nutritionals unit - Bristol's last diversified business - reflects management's improved confidence in the biopharma business and strength of Mead Johnson's stock price.

While some drug makers have been hedging their pharmaceutical bets by diversifying into areas like animal health and consumer health, Bristol-Myers Squibb is going all in on its wager on biopharma. The company announced plans to split off its 83.1 percent holdings in Mead Johnson Nutrition Co. Nov. 15, its last diversified business.

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.

Bristol owns 170 million shares of Mead Johnson. If all 170 million shares are exchanged, the deal could be $0.10 accretive to Bristol's earnings per share in 2010, Credit Suisse analyst Catherine Arnold estimated in a same-day research note.

Bristol faces one of the industry's largest patent cliffs in 2012, when the firm expects to lose Plavix (clopidogrel) and Avapro (irbesartan) to generics, drugs representing about 40 percent of 2008 sales. Bristol has several new drugs pending FDA approval or in late-stage development, but these won't make up for the shortfall. In preparation, it has been trimming costs and shedding non-core assets like its ConvaTec ostomy and wound care business since 2007, using the proceeds to reinvest in the pharmaceutical pipeline and acquire new assets with a focus on serious unmet medical needs. Importantly, it also has taken steps to significantly improve its balance sheet and stabilize its cash flow.

The decision to split off the Enfamil infant formula maker Mead Johnson - a business unit Bristol spun out in an initial public offering in February - reflects management's confidence in its pharmaceutical pipeline and the strength of the Mead Johnson stock, which has performed better than expected, CEO James Cornelius said during a same-day call. The split is in line with the company's long-term strategy to focus on biopharmaceuticals.

"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."

Bristol Takes Advantage Of Mead Johnson's Market Valuation

Wall Street has reacted favorably to the Mead Johnson IPO. The IPO Feb. 11, in which Bristol sold 30 million shares for $24 each, was the first for the U.S. health care industry since 2007 ("The Pink Sheet" DAILY, Feb. 18, 2009).

The stock has since grown more than 88 percent; it closed Nov. 13 at 45.25 and has been trading above $40 since September. Part of the run up has been fueled by takeover speculation. The Financial Times reported in September that the French food maker Danone was in discussions to acquire the business, although Danone denied the rumors. The current strength of the stock is one reason Bristol is making a move to separate the business now, sooner than was expected.

"Mead Johnson's stock has behaved like a rocket ship, so the stars literally line up to try to do this transaction before the Christmas holidays," Cornelius said. Mead Johnson closed down 4.5 percent to 43.21 Nov. 16, while Bristol closed up 4.8 percent to 24.30.

During Bristol's third-quarter sales and earnings release in October management acknowledged that it was continuing to evaluate strategic options for Mead Johnson in light of the strong stock performance.

Still, at a time when drug makers like Pfizer and Merck are diversifying into business areas like consumer healthcare, animal healthcare and generic drugs, news that Bristol is shedding the one business it could leverage against pharmaceuticals demonstrates the level of commitment management has to its strategy of creating a lean, nimble research-based organization.

"We're trying to execute the strategy with this last piece of...monetizing and reducing our shares outstanding," Cornelius said. "We do...go into 2010 as a purely biopharma company. Our success will be our execution, and the progress we make on registering and launching five more new products during the next 24 months."

The split off of Mead Johnson will also improve cash flow at Bristol. The company expects the transaction will result in a reduction of 282 million shares, or 14 percent of its share capital. As a result, the company will have to shell out less cash on its dividend. With a dividend of about $1.24 per share, Bristol stands to save $349 million annually, although the company will lose the roughly $0.80 dividend Mead Johnson pays on its 170 million shares, or about $136 million.

The company expects to have close to $10 billion in cash by the end of the year, money it can use to acquire new assets to add to its "string of pearls." On top of the $7.9 billion, the company had on hand at the end of the third quarter, Bristol recently received a $1.75 billion payout from Mead Johnson from an inter-company loan repayment. The company ended 2006 - the year Cornelius took over - with $4.0 billion in cash and marketable securities.

Bristol has been working to shore up its cash flow ahead of the patent cliff it's facing. In April, the company updated and extended a 10-year deal with Otsuka Pharmaceutical Co. around the atypical antipsychotic Abilify (aripiprazole), a deal that helped to improve the company's cash flow in the near-term and stabilize its earnings base (Also see "BMS & Otsuka Expand Their Abilify Deal, Enter into New Oncology Co-Promotion" - Pink Sheet, 6 Apr, 2009.).

- Jessica Merrill ([email protected])