What Makes Biogen (BIIB) and Bristol-Myers Squibb (BMS Such Attractive Takeover Targets

Merger-and-acquisition activity is expected to pick up for the last half of this year. This is based largely on the loss of prominent patents in the biopharma industry, and what appears to be a build-up of cash reserves. With that in mind, George Budwell, writing for The Motley Fool, looks at two big potential targets.

1. Biogen

Cambridge, Mass.-based Biogen (BIIB) has been the source of buyout rumors since at least 2016, when it isn’t otherwise being urged by investors and analysts to buy something. The reason everybody’s encouraging it to buy something is because its dominant multiple sclerosis (MS) franchise is losing market share to Celgene (CELG)’s ozanimod and Roche (RHHBY)’s Ocrevus. On the other hand, the company is still dominant in HIV/AIDS and has a potential Alzheimer’s candidate, aducanum, while not blowing everyone away with its potential, nonetheless if approved in a couple years could bring in plenty of revenue—a fairly big "if" though.

Budwell cites two reasons for why Biogen might be a tasty target. First, with a market cap of $59.5 billion, it’s "in the sweet spot from a financial perspective. Several drugmakers could flat out pay cash for Biogen at its current valuation to tack on its roughly $12 billion revenue stream, and $3.74 billion in free cash flows."

Secondly, aducanumab could be a huge blockbuster. The problem there is it could be a huge failure, too, which is usually the case for Alzheimer’s drugs.

But the company’s recent approval of Spinraza for spinal muscular atrophy (SMA), although having a slow start, is expected to hit "megablockbuster status." 

2. Bristol-Myers Squibb

In April, there were rumors that Pfizer (PFE) might buy. Bristol-Myers Squibb (BMY). And Pfizer’s executives haven’t been shy about suggesting they’re still in the market for acquisitions. Of course, earlier speculation was that Gilead Sciences (GILD) might be interested in Bristol-Myers.

The key ingredient here is Bristol-Myers’ Opdivo, which is expected to rake in $4 billion in sales this year for its 11 cancer-fighting indications (and counting).

Budwell notes that, as far as anyone knows, Bristol-Myers has yet to receive a formal offer from anyone. "Presumably," he writes, "potential suitors are concerned about Opdivo’s ability to break into earlier lines of therapy for its most valuable indication—non-small cell lung cancer (NSCLC)—and to stave off competitors in later-line settings as well. Opdivo, after all, flamed out in a clinical trial as a monotherapy for NSCLC and its ongoing combination study with Bristol’s Yervoy is showing some worrisome signs as well."

Nonetheless, Bristol-Myers is a powerhouse in immuno-oncology, and Opdivo is likely to be the go-to drug for combination therapeutics in cancer. The company also has a deep immuno-oncology pipeline, including its anti-LAG3 and IDO-inhibitor drugs.

Budwell writes, "As an added bonus, Bristol also sports two additional legit franchise-level drugs. Specifically, Bristol and Pfizer’s blood-thinner, Eliquis, generated a noteworthy $3.3 billion in sales last year and became the world’s leading oral anti-coagulant globally for stroke prevention in patients with atrial fibrillation. And the drugmaker’s rheumatoid arthritis medication, Orencia, hauled in a stately $2.3 billion in 2016."

The downside to Bristol-Myers Squibb as a buyout target is the price, which would probably be over $120 billion. That thins the herd significantly, including making it an unlikely target for Gilead. Pfizer could, if it has the stomach for a big buy after getting shot down over AstraZeneca (AZN) and Allergan (AGN). But both those deals were tax inversions, and Bristol-Myers is a U.S. company, so the tax-inversion issue wouldn’t be a problem. Nor has the Trump administration shown many signs of blocking domestic mergers.

Budwell writes, "In regards to Biogen and Bristol, these two companies both offer modest near-term growth prospects, fairly clean balance sheets, and some intriguing clinical assets. As such, a buyout thesis certainly isn’t necessary in order to consider adding these top pharma names to your portfolio."