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Carl Icahn Takes Aim at Bristol-Myers Squibb

By Todd Campbell and Kristine Harjes - Mar 1, 2017 at 7:06AM

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Carl Icahn's reportedly focusing his brand of investor activism on Bristol-Myers Squibb, but it's anyone's guess if he'll be able to convince the company to sell. Also, Celgene delivers a phase 3 win with blockbuster implications.

Bristol-Myers Squibb (BMY 1.64%) is reportedly in Carl Icahn's cross-hairs. The iconic billionaire investor is famous for making big bets in beaten up companies and then forcing management to unlock value for investors. Usually, that means a change in the C-suite, a boost in dividend payments, or an outright sale. In today's episode of the Motley Fool's Industry Focus: Healthcare, the team discusses what Icahn may have in mind for Bristol-Myers Squibb and if an outright sale of the company could be in the cards. 

Also, the team dives into Celgene Corp.'s (CELG) news that its late-stage multiple sclerosis drug met its primary endpoint. The positive trial results clear the way to a FDA filing later this year, but can this drug reshape patient treatment? 

A full transcript follows the video.

This podcast was recorded on Feb. 22, 2017.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Kristine Harjes, and it's Feb. 22. Calling into Fool HQ in Alexandria, Virginia, is the healthcare expert, Todd Campbell. How are you, Todd? What's new?

Todd Campbell: Hi, Kristine! How are you, today?

Harjes: I'm doing great. We have an exciting show today. The first half of it is about a company that we actually just talked about last week, which is Bristol-Myers Squibb. But this week, we have a totally different reason for talking about them. News dropped yesterday that billionaire activist investor Carl Icahn took a stake in the company.

Campbell: Yeah. We don't know how big a stake, that hasn't been announced yet. But usually, when he goes, he goes big.

Harjes: Yeah, it's presumably a sizable stake, because as an activist investor, he is joining on to make a difference in this company. He's well-known for having shareholder value in mind, and acquiring big stakes of companies and pushing for change to maximize shareholder value, which you just can't do if your stake is a small amount.

Campbell: Right. I think a lot of our listeners are going to know the name Carl Icahn. I think most everybody knows that he's rich. 

Harjes: Yeah. He's worth, what, $20 billion?

Campbell: I was going to do a guessing game! You jumped in there a little too quick!

Harjes: [laughs] Sorry, Todd!

Campbell: No worries. Forbes, last time I checked, they had him listed as $16.6 billion. Obviously, that puts him in the top echelon, definitely the top 100, in terms of wealth. So, yeah, he's had a long career, he's been involved in activism for shareholders since the 1970s or 1980s, all the way back to when TWA was an airline. He has a rich history that includes some pretty interesting involvement in various healthcare stocks over the last 15 to 20 years, companies like ImClone and, more recently, Forest Laboratories, which he helped orchestrate a $25 billion sale of a few years back. So, he's not a newcomer to the space. Obviously, he likes to mix things up. So it wouldn't shock me if, when he starts talking, he starts saying things like "I want change at the top, I want us to be more shareholder-friendly."

Harjes: Right. Something else that I think a lot of people suspect with this stake that he's taken is, he wants to push them to go after an acquisition. There have been acquisition rumors surrounding Bristol for quite a while now, but I would say they're a lot more elevated now with Carl Icahn involved.

Campbell: Yeah. Last summer, it was valued at $125 billion. It was a big company. At that point, very few competitors could make a bid to buy. Since then, there's been a stumble, and we'll get to that in a second. Since then, the market cap has fallen to, I think, about $90 billion, something like that.

Harjes: Right, they're down about 30% from those summer 2016 highs.

Campbell: Right, and that's a pretty dramatic drop in the span of eight months or so. And, obviously, Icahn thinks that it's overdone. He thinks there could be some value to unlock there. Whether or not he can find somebody who is willing to put that much money, it's still a ton of money, it's not just $90 billion, you're going to have to pay a premium on top of that. It's going to be very tricky to see who is willing to pay what to get Bristol-Myers' intriguing product lineup. But how much is someone going to be willing to pay to get it?

Harjes: Yeah, and I definitely want to speculate a little bit on who we think could buy Bristol-Myers, but before we do, you alluded to a setback which was the reason they lost all that value. Do you want to explain that?

Campbell: Yeah. The one big reason why Bristol-Myers was such a success story leading up until last summer was that it has arguably the best-in-class -- up until that point -- immuno-oncology drug called Opdivo. Opdivo is an absolute monster in treating lung cancer. Peak sales estimates for Opdivo across all cancers have been running at $10 billion. I saw a couple of people with projections. $10 billion per year for one drug would just be amazing, astonishing.

Harjes: That is monstrous.

Campbell: Yeah. The idea was, we're going to get this on the market early for late-stage lung cancer -- so, after patients have seen their disease return after a few other therapies -- and then we're going to slowly but surely walk that forward so it gets used earlier and earlier. Unfortunately, last year -- and in my view, this is because of the trial design -- Opdivo's trial to expand its use early into treatment fell short. It failed. What was really disappointing about that is that Opdivo goes head-to-head in lung cancer against another drug that works very similarly to it called Keytruda, and Keytruda succeeded. So, everybody all of the sudden from last July up until now has been saying, "Oh my god, what's going to happen in lung cancer treatment now with Opdivo's market share? Is it all going to flow to Keytruda now? What's that going to mean for Opdivo's peak sales projection going forward?" So, that's why you've seen the share sell off, and this potential discount is what's gotten Icahn so excited.

Harjes: Right. We have, as you alluded to, talked about this Keytruda vs. Opdivo battle before. It's in an earlier episode. Folks listening, if you are just starting to follow along with the show, feel free to email us at, and I'll send you that earlier episode. But, people who have been listening for a while, hopefully you remember this story. As Todd mentioned, it was a lot to do with trial design, Opdivo vs. Keytruda.

Campbell: Right. One of the things I think Icahn is looking at is, he's looking at it and saying, "Yeah, we lost 30% of the market cap of this company, but really, is Opdivo not going to eventually get used earlier and earlier and earlier?" Bristol-Myers is conducting a ton of different studies on this drug, including a bunch of studies that could still make this a first-line treatment in lung cancer over time. You're still, even with the setback last year, talking about a drug that is racking up sales at a pace better than $1.3 billion in the fourth quarter. $1.3 billion in one quarter. So, this drug is no slouch, and I think that sales are going to continue to grow. If we assume they're going to continue to grow, then maybe you might find some company that wants to expand into cancer that would look at Bristol-Myers and say, "Yeah, it's expensive but ... "

I think it's trading at like 5 times sales. Kristine, you and I have talked a lot about different M&A deals in healthcare over the past few years, 5 times sales is not ridiculous, especially if you have the potential to have sales grow 10% or more annually over the course of the next five years or so.

Harjes: Right. Opdivo seems to me like it could be a cornerstone drug of an entire oncology franchise. If you look at Bristol-Myers' pipeline, they have 21 drugs and drug candidates in oncology, and they have this absolute monster in Opdivo. So, when you look at who could potentially take them over -- and I'll be honest, this is a name that, when I first heard it speculated, I was like, "No way." But when I thought about it, it made sense, and I'll explain. I think Gilead Sciences (GILD 0.80%) could potentially be looking at Bristol-Myers. I think that's still kind of a long shot to say. And like I said, when I first heard it, I was like, "No." I dismissed it. But looking at it a little bit more closely, that is a fairly typical Gilead move, as far as buying a molecule that is the cornerstone of potential franchise. And we know that Gilead is looking to get into oncology. We know that they've been holding off on making an acquisition because they said that things are too expensive -- well, here's your discounted buy.

One thing that does make me pause is the size of this deal. Gilead has made some really splashy acquisitions, but nothing that's this big, that's for sure. But if you look at their cash balance, they have a ton of cash on the books, they have around $30 billion?

Campbell: Yeah, I think it's around $32 billion. This would have to be a merger of equals. I think Gilead's market cap is around $90 billion as well.

Harjes: Yeah. So, if you consider Bristol -- and you mentioned this earlier -- trading for around $90 billion now, would probably get some sort of premium above that. So, let's say this is a $100 billion buyout for Gilead. If you take their cash value, subtract that, then you end up with them needing to borrow about $68 billion. So, I'm pretty sure that they could get that sort of loan at an interest rate of 3%. I know in 2016, they sold bonds that matured in 11 years at an interest rate of 2.95%. So, if you take 3% of the $68 billion, that they're borrowing, that's only $2 billion in interest a year. These two companies combined generated over $5 billion in free cash flow just last quarter. That annualizes to $20 billion a year. This seems doable to me.

Campbell: I think it depends. Gilead has its own host of struggles right now. New listeners, again: Go back a few episodes, we talked about some of the things that Gilead is dealing with right now. I think if the share price was stronger, then maybe you could make the argument that you could just do a share-plus-cash deal, and that might get it done. I'm not sure whether or not that would be easily done here. There's other people who could step up into the fray, as well. You have huge companies over in Europe that theoretically could come in. You have Roche, for example, which has a $200 billion market cap. You have Sanofi, which has just been trying to do a deal for over a year-and-a-half, they got outbid for Medivation by Pfizer, they got outbid by Johnson & Johnson for Actelion.

Harjes: Yeah, as you put it to me, they've been left at the altar quite a few times.

Campbell: Yeah absolutely. You could also argue that a company like Amgen, which has a bunch of money and a $127 billion market cap, and a focus on oncology already, might even be willing to step in to try and overcome some of the headwinds that they could be facing because of biologic competitors called biosimilars that are starting to roll out for their drugs. And then you have AbbVie, which has a market cap that's similar to Gilead's, and also has cash kicking around. They're facing patent expiration on their best-selling drug, Humira, in a couple of years, and they've already started to make acquisitions to boost their exposure to oncology. For example, they spent $21 billion a couple years ago to buy Pharmacyclics to get their hands on 50% of Imbruvica. So, you have a lot of different players, theoretically, that could make a deal. We didn't even talk about Pfizer. Pfizer, at one point, was willing to pay $160 billion to combine.

Harjes: For Allergan?

Campbell: Yeah. There's a lot of potential big deals that could be done. And yes, it would be a complex deal. And then, to throw in even one more wild card, because why not -- the CEO of Allergan is Brent Saunders, who, coincidentally, was the CEO of Forest Labs when Icahn sold it.

Harjes: Interesting.

Campbell: So, maybe he knocks on Brent's door and says, "Hey, I know you just got $30 billion from selling your generics unit to Teva. You interested in trying to work something out?" I don't know. I think that's probably a wild card, because that one already has a lot of debt on the books. But stranger things have happened.

Harjes: Yeah. Well, if it does happen, you can say you called it when. But it'll be really interesting to watch, and I'm definitely looking forward to hearing Icahn speak up about what his intentions are, and I hope that he does.

Campbell: Yeah, and maybe to rein in some optimism here -- I mean, don't go out and buy the stocks solely because you think it could be an acquisition candidate. Opdivo is a very exciting drug, it's an interesting drug, it's going to be a top seller. But Icahn isn't always successful. He gets involved in companies, and sometimes deals don't materialize. For example, he was actually an owner of Allergan not that long ago, but only held it for six or seven months. At one point, he held Biogen  shares for four years, trying to get them to do something, and it never really panned out.

Harjes: Todd, you keep this show responsible. Thank you. [laughs] So, before we move on to the second half of our show, I wanted to mention a new service that's being offered by The Motley Fool. It's called Total Income. Speaking of responsible, it's actually quite a responsible service. It's all about generating income from the portfolio that you have through dividend stocks and options, bonds, even real estate. It's a totally different type of product than the traditional ones that you guys might be used to. It's a little bit pricier than our flagship service, Stock Advisor. But we think it will easily pay for itself. If you're interested, check it out at It's a really interesting product, and maybe it'll be right for you.

Second half of the show today is also fairly newsy. We wanted to share with you guys a little bit of data that came out for a Celgene drug called Ozanimod.

Campbell: Yeah. There's never any shortage of data when you're interested in following biopharma, right Kristine?

Harjes: For sure. We've always got news to cover.

Campbell: Oh my gosh. There's so many different trials that are going on. We try not to get too wrapped up in the early stage trials. We like to try and keep focused on Phase II and Phase III trials, drugs that have the greatest likelihood of coming to fruition. 

Harjes: This is a big one. This is a potentially huge drug that also is in Phase III.

Campbell: Absolutely. One of the things that I think investors were scratching their heads about a few years ago was Celgene's willingness to pay $7 billion to buy Receptos to get their hands on a Phase II drug, a mid-stage drug, for multiple sclerosis. We just found out that that may have been money very well spent.

Harjes: You say "may" -- there's a little bit of a caveat, some hedging there, and that's because we don't actually have the specific details of the results yet, but we do know that in its Phase III SUNBEAM trial, this drug met its primary endpoint for reducing multiple sclerosis relapses better than Biogen's drug Avonex. And, importantly, it did so without new safety risks. So, at an upcoming conference, we'll get the specifics about this, but those two things, that it met the endpoints and did so safely, that's great, that's really good news.

Campbell: Yeah. This is probably one of the most highly anticipated Phase III data readouts of 2017. Because multiple sclerosis is a very big and important market. There are 400,000 people with MS in the U.S. There's another 2.5 million total worldwide. This is a $19 billion market. Historically, this market has been dominated by drugs made by Biogen, which controls about a third of the market share. One of the best-selling drugs, historically, was Avonex. That has shifted in the last few years, because drugs that have come out that are oral drugs, rather than infusion or injection drugs, are gaining much more adoption between doctors and patients. Who wouldn't rather take an oral drug, right?!

Harjes: Yeah, that makes sense.

Campbell: Yeah, absolutely. So you have about $10 billion of the $19 billion that is going toward oral drugs. And what makes Ozanimod so interesting -- this is the Phase III drug that Celgene bought from Receptos -- is it has a similar target to one of these best-selling oral drugs, but it could have best-in-class safety. And the drug that I'm talking about is Gilenya, which is made by Novartis, and had $3 billion in sales last year. Both of these drugs, Gilenya and Ozanimod, target the S1P pathway. But there's big differences between these two drugs. Gilenya is non-selective, where Ozanimod is selective, so it targets specific parts of that target. It's very differentiated in how it works within that S1P target. I think that is a huge potential advantage that could help it win away a lot of money from Gilenya, and potentially, a lot of money from these other oral drugs, including Tecfidera, which is made by Biogen and had $4 billion in sales, and even Aubagio, which is made by Sanofi, and had $1-point-something billion in sales last year, too. So, this is, potentially, a blockbuster drug for Celgene. And as we've known -- and Kristine, you and I have seen this time and time again with Celgene -- they know how to develop and commercialize drugs that treat major indications like this.

Harjes: Exactly. When you consider that 15% of Gilenya patients stop treatment due to cardiac and liver toxicity risks, and that Ozanimod isn't showing any of these effects, you can see why investors and even patients, of course, get pretty excited about this. When you look at Celgene's strengths, of course, they know how to commercialize and market a drug. They're also very good at expanding indications for approved drugs. So, you see Ozanimod, really good MS data. It's also being studied elsewhere, for example, in ulcerative colitis. In there, it could be the first approved medication.

Campbell: Yeah. Whenever I look at any kind of company or any kind of investment, different drugs, I try to figure out what could go wrong. That's why I oftentimes try and hedge things with words like "may." There is one more Phase III readout that investors are going to have to pay attention to on Ozanimod in MS. If that's good, if that's as good as this one, and the data that they release, when they release the full data that we get to dig into, if that's good, then we're going to see filing for FDA approval by the end of this year, and then, potentially, that could mean a launch at some point in 2018. At the same time, like you mentioned, we have some label expansion activity that's going on with different trials, both with ulcerative colitis and Crohn's disease. We should start getting readouts sometime in the next year or year and a half on those indications, as well. Overall, that has Celgene thinking this could be a $4 billion to $6 billion a year drug.

Harjes: Which is great. When you look at Celgene's targets for future growth, they're pretty ambitious. They're guiding for around $13 billion in revenue for 2017. But then, by 2020, they want to grow that to $21 billion.

Campbell: Right, and a lot of that is going to come from label expansions. And this certainly won't hurt. I think they're modeling $1 billion, potentially, in sales from Ozanimod in MS. I think that could be conservative if the prescribing label, upon approval, is better than Gilenya's, and theoretically, even better than Tecfidera. I mean, Tecfidera has been associated with some rare cases of a rare brain disease called PML. That's the one thing in MS that people really want -- a safer drug that can still deliver that efficacy, reducing the number of relapses. So if we can come in with the sweet spot, if Celgene has the sweet spot of delivering both the efficacy and the better safety profile, then I think they have a winner on their hands.

Harjes: Yes, and that would be great news for patients and investors. So, we'll definitely look forward to the full data released at whatever upcoming international scientific meeting they will release that data at, as well as the later part of the Phase III data coming out, hopefully, sometime soon.

Todd, thank you so much for your thoughts today. Folks listening, thank you for tuning in. As always, people on the program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. For Todd Campbell, I'm Kristine Harjes, thanks for listening and Fool on!

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