The Zacks Analyst Blog Highlights: WellPoint, AMERIGROUP, Bristol-Myers Squibb, Amylin Pharmaceuticals and Eli Lilly

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Jul 12, 2012, 09:30 ET

CHICAGO, July 12, 2012 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include WellPoint Inc. (NYSE:WLP), AMERIGROUP Corporation (NYSE:AGP), Bristol-Myers Squibb Company (NYSE:BMY), Amylin Pharmaceuticals, Inc. (Nasdaq:AMLN), and Eli Lilly & Company (NYSE:LLY).

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Here are highlights from Wednesday's Analyst Blog:

WellPoint Placed Under Review

Subsequent to the announcement of a definitive deal between WellPoint Inc. (NYSE:WLP) and AMERIGROUP Corporation (NYSE:AGP), A.M. Best Co. has placed the financial strength ratings (FSR), issuer credit ratings (ICR) and debt ratings of WellPoint under review, with a negative outlook.

WellPoint will acquire Amerigroup in a$4.9 billion deal that is expected to be consummated in the first quarter of 2013, pending approvals.

Pursuant to the deal, WellPoint will also acquire senior debt worth $475 million of Amerigroup. Moreover, the company is expected to fund the purchase with cash, commercial papers and issuance of new debts.

The rating agency expressed its concerns regarding the company's financial position, as by assuming Amerigroup's debt, WellPoint's financial leverage will increase to 40%. Moreover, its goodwill and intangibles to equity are expected to exceed 100%. The rating agency anticipates these figures to surpass that of its peers, rendering WellPoint's position vulnerable and exposed to market risks.

A.M. Best also opines that the increase in the company's total debt will bring about a margin compression not only in the books of the parent company but lead to a contraction in the returns of WellPoint's subsidiaries. This might pressurize the capitalization levels of the company and hamper its dividend policy in the upcoming quarters. Also, they are apprehensive given the rising economic pressures and restrained state budgets for financing the managed Medicaid programs.

However, the rating agency is hopeful given the company's cash position that has improved 8.5% over the year-ago quarter. The company will also benefit from increased customer-base and also broaden its product offerings.

Another rating agency, Moody's Investor Services also reduced the senior debt rating of WellPoint to Baa2 from Baa1 with a stable outlook Reuters reported. The company has an interest coverage ratio of 11.45%, which is below the industry average of 23.42%. We believe that by increasing its debt obligations it will further increase the interest expense burden. Simultaneously, the ability to meet its commitments might be pressurized.

WellPoint currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. However, we maintain a long-term Neutral rating on its shares.

Bristol-Myers/Amylin Deal Progresses

Bristol-Myers Squibb Company (NYSE:BMY) recently announced the commencement of a cash tender offer to buy the entire outstanding common stock of Amylin Pharmaceuticals, Inc. (Nasdaq:AMLN). The duration of the tender offer is until August 7, 2012, (5:00 PM New York time). However, the offer, whose closure is subject to certain terms and conditions, can be extended.

We remind investors that Bristol-Myers had announced its decision to acquire Amylin for $31.00 per share or approximately $5.3 billion in cash on June 29, 2012. The offer price represented a premium of 10% on Amylin's closing price on that date.

At the time of announcing the deal, Bristol-Myers stated that it will assume Amylin's net debt and make a contractual payment to Amylin's former partner, Eli Lilly & Company (NYSE:LLY). The total value of the deal will extend to $7 billion in that case. We remind investors that in November 2011, Amylin and Eli Lilly had terminated their partnership for the worldwide development and commercialization of exenatide.

We believe that Bristol-Myers' impending takeover of Amylin will benefit both companies. We note that following the termination of Amylin's exenatide agreement with Eli Lilly in November 2011, Amylin has been considered to be a potential takeover candidate for companies with a focus on diabetes. Amylin's exenatide franchise consists of Byetta and Bydureon (once-weekly exenatide).

While Byetta sales have been lagging expectations, Bydureon, which was launched earlier this year in the US, could very well be a blockbuster. Moreover, the deal is financially rewarding for Amylin's stockholders, who have been advised by its board of directors to tender their shares. Amylin's shares shot up significantly from the time acquisition rumors started doing the rounds in March 2012.

The Amylin acquisition is a smart strategic move by Bristol-Myers since it already has a presence in the diabetes market (Onglyza and Kombiglyze). Moreover, the loss of exclusivity of its blockbuster blood-thinner Plavix on May 17, 2012 in the US is likely to result in substantial revenue losses for Bristol-Myers. The Amylin buy, through which Bristol-Myers aims to expand its presence in the lucrative diabetes market, is an effort to combat the substantial revenue losses due to Plavix's genericization in the US.

The announcement of the Amylin deal is the second major deal for Bristol-Myers this year. In February 2012, Bristol-Myers purchased Inhibitex, Inc., for $2.5 billion targeting the lucrative HCV market.

Neutral on Bristol-Myers, Amylin

We currently have a Neutral recommendation on Bristol-Myers. The stock carries a Zacks #3 Rank (Hold rating) in the short run. Our stance is similar on Amylin.

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