CEO Gaffe of the Week: Bristol-Myers Squibb
Last week I introduced a new weekly series, the "CEO Gaffe of the Week." Having come across more than handful of questionable executive decisions last year when compiling my list of the Worst CEOs of 2011, I thought it could be a learning experience for all if I pointed out potential gaffes when they occur. Trusting your investments begins with the leadership at the top - and with leaders like these, sometimes you don't need enemies!
This week's CEO will likely be an unpopular choice, but I have a pretty compelling case why he deserves the top honors. So Bristol-Myers Squibb (NYS: BMY) CEO Lamberto Andreotti ... come on down!
The dunce cap
Imagine going to your local $1 store and walking up to the register with an item that has a $20 price tag on it. That's exactly what Bristol-Myers did this week when it agreed to purchase Inhibitex (NAS: INHX) on Monday for $2.5 billion, a 163% premium over its previous closing price and a clean 58% higher than Inhibitex's all-time intraday high, which was hit on Dec. 1.
If these figures sound at all familiar, they should. In November Gilead Sciences (NAS: GILD) made an eye-popping and preposterous $11 billion offer to buy Pharmasset (NAS: VRUS) in order to get ahold of PSI-7977, Pharmasset's oral hepatitis-C treatment that doesn't require interferon injections. This purchase placed a huge premium on Pharmasset's already inflated value and represented a 59% premium to Pharmasset's previous all-time high. The real head-scratcher of the Pharmasset purchase was the gamble Gilead was willing to take, considering that PSI-7977 isn't even out of phase two clinical trials yet.
Not to be trumped, however, was Mr. Andreotti and his apparent need to make it rain money in the biotech sector for fear of missing out on all the exciting new hep-C treatments. If you think $11 billion was a gambler's bet on a phase-two experimental treatment, then I'm curious how you'd feel knowing that Bristol just ponied up $2.5 billion for INX-189, a hep-C drug that's only cleared phase one clinical trials. The best part is that you don't have to take my word for it. Here's a short excerpt from Inhibitex's CEO Russell Plumb: "This transaction puts INX-189 and the Company's other infectious disease assets in the hands of an organization that can more optimally develop them ... "
My interpretation, in short: "I'm thrilled someone actually bought us because we certainly didn't have enough money to make this work."
To the corner, Mr. Andreotti
Hidden deep within the buyout news from Bristol-Myers is the fact that this acquisition will be dilutive to earnings through 2016. I'm sure that's exactly what shareholders wanted to hear as the company is facing patent expirations on two of its three best-selling drugs, Plavix and Avapro. Its deal to market Abilify is also up, all of this in 2012. Plavix accounted for more than a third of Bristol's sales in 2010 and is the second-best-selling drug in the world. Avapro added on another $1.2 billion in sales. These three drugs accounted for half of Bristol's third-quarter sales and show just much of Bristol's revenue stream could be at risk in the near future.
So again I ask: Was purchasing Inhibitex for $2.5 billion in cash with a drug approval far from certain -- and still many years off even then -- a smart move? I'd have to say "no." With 2012 looking like doomsday for many pharmaceutical companies facing patent expirations, Bristol's purchase of Inhibitex may wind up being the bonehead move of the year once the euphoria from the sector fades away.
Do you have a CEO you'd like to nominate for this dubious weekly honor? Shoot me an email and a one- or two-sentence description of why your choice deserves next week's nomination and you just may wind up seeing your nominee in the spotlight.
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At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He is shameless when it comes to poking fun at dubious CEO antics. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. Motley Fool newsletter services have recommended buying shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never wears a dunce cap.
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