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Bristol-Myers' trial results, activist investors put drugmaker in M&A spotlight

Bristol-Myers Squibb Co. showing at the world's biggest cancer meeting has renewed speculation that the drugmaker could be a takeover target.

The company's experimental combination of Opdivo and Yervoy for non-small cell lung cancer failed to demonstrate a significant improvement in patient survival over Opdivo alone.

Although the presentation at the annual American Society of Clinical Oncology conference pushed Bristol-Myers stock down more than 5%, Jefferies analyst Jeffrey Holford had a tempered reaction, saying that approval is still likely because the combination showed improvement in another measure: survival without disease progression.

Holford also said there is a potential for a takeover if the combination therapy "fails to deliver." He cited Pfizer Inc., Johnson & Johnson, Sanofi or Novartis AG as possible acquirers — four of the world's 10 largest pharmaceutical companies by market capitalization. Large drugmakers are hoarding cash at record levels, and that money could be spent on acquisitions, according to a recent S&P Global Ratings report.

Bristol-Myers has few of the standard takeover defenses in place, Erik Lopez Sr., attorney for Jasso Lopez PLLC and author of the M&A Lawyer Blog, said in an interview.

Most notably, the company does not have a so-called poison pill defense, according to S&P Capital IQ data. A poison pill would give friendly Bristol-Myers shareholders the right to acquire additional shares below the market price if a third party obtains a certain percentage of the company's stock, Lopez said. Under the law in Delaware, where the company is incorporated, Bristol-Myers can quickly adopt a poison pill if it feels threatened, Lopez said.

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A hostile takeover of Bristol-Myers would be challenging due to its large size, the attorney said. To call a special meeting to alter the composition of the board outside of the annual meeting of shareholders, a hostile bidder would need to acquire 25% of Bristol-Myers' outstanding shares, an expensive proposition given its market capitalization of about $90 billion.

"It's funny, you see these large companies, they are very cavalier about their takeover defenses because they know there are very few counterparties doing something that they wouldn't like," he said.

Prior setbacks in developing lung cancer treatment and subsequent share price tumbles have already attracted activist investors to Bristol-Myers, said Fitch Ratings' director of corporate healthcare, Robert Kirby, in an interview. In February, Carl Icahn acquired a stake in the company, and JANA Partners LLC added three of its nominees to the company's board of directors, expanding its membership to 14 members.

As of March 31, 11 activist investors owned more than 7 million shares of Bristol-Myers, or a little more than 0.4% of the company, according to S&P Capital IQ data. JANA partners sold more than 3 million shares during the first quarter of the year, reducing its holding by more than 80% to about 700,000 shares.

"Carl Icahn and those like him generally will look to use their position as a stockholder, as a well-financed party, and as a board member to advocate publicly on behalf of their preferred strategic plan for the company, and as needed, threaten to commence a hostile proxy contest in order to change the composition of the board of directors to the extent he feels the board of directors is not responsive to his concerns or willing to pursue his preferred path," Lopez said.

No classified board

Changing the directors would be relatively simple because Bristol-Myers does not have a classified board, meaning that all of its members are up for re-election every year. Companies with classified boards generally have only a third of their board members up for re-election every year, Lopez said.

Following the appointment of JANA's nominees to the board, three directors did not run for re-election at the May 2017 annual meeting of shareholders, once again reducing the board to 11 members. Those who left include former company CEO Lamberto Andreotti and Thomas Lynch Jr., who was appointed chief scientific officer in March.

"The recent thinking among M&A practitioners is that it's much easier to listen to and cooperate with activists than to try to fight them," Lopez said.

A takeover is far from a forgone conclusion, according to Fitch Ratings' Kirby. Besides doing deals of its own to bulk up its pipeline, Bristol-Myers could also boost its share price enough to please investors through one-time dividends and cost-cutting, he said. Bristol-Myers has already undertaken a $2 billion accelerated share repurchase program.

Lung cancer market is key

Antitrust issues arising from product overlap are another barrier, he added. Pfizer in May received FDA approval for a drug similar to Opdivo, while Johnson & Johnson has competing medicines in the diabetes space. Such products may need to be divested as a condition of antitrust approval.

Bristol-Myers' rapidly developing immunotherapy portfolio makes it the most attractive strategic asset among large cap pharmaceutical companies, Leerink analyst Seamus Fernandez wrote in May. More disappointing trial results or poor sales of the still-unapproved combination therapy for lung cancer would lower the stock price further, possibly tempting potential acquirers who are eyeing the pipeline.

Bristol-Myers has not disclosed when it will file for FDA approval of the combination therapy, company spokesman Ken Dominiski said in an interview.