Expert Financial Analysis and Reporting

Investment Opinion

I prefer growth through internal product development over growth through acquisition. It is the product pipeline that drives my buy recommendation on Bristol-Myers Squibb (BMY). The acquisition of Amylin (AMLN) has some tactical appeal as it strengthens BMY’s position in the diabetes market, is only modestly dilutive in the near term and could be quite accretive in the years beyond 2014. I see it as a modest positive.

The Amylin Acquisition

Bristol-Myers Squibb has announced that it intends to acquire Amylin for $31 per share ($5.3 billion) and to assume a $1.7 billion net debt and contractual payment to Eli Lilly (LLY) ; the total cost of the transaction amounts to $7.0 billion. The existing diabetes relationship with Astra-Zeneca (AZN) will be expanded to include Amylin’s diabetes portfolio. Astra Zeneca will pay BMY $3.4 billion and essentially the profits from Amylin will be equally shared between the two companies. In its press release BMY said that the acquisition is expected to be dilutive to its EPS by $0.03 per share in 2012 and 2013 by $0.03, modestly accretive in 2014 and meaningfully accretive in the out years beyond 2014.

Amylin’s most important currently marketed product is its injectable GLP-1 product Byetta (exenatide). Amylin and its previous partner Eli Lilly have struggled with Byetta in the market place due to: (1) primary care physicians have preferred oral GLP-1 analogs such as Januvia, (2) competition from Nova’s (NVO) directly competitive injectable Victoza, (3) reimbursement issues and (4) the pancreatitis side effect issue. Byetta has been experiencing declining sales: in 2011, 2010 and 2009 sales were $518 million, $559 million and $667 million respectively. The other marketed product Symlin is used as an adjunct to insulin administered at mealtime. It had sales of $104 million in 2011 and is showing modest growth of 5% to 10% per year.

The driving force of the acquisition is Bydureon, a once a day sustained release version of exenatide that is the first marketed once a week injectable GLP-1 analog. It was approved in the US in January 2012 and in Europe in June of 2011. It is just going through its intial stocking in the US following approval and recorded sales of $7 million in 1Q, 2012.The convenient once a week dosing combined with important clinical attributes such as weight loss, lack of significant hypoglycemia, and potential beta cell preservation make for an attractive product profile. The diabetes market is huge and supports several billion dollar blockbuster drugs. I think that BMY and AZN feel that Bydureon can also become a billion blockbuster. There are a number of competitive once a week products in development, but the first mover advantage of Bydureon should make it a dominant product in its market segment.

Disclosure: The author of this article owned shares of Bristol-Myers Squibb at the time this note was written. This should be taken into account as it may introduce bias into the conclusions and interpretations that are made. In reading this note, you acknowledge that you have not used it as the sole basis of your decision making and that all investment decisions are based on your own analysis. An investment in Bristol-Myers Squibb carries substantial risk and investors could potentially lose much of their investment. The reader acknowledges that he/she has carefully read the Investment Approach, Terms/Conditions and Disclosures sections in the About Us section of the website. The reader acknowledges that he/she will not hold SmithOnStocks accountable for any investment loss that may be incurred if a decision is made to invest in Bristol-Myers Squibb.