How could you make a Bristol-Myers takeover work without shredding a $5B R&D division?

Carl Icahn

When Carl Icahn bought into Allergan last May, the combative activist investor immediately put out a statement that put him squarely in the Brent Saunders fan club. Allergan $AGN CEO Saunders had made money for Icahn before, when the activist helped bring him into Forest Labs as he was pushing that company to make some big changes. And Icahn felt that he would continue to make money at Allergan.

The unwritten message: Icahn wasn’t setting up another Big Squeeze, pushing Allergan into an M&A deal Saunders wasn’t looking for.

But when Icahn stepped up for a bite of Bristol-Myers Squibb’s $BMY equity, according to a report in the Wall Street Journal, the immediate assumption was that he was angling for one of his classic investment gambits, preparing to push a stressed biopharma company toward an M&A deal.

And Saunders didn’t exactly try to douse that thought.

Brent Saunders, CEO Allergan

“Carl is a very smart, thoughtful investor. I have to believe that he looks at Bristol-Myers and the industry and he’s saying, ‘Great company, great pipeline and an industry that should potentially consolidate.’ So that’s a formula that Carl tends to like,” Saunders told Bloomberg. And he also told the news service that everybody is probably looking at Bristol-Myers now, even if it’s just for a few minutes of wistful thinking.

Bristol-Myers has had a steady drumbeat of bad news that has hammered away at its stock price and reputation as a leader in the checkpoint field. As expectations on Opdivo have shrunk against Merck’s bullish advances with Keytruda, Bristol’s market cap has suffered badly. So what would have been all but unthinkable a year ago is now the one thing that is on every big player’s mind.

What follows is a short list of big outfits that would have the cash to pull off a premium deal for a company with a market cap of $92 billion. And you’ll find Pfizer at the top of just about everyone’s list.

Pfizer CEO Ian Read is the only Big Pharma chief to show a real interest in a megamerger — though his play for AstraZeneca and Allergan was based on a tax inversion. Trump’s prospective tax reform plans, though, may persuade Read that the time is ripe to go after a company like Bristol-Myers. And while Pfizer paid a record $850 million to partner with Merck KGaA on a checkpoint, the pharma giant wouldn’t mind vaulting into a leadership role.

You can expect plenty of layoffs and turmoil if anything like that goes ahead. Pfizer spent close to $8 billion on R&D last year, compared to Bristol-Myers’ $5 billion. A tie-up would leave Pfizer looking to chop billions of dollars in research spending. But Bristol-Myers R&D has been lauded over the years, with a rep that’s much better than Pfizer’s. So who’s to say where the ax might fall.

Read is one of the few Big Pharma CEOs who believe that a megamerger can work, so long as you carve out all the duplications.

“If you believe you can reorganize your research into productive smaller units, there is a logic to consolidation of the industry by taking out duplicative expenses,” Read told reporters recently.

The prospect of any takeover would likely get Bristol-Myers’ best and brightest in the R&D operation polishing up resumes and hunting down job leads.

“You would have to think that the BMS scientists realized that they’ll be on the chopping block should this occur,” John LaMattina, the former R&D chief at Pfizer, tells me. “CVs are undoubtedly being updated. Chances are that the scientists are speculating more about a potential acquisition than new scientific publications.”

Novartis — another market leader in R&D — also has cash and investments it can convert to paying off a deal like that. It also goes for high efficiency, with no stone left unturned in search for synergy. And Gilead has routinely been listed as the Big Biotech in most need of a dramatic makeover. Gilead would be the one company most likely looking to keep much of the research group that Bristol has built. They all make the Bloomberg list.

Saunders may be thinking about a Bristol-Myers takeover, but coming up with that kind of cash after committing to a batch of bolt-ons would be no simple matter.

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Research Scientist - Immunology
Recursion Pharmaceuticals Salt Lake City, UT
Director of Operations
Atlas Venture Cambridge, MA

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