Numerous possibilities of acquisitions and partnerships are flooding the pharmaceutical sector. Bristol-Myers Squibb (BMY) has officially acquired Amylin Pharmaceuticals (AMLN), while also preparing a side partnership with AstraZeneca (AZN) following the completion of the Amylin deal. This may bring down Bristol-Myers Squibb's gross profits in the short-term, but it remains a good investment for the long-term portfolio. Furthermore, AstraZeneca has decided to carry on with its alliance with Merck (MRK). I will show how this deal makes Merck an attractive buy, and how it will help add to the company's already strong numbers.
I believe Bristol-Myers Squibb, with its stock currently sitting about four dollars below its 52-week high of $36.34, is definitely a good stock to invest in. Not only does Bristol-Myers offer a great dividend yield of 4.3% for an annual dividend of about $1.36, but also its acquisition of Amylin Pharmaceuticals is in a great position to boost its business. The acquisition of Amylin will cost Bristol-Myers $31 per share, plus a cost of $1.7 billion that will go to Eli Lilly (LLY) for the completion of a contractual obligation. The total cost of the acquisition will be near $7 billion, and has been unanimously approved by both the Bristol-Myers Squibb and Amylin board of directors.
I expect this deal to be very profitable for Bristol-Myers since it will successfully expand the company's portfolio of diabetes treatments by acquiring Amylin's Byetta and Bydureon drugs. Not only is it acquiring these drugs, but Bristol-Myers Squibb is also working on a follow-on deal with AstraZeneca that will allow the companies to jointly develop and work on Amylin's products, including these diabetes treatments. This deal with AstraZeneca expands an existing partnership within the two pharmaceuticals' diabetes segments. This market holds a huge opportunity, as many people are afflicted with diabetes, which is often attributed to obesity. By increasing this partnership, I expect each of these companies to benefit in the form of growing revenues and profitability, from the improvements they make in diabetes treatments. I also think these deals will be good for Bristol-Myers Squibb, because they have taken precautionary steps by equally sharing the gains and losses of the Amylin acquisition with AstraZeneca. Overall, these deals made by Bristol-Myers should increase the return on investment for its shareholders, and also for shareholders of AstraZeneca.
Bristol-Myers Squibb announced another quarter of stable revenue in March, sitting near the $5.5 billion mark, up from about $5 billion from last year. Its profit margins are slowly climbing upward, toward 25%. Analysts are predicting revenue will go down quite a bit over the upcoming quarters, but that may be considering the huge chunk of cash it's giving to Eli Lilly as well as the buyout.
AstraZeneca's quarterly revenue has not been quite as stable, as it slipped from the $8.5 billion mark it hit in the final quarter of 2011. With gross profits slipping, and analysts calling for even lower revenue for the remaining quarters of 2011, I can't back AstraZeneca until it can prove its partnership to be more profitable.
But AstraZeneca is going to have another chance. In a different case of keeping a profitable partnership alive, an agreement has been made between AstraZeneca and Merck to continue a drug agreement through 2014. In a deal that was originally intended to end this coming September, Merck will continue to receive the benefits fixed with the sales and profits of AstraZeneca's acid reflux medicines Nexium and Prilosec. AstraZeneca had the option of buying Merck's interest in the partnership when the deal was coming to a close, but decided to extend the partnership until 2014, when it will once again have the option to buy Merck's portion.
Merck should definitely benefit from this extended partnership, as it is predicted to add nearly $200 million to Merck's revenue in 2012, and another 3 to 5 cents in earnings per share. The increase in revenue is great for Merck, as it helps the company maintain a good profitability, and the shareholders will directly feel the expected rise in earnings per share - this could lead to more future investors. Furthermore, when AstraZeneca does finally buy Merck's portion of the partnership, Merck will be awarded nearly $400 million due to the amended contract. I believe Merck is a good investment opportunity due to its already strong year and analyst predictions for further growth.
Merck is a strong buy right now, especially with the impending boost to its revenue, which would keep its gross profit above $9 billion. With profit margins climbing higher and an operating margin higher than its been since the beginning of 2011, Merck looks solid for the rest of the year. As for Bristol-Myers Squibb, it may take a dip in revenue from its acquisition but it's setting itself up nicely for the future. The company has reported stable numbers for a string of previous quarters, though nothing dynamic. This acquisition may give it a chance to really reward investors, though that's down the road. Bristol-Myers Squibb is a hold or wait for now, but keep an eye out for that right time to buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.