Replies to post #86966 on Biotech Values

[DewDiligence]

Addendum re BMY-MJN stock swap: In addition to the three bulleted reasons in #msg-44176162, a fourth albeit minor reason to not tender is that MJN effectively can’t be acquired by a third party during the six months following the BMY stock swap. If such a sale of MJN were consummated, the IRS could interpret the BMY-MJN stock swap as a sham transaction whose real purpose was to enable BMY to sell MJN without incurring a capital-gains tax. The consequence of such an interpretation would be the IRS’ revoking the tax-free status of the stock swap, which would be a very bad outcome for all parties (except, of course the IRS).

This additional point does not affect my decision on the stock swap to a material degree, but I thought it was worth mentioning for the sake of completeness.

[DewDiligence]

BMY extends the MJN tender expiration from Dec 14 to Dec 17
and increases the upper bound of the exchange ratio by roughly
5% (from 0.6027 shares to 0.6313 shares):

http://finance.yahoo.com/news/BristolMyers-Squibb-and-Mead-bw-826336452.html?x=0&.v=2

Clearly, BMY is delaying the expiration and sweetening the deal slightly because the response to the tender offer to date has been anemic. (Evidently, many shareholders concur with the three bulleted points in #msg-44176162.)

The new pricing period for setting the exchange ratio is Dec 11, 14, and 15, and the announcement of the final exchange ratio will come before the market open on Dec 16 (rather than Dec 11, as originally planned).

[DewDiligence]

BMY MJN: After doing a little more DD on MJN, I’ve decided not to participate in the stock swap unless BMY sweetens the terms a second time, which is unlikely, IMO. Even at the upper bound of the exchange-ratio collar, I would not be tempted to tender; in other words, I’d rather own 1 share of BMY than 0.63 shares of MJN. To recap, the reasons not to tender are:

• MJN has had a big run since its early-2009 IPO and the valuation is now stretched, IMO.

• MJN’s core product, infant formula, is vulnerable to private-label competition. MATK sells the key health-promoting ingredients (docahexaenoic acid and arachidonic acid) to any infant-formula vendor who wants them on a non-exclusive basis.

• MJN effectively can’t be acquired by a third party during the six months following the BMY stock swap because such a sale could cause the stock swap to lose its tax-free status.

• I think BMY is being “cleaned up” for an eventual sale to a Big Pharma such as SNY, GSK, or NVS. (The highly vocal assertions to the contrary by the CEO’s of these companies strike me as “protesting too much” in the Shakespearean sense.)