Over the weekend, Bristol-Myers Squibb (NYSE:BMY) announced that it would shell out a total of $7 billion to acquire Amylin Pharmaceuticals (NASDAQ:AMLN), which develops drugs for diabetes. Investors, however, weren’t excited by the transaction, which includes $5.3 billion in cash. In today’s trading, the stock price is essentially unchanged.
In fact, BMY’s performance has actually been so-so for the year. The return is only 2%.
So, can BMY get some momentum back? To decide, let’s take a look at the pros and cons:
Global Powerhouse. BMY’s drugs help to fight a myriad of diseases, such as cancer, heart disease, diabetes, HIV/AIDs and even psychiatric disorders. Over the past decade, the company has launched 13 new drugs.
Some of BMY’s major products include Plavix (a blood-thinner that protects against heart attacks and strokes), Erbitux (helps treat cancer cells) and Avapro/Avalide (a treatment for hypertension and diabetic nephropathy).
In 2011, the company generated net sales of $21.2 billion and profits of $3.7 billion.
Focus. Over the past few years, BMY has undergone a significant change in strategy. The company has unloaded non-pharmaceutical businesses, focused on acquisitions and licensing, and implemented systems to increase productivity. For example, BMY has sold off divisions like Medical Imaging, ConvaTec and Mead Johnson (NYSE:MJN).
By doing this, it has been able to generate more cash resources to pull off acquisitions.
Partnerships. These have been key for BMY’s success. Consider that Plavix and Avapro came from a venture with Sanofi-Aventis (NYSE:SNY).
Interestingly enough, BMY’s deal for Amylin will also involve a partnership. AstraZeneca has agreed to contribute $3.4 billion to develop treatments for diabetes.
Patent Expirations. This is a huge problem for BMY. Already in 2012, the company has lost its U.S. patent protection on Plavix and Avapro/Avalide. These drugs accounted for revenues of $7.1 billion and $952 million, respectively. And yes, generic competition has emerged.
In 2015, BMY will also lose patent protection on antidepressant Abilify, which generates $2.8 billion in revenues.
Competition. The market for diabetes drugs is massive, coming to $35 billion in 2011. According to EvaluatePharma, that’s expected to reach $58 billion by 2018. Yet BMY faces tremendous competition. Some of the main rivals include Novo Nordisk, Merck (NYSE:MRK) and Sanofi.
Cost Pressures. As world populations age — and the global economies slow down — the pressure is rising to find efficiencies with health care. As a result, there will likely be more government initiatives to lower prices of drugs.
No doubt, BMY was smart to buy Amylin. Even with the competition, the diabetes market is big enough for a variety of players.
Yet the deal won’t be enough to blunt the impact from the loss of patent protection on key drugs. That means, there’s still lots of uncertainty about how BMY will continue to find growth.
All in all, the cons outweigh the pros on the stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.