The Health Care M&A Monthly: Bristol-Myers Squibb Builds a Bridge to New Revenues

After some weeks of speculation in the press, Bristol-Myers Squibb (NYSE: BMY) finally announced it would buy The DuPont Pharmaceutical Company, a subsidiary of E. I. Du Pont De Nemours (NYSE: DD), for $7.8 billion in cash.
This deal advances both companies’ plans to reorganize along the lines of their core competencies. Though DuPont once dreamed of growing its pharma business from annual revenues of $1.5 billion to over $10 billion, the company ultimately decided the commitment of resources needed to compete outstripped any foreseeable gains, and announced last December that it would sell operations off. DD will use a portion of the proceeds to fund its share buyback program.
Conversely, BMY wants to devote more attention to its pharma business. As noted in previous issues, it is planning to spin off its Zimmer orthopedics business. And last month the company agreed to sell off its Clairol cosmetics business to Procter & Gamble (NYSE: PG) for $4.9 billion in cash, a deal which paves the way for the deal with DuPont not in the least because it provides some of the cash needed to fund the acquisition of DD’s pharmaceuticals business.
What took some observers by surprise is the price being paid. With the DD pharma unit generating annual revenue of about $1.5 billion, BMY is paying 5.2x revenue; the rule of thumb many analysts follow for pharma companies is a more modest multiple of 2.5x. Although not an outlandish premium, comparison with the chart on page 1 shows that BMY is indeed paying above both the median and the average multiples for a target of DD’s size. The figures in the chart are based on 28 pharmaceutical deals made over the past 18 months. As might be expected, targets with higher revenues command a premium so the median multiples paid for them are higher. Thirteen of the 28 deals in this universe targeted companies with revenues in excess of $50 million. While not the highest P/R multiple in this sample—Johnson & Johnson (NYSE: JNJ), for example, is paying 12.5x for Alza Corp.—it closely resembles the 5.2x that Glaxo Wellcome paid last year to acquire SmithKline Beecham (now GlaxoSmithKline, NYSE: GSK). In that deal, however, the acquired company brought to the table nine times the revenue that DD’s pharma unit brings to this one.
In short, BMY is probably paying more than it would otherwise, all things being equal. Which, of course, they almost never are. The presence of other potential buyers may naturally have bid up the price; it was rumored that Swiss-based Novartis AG (NYSE: NVS) wanted to expand in the US. Here, however, BMY has the home-field advantage, and is better positioned to realize cost savings down the road than a foreign company. But what may ultimately have driven BMY’s bid, and driven it up, is an urgent need to shore up the company’s revenue stream as some of its best-sellers face competition from generics. Taxol, BMY’s cancer drug, lost its patent protection last year; Glucophage, the diabetes drug, and BuSpar, an anxiety drug, will lose theirs this year.
Most worrisome for BMY is Sustiva, its HIV drug, a component of the "AIDS cocktail" that by itself generated $386 million in revenue last year and is due to lose patent protection in 2003. DuPont Pharmaceutical’s development pipeline includes a drug that may not only replace Sustiva, but could actually expand sales with its enhanced properties. DD’s drug portfolio also includes a strong cardiovascular component; however, the deal excludes two antihypertensives, Cozaar and Hyzaar, jointly developed by DuPont and Merck & Company (NYSE: MRK). Morgan Stanley advised DuPont; J.P. Morgan Chase & Co. advised Bristol-Myers Squibb.
Pharmaceutical companies have several ways to preserve the higher revenue levels of proprietary drugs; they can, for example, "tweak" their drug formulations to extend patent protection. But they will often find it strategically beneficial to acquire other companies’ development pipelines, not only for the higher revenues that brand-name pharmaceuticals command, but also to obtain a diversified product offering.