Are Mega-Mergers Back?

**Travis Hoium** (0:02)
It's Monday, stocks are up, and Motley Fool Hidden Gems Investing starts now.
Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium, joined today by Lou Whiteman and Rachel Warren. We got a couple of new guests and a new host today for the Monday show, but we will all three be back on Wednesday as well. One of the big news items over the weekend as we prepare for a very busy earnings week, Rachel, is that AstraZeneca and Bristol-Meyers Squibb have apparently at least talked about a merger. This would be another, we talked about mergers and acquisitions on the show recently, and that this administration may be a little bit more amicable to some of these deals. But this could be a huge deal in the pharmaceutical industry. So what do we need to know?

**Rachel Warren** (0:51)
Yeah, this is an interesting one. And a lot of analysts are perplexed by this news. And the reason for that is kind of multi-fold. But one is that AstraZeneca already has one of the strongest organic growth profiles in all of pharma. I mean, this is a company that's on track to hit $80 billion in annual sales by 2030 So if there's one company that doesn't necessarily need to go out and participate in a huge merger, it would be AstraZeneca. This would essentially force them to absorb Bristol-Meyers Squibb's looming patent cliff on some really key legacy assets. I mean, Bristol-Meyers is staring down some brutal generic competition for some of its top selling blockbusters, Eloquus being one of those well-known ones. And so I think there's a justifiable fear that taking on this merger, acquiring these drugs so close to their patent cliff that could really dilute AstraZeneca's oncology-driven growth business. But there's other things to consider too. There's some potential antitrust roadblocks that would come up. I mean, both AstraZeneca and Bristol-Meyers Squibb are powerhouses in the world of cancer care. And so you'd probably be seeing some red flags triggered for, you know, the USFTC, European regulators as well.
Another thing to note, maybe this is coming up for some reason because AstraZeneca is wanting to expand its exposure within the US. Bristol-Meyers drives about 69% of its revenue from the US compared to AstraZeneca's 42%.
Couple final notes I'll make here. We have seen throughout the history of pharmaceutical mega-mergers, they frequently lead to a destruction of shareholder value. There is this concern that if this deal actually went through, we could see some of the other big pharma companies feel that they need to engage in a wave of defensive mega-mergers. One other thing to note, if you're looking at this as a potential merger, a straight cash and debt buyout is essentially impossible. Neither company has the independent balance sheet firepower to pull it off. Bristol-Meyers has a deal capacity of around 32 billion, AstraZeneca around 37 billion. A lot of unanswered questions still.

**Travis Hoium** (3:00)
Lou, besides this potentially being the worst-named law firm in the world, what stuck out to you?

**Lou Whiteman** (3:06)
I'll say, I think the truism that mergers are terrible, that most mergers fail, is overstated. I am a big proponent of smart M&A. I don't think this is smart M&A. This feels like size for the sake of size. Yes, technically, Zeneca would get more exposure to the US, but like Rachel said, it's already more than half a sale, so I think that is weak T in terms of justification. The issue here is that I really think this deal might be not in the public good. There is so much product overlap here. The two companies have very similar therapeutic interests, as they say. They compete in areas like cancer, immunotherapy. They have pipelines that are chasing the same targets. Look, if this happens, inevitably some promising molecule that right now is being championed by a company will get shelved or it won't get as much attention because there are other molecules in the portfolio that are doing something similar that either management likes better or something like that.
I have a theory on why we're hearing about this, and we can get into that if you want, but I don't think this is going to...
All right, so look, there is a sense that the current administration is merger-friendly. I don't know if the reality has really shown that. I mean, I think it's a mixed case at best, but the perception matters. I think we are going to see a lot of ambitious swings at the fences in M&A in the next six or nine months because we are coming up on the deadline that they are going to have to start the process if they want to get this done ahead of the 28 election. Again, I'm not trying to make political commentary. I don't know if they will get done. But I do think that perception rules here. And the sense is, is that now is when the getting is good. If you want this administration to review your deal, you have to, you better, you got to step on.