Bristol-Myers Agrees To Expensive Buyout Of Amylin: Stay Away

Jul. 2.12 | About: Bristol-Myers Squibb (BMY)

Last week, Bristol-Myers Squibb (NYSE:BMY) announced an additional $3B buyback program (see article here on avoiding stock) that signaled to investors to be cautious. While the amount sounded significant, the details suggested the buyback wouldn't amount to much more than 1.5% of the outstanding stock each year.

Now after the close on Friday, Bristol-Myers announced the agreement to purchase Amylin Pharmaceuticals (AMLN) along with AstraZeneca (NYSE:AZN) for $5.3B. This deal surely suggests that the company won't buyback as much stock as expected at least in the near term.

The timing of the two announcements has to be in question. Why increase a buyback with the stock hitting a ten year high? Not to mention right before announcing a cash intensive acquisition that will not only strain any cash that could be used for a buyback, but also that is dilutive making the stock less attractive. Investors buying last week have to feel duped.

Deal Details

Bristol-Myers will acquire Amylin for $31 per share in cash for an aggregate purchase price of approximately $5.3B. This amounts to a 10% premium from the close on Friday, but the price is over 150% from the start of 2012. The total value of the transaction will hit $7B when including Amylin's net debt and a small contractual payment obligation to Eli Lilly & Company (NYSE:LLY).

In a interesting twist, Bristol-Myers's also announced that following completion of the deal with Amylin it would enter into collaboration agreements, based on the framework of the existing diabetes alliance, with AstraZeneca. AstraZeneca will make a payment of $3.4B in cash and share the profits and losses equally.

Drugs

Basically due to the failed drug called dapagliflozin, the collaboration between Bristol-Myers and AstraZeneca has now spent $5.3B to replace it. Maybe that isn't 100% accurate though this deal might have not been done without it.

The deal does provide access to a very promising diabetes franchise and the world has a diabetic epidemic only getting worse. The main two drugs are Byetta and Bydureon that generate the majority of the revenue currently.

Bydureon just received FDA approval in January and is presumably the main reason for the deal. The drug only requires an injection once a week greatly improving over normal Type 2 diabetes drugs that require twice daily injections such as Byetta

Financials

Bristol-Myers will finance the deal from existing cash resources and credit facilities suggesting that any major use of that announced $3B buyback will be delayed to out years.

Possibly the most important news to investors willing to pay 10 year highs for the stock on Friday is that the deal will be dilutive by $.03 for the first two years. Long term though meaningful accretion is expected later in the decade.

While dilutive in the start, the company needed such a deal to help with slumping revenues that will drop from $21.2B in 2011 to $16.7B in 2013.

Conclusion

While the deal is much more expensive than even Bristol-Myers hoped for back with the original $22 offer back in February, it probably needed it to shore up the future. The company has the cash generation ability to pay for this deal with cash on hand and future cash flow.

While this deal might ultimately be good for the company, it likely could signal a top for the stock. A deal that is net dilutive through at least 2014 won't help a stock trading at rich levels already. Throw on integration risk and it doesn't appear like a stock worth holding until future positive quarters come about in 2013 or 2014.

For investors though, the timing couldn't have been worse. This has to cap gains for a while and absolutely shots down all the excitement from the buyback announcement. One that has to be questioned considering the pending news. Maybe management was just posturing with Amylin by suggesting it would walk away from the deal and buyback stock instead. Either way, shareholders lose out at least for now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Please consult your financial advisor before making any investment decisions.