Jenks Healthcare Business Report April 2002

In the April 2002 issue:

Bad Luck or Bad Management: What’s Next For Bristol-Myers?

Is Bristol-Myers Squibb adrift, or will management get its arms around the many problems facing the pharmaceutical giant? With its share price already at a four-year low, one more blowup and the company may be heading to the altar.
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Public Equity Market

One jumbo IPO for Alcon, Inc. gets priced, while MedSource Technology drops its offering price by 25%. Shareholders of two companies sell their shares after solid price rises from their October IPOs.
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Private Placement Market

WebMD surprises the market with a $300 million convertible note placement, but thoughts are mixed as to how well management will be able to deploy the extra cash.
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Venture Capital Market

A new health care venture fund raised $400 million, up from an expected $250 million, proving that interest in the sector remains high. In the past month, 15 companies raised more than $260 million as the deal flow continues.
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Jenks Healthcare Business Report

Bad Luck or Bad Management: What’s Next For Bristol-Myers?

Just when they thought it was safe to emerge from the debacle called ImClone Systems (NASDAQ: IMCL), management at Bristol-Myers Squibb (NYSE: BMY) has stumbled again…and again. With blockbuster drugs losing their patents faster than Bill Clinton dropping his drawers, all the major pharmaceutical companies are in search of the drug development grail.

In late March, however, BMY was forced to reveal that a new study of a drug for the treatment of heart failure, Vanlev, found that the drug was only marginally better than a generic version of Merck’s (NYSE: MRK) blockbuster, Vasotec. News of the results sent BMY’s share price down by 15% to a four-year low.

Credibility, or lack of it, is the number issue now at the company. During the course of the development of Vanlev, investors had expected the drug to be BMY’s next blockbuster, with annual sales of $1.0 to $2.0 billion at its peak. Obviously, this will not come to pass, and management had to spend a few days wiping the egg from its face.

The news that Vanlev performed well in studies of 25,000 patients with hypertension, or high blood pressure, however, did little to sway investors. The bottom line is that even good news will be met with skepticism given the series of miscues.

Just 10 days after the Vanlev announcement, BMY had to reveal that wholesale inventories of its medicines are too high in the U.S. and that reducing them will hurt earnings in 2002. But the "hurt" may be up to a 40% decline this year from earnings in 2001, and this coming from a company that was once considered a star. The 15% share price drop would have been much worse if the shares had not already lost so much ground in the past few months.

The problem is that with so many blunders recently, it is impossible to determine if there is anything else that might pop up, and with this many troubles, the likelihood is that management does not have a good enough grasp on operations to have an answer. BMY’s CEO, Peter Dolan, stated, "I have taken a hard look at our business and have concluded that we must improve our current operating performance, our cost structure, and our focus on bringing great drugs to the market in the near term." Rocket science this is not, and one would have expected something a bit more profound.

The fact that he is also "assuming direct responsibility" for BMY’s global pharmaceutical business, in addition, to his chairman and CEO duties, does not instill a greater sense of confidence in the company.

One also has to question where the Board of Directors has been over the past six months. Obviously, its oversight responsibilities have been lacking. But the directors are probably going to have a busy time in the months ahead, as takeover rumors immediately hit the market with BMY’s latest disclosures and the resulting plunge in equity value. If there had been just one or two mistakes, shareholders might stand by management and weather the current storm. But given the circumstances, investors will most likely take any reasonable premium that is offered above current price levels.

With 1.9 billion shares outstanding, however, few companies have the financial wherewithal for a $70 billion to $100 billion price tag. The possible names bandied about so far include Pfizer (NYSE: PFE), Merck, Johnson & Johnson (NYSE: JNJ), GlaxoSmithKline (NYSE: GSK), Pharmacia (NYSE: PHA) and Novartis (NYSE: NVS). A hostile bid would require cash, and that is a long shot, but bankers are probably already crunching the numbers for their clients, smelling a huge fee in the current M&A market drought. Apparently, one research analyst has estimated that at a price of $50 per share, JNJ’s earnings per share would rise by 2% in 2003 without factoring in any cost savings, but would jump by up to 17% with savings factored in, if it bought BMY. There has been no comment from JNJ.

Our guess is that no one will want to make a hostile bid, and Mr. Dolan will not be very receptive to a friendly merger, preferring to turn the company around himself instead of admitting defeat after less than a year at the helm. After all, many decisions in business are based on ego and not sound business judgement. On the other hand, there would appear to be little reason to sell the company, absent a significant premium to the severely discounted current price. If there are no more surprises, there is a good possibility that BMY will remain independent; one more bombshell, however, and the vultures won’t be circling, they will be dining.

BMY Is Not Alone

Unfortunately, Bristol-Myers has some good company with regard to problems. In late March, Watson Pharmaceuticals (NYSE: WPI) announced that the FDA rejected the company’s Oxytrol skin patch for overactive bladders, but requested additional information on the product. Because of the delay, WPI revised the company’s financial outlook for 2002, lowering revenue estimates $30 million to $50 million for the year. Sometimes there is a silver lining, and because of the delay, significant launch expenses will also be postponed, resulting in an increase in earnings per share this year of $0.05 to $0.10.

In a profit warning similar to BMY’s, Genzyme Corp. (NASDAQ: GENZ) announced that it will reduce wholesale inventories of its flagship drug, Renagel, which is used in kidney dialysis. The inventory levels will be lowered from 12 weeks to six weeks, resulting in a one-third drop in first quarter earnings per share estimates. Sales of Renagel are expected to approach $280 million in 2002, after more than tripling in 2001. Although sales of the drug will not be impacted by the inventory reductions, investors took GENZ’s share price down 10% on the news.

Finally, ViroPharma (NASDAQ: VPHM), a development-stage pharmaceutical company focusing on new antiviral medicines, disclosed that an FDA advisory panel recommended against approval of the company’s new treatment for the common cold. While the panel found that the drug, Picovir, did reduce the length of a cold by one day, it had some serious side effects. VPHM’s share price plunged by 59% on the news, and then dropped further to a 52-week low of $3.56 per share, compared to a high a year ago of $41.00 per share (ouch).

The shareholder lawsuits have already been filed, but management may have a big financial headache looming. Aventis SA (NYSE: AVE) paid the company $25 million for marketing rights to Picovir, but $20 million of it may have to be refunded if certain milestones are not reached. FDA approval certainly is an important milestone. One executive at ViroPharma said, "This drug is not dead." Perhaps, but it may be awhile before it leaves the ICU. The company has no other drugs in late stage development.

Read the past headlines.