A (4:13)

To Lou's point. Thinking about like jamming stuff into trucks, it, it certainly there, there is some sort of logic to what's going on here. But I feel like M and A activity in specifically in like consumer brands has been like that joke from the TV show Arrested Development. It became like an Internet meme. Or it's like, well, did it work out for them? And then they go, no. They delude themselves into thinking it will work, but you know, destroys value, but it could work for us. And every single time I've been running through the mental Rolodex of consumer goods deals over the past decade where you can say it was definitively a win for its investors. We mentioned Kraft Heinz. That was kind of a blunder. The AB InBev buying SAB Miller to unite the beer worlds, that was not so great. Currying Dr. Pepper merger hasn't turned out too well either. I mean the jury's still out on this recent one with Kimberly Clark and Kenview. But I can't think of a major consumer brands deal where we're like yep, really good stuff. Now consumer brands is historically a defensive sector. So the goal for some investors may be just, you know, collect a dividend, call it a day, it's fine. That's what a lot of investors want. But aside from that, this track record of value destruction at these major brands has to be like a red flag going into these sort of deals, don't you think?

C (5:33)

My theory here is it's not the deals, it's the companies. The value of brands have been diminished over the course of the last 20 years or so. I kind of blame the Internet, better flow of information, but who knows. But consumer goods to me today is a barbell. Most consumers will pay up for certain specific items, whether it's on holding shoes in any given moment or one just kind of splurge. But otherwise consumers are happy to buy generic. That's a nightmare for these mid tier brands. And that's most of what we're talking about with Kimberly Clark, Ken View, Kraft and Heinz. If that's the case, this is a bad move for McCormick and honestly I believe it enough that I personally try not to invest in brands in the middle. The bottom line is I don't think people still find value in buying say Tylenol versus Kroger brand Tylenol. And that's a problem for anyone selling these kind of wide distribution but a little bit extra because it's a brand name sort of sort of products.

B (6:34)

There have been a few decent examples of deals like this that have worked performance Food Group Getting back to the Cisco situation is one that looks really interesting. Ticker symbol is PFGC and between 2019 and 2023 it acquired three of its major competitors, including Cheney Brothers, which is a big Cisco competitor. And a major reason was to add new consumer segments, which is one of the reasons Cisco's acquiring Restaurant Warehouse the Stock is up 160% since the start of 2019. I'd call that a pretty solid example and a pretty close parallel. But I completely see your point. There is a lot that can go wrong with these types of acquisitions, especially when a company like Cisco is taking on $21 billion of new debt to make it happen.

A (7:19)

Yeah, and just for keeping score too, the deal between Unilever and McCormick is also going to be taking on a rather considerable portion of debt as well. And whatever happen happens with these. The question for the next couple of years is how quickly can we get these debt levels back down to kind of pay off and make these things worth their while? So we will be watching that. And then after the break, we're going to look at another M and A deal, but completely unrelated industry.

D (7:47)

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A (8:51)

Okay, so we're going to shift gears in the industries we're talking about. We're going to, but stick with M and A. Yesterday, Eli Lilly announced it was a acquiring Sentessa Pharmaceuticals. As the case with most biotech deals, it is contingent on Sentessa meeting some milestones. But assuming Sentessa hits them, the deal is worth approximately $7.8 billion. Now, I'm going to leave it to you, Matt, to kind of get into the details of what it does, but Sentessa is a clinical stage development company that's looking to treat narcolepsy. But why is Eli Lilly willing to fork over $7 billion for a company that doesn't really even have a commercial treatment yet?

B (9:32)

Yeah, that's a really good question. So as you mentioned, they're a clinical stage pharmaceutical. They develop treatments for rare diseases. It's not just narcolepsy. They have some other things in the pipeline, but that's their most promising candidate. They have a product that's in later stage trials. It just passed phase two. Trial data was very promising. And the main product, it looks like it's going to become the first to market treatment and the most effective for several forms of narcolepsy. And this is estimated to be a $5 billion market. It has several other treatments like I mentioned in earlier trials, but that drug is why Lilly's buying it. So the idea is that Lilly's capabilities can help it accelerate its time to market. And if it's successful in obtaining FDA approval, which is those milestones you mentioned, in order to get that full 7.8 billion, it would have to get FDA approval for all of these forms of narcolepsy. And if that happens, the treatment could be worth several times what Lilly's paying for it. It's a big if, but that's the goal.

C (10:31)

You ask why Lilly's paying up for a company that doesn't have a commercial product yet? This is just a big part of how R and D works in the industry. I mean, look, I've seen estimates, it's almost $2 billion that Big Pharma spends to get just one drug into production through clearance. If you can do kind of close closer to a sure thing for 7 or 8 billion, suddenly it doesn't look too bad. In Lilly's case too, this is a proactive move to make sure that this does not become a one hit wonder or one product company. Right now, about 60% of Lilly's revenue comes from GLP1s. And if anything, given the all of the trials they have for different treatments, trying to get other GLP treatments on label, that's likely to only go up from here. The nature of pharma is all good things come to an end. You're constantly racing to stay ahead of a patent expiration cliff, investing in a prominent therapy outside of GLP1s, that makes a lot of sense. Assuming their scientists think that there is a there here. And I'm going to leave it to their scientists and not me to say whether or not what they're buying really makes sense.

A (11:41)

Apparently they think so to that point too. I'm not going to claim to be somebody who can read clinical trial data very well and say whether it's good or bad in the direction they're going. But as somebody who has invested in the space from time to time, there are some hard numbers that investors should think about when looking at clinical stage pharmaceutical companies. And it's something around 20 to 30% of drug candidates that start a phase 2 clinical trial end up actually getting all the way through trials and to FDA approval. So you want to think of it as almost like companies with lots of shots on goal in their development pipeline because you know, there's no foregone conclusion that any of these in particular ones are going to make it through. And as we mentioned, there are some kind of like contingencies built into the deal that says, hey, you know, you have to meet these milestones for us to actually pay out the number that we're saying. I want to shift gears a little bit because talking about health care in general, I want to get your guys thoughts, but this don't want to drift too far here. One thing it's hard to shake when looking at the industry right now is FDA approval. You know, the rules and processes for getting approvals look pretty different in this current administration than in prior ones. And I think we mentioned it on a prior show earlier this year. Moderna CEO Stephane Vance said that it is scaling back clinical trials for its MRNA vaccines because it would be, as his quote said, difficult to see return on investment. Now that was specifically tied to MRNA vaccines. And we know that the current administration's position on vaccines is very different than what we've had in the past. And I know that both of you have some ties to the healthcare industry through your families and stuff like that. But as you look at this space as investors, have the recent changes in FDA approvals maybe change the way you think about investing in clinical stage companies, at least in the time being?

B (13:33)

I generally avoid the pharmaceutical industry for the reasons that you mentioned because only 20 to 30% of the drugs that pass phase 2 trials actually come to market. So for me it hasn't really changed the way I invest personally, but it's definitely something that health care investors should take into account.

C (13:51)

Yeah, so I am due to family for most of my career I've been restricted by conflict of interest. I can't. So that's an easy answer for me. But I will say this. These are long term projects. It takes upwards of a decade to get some drugs through clearance. I don't think these companies have to worry about any one regime because usually things have changed over the course of it. So I don't think, I mean, I think it's something for investors to be aware of, but I wouldn't lean into political wins, changes kind of coming from the agency with, you know, cycle to cycle. I think that, you know, if, if the science is good, there's a ways to get it done. And so you focus on trying to figure out the science.

A (14:36)

After the break, we're going to dip into the mailbag.

E (14:38)

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A (15:37)

Claude AI Fool Quick reminder, we want to make you part of the conversation, so if you have a stock or investing question for Matt, Lou, myself or anyone else on the Motley Fool Money show, you can now email us@podcastol.com we'd love to have your Mailbag segments whenever possible. So send in your questions and just remember to keep them foolish. That email again is podcastsool.com podcastsool.com and I'm going to read this listener question that we got a little while ago. It comes from Vijay Kant. I apologize if I mispronounce any names. I guarantee it's going to happen whenever you do these Mailbag sections. His question was I want to get your perspective on the long term investment thesis of Whirlpool. The ticker is whr. I'm drawn to the generous dividend but also question the sustainability of the dividend given its high debt load on the balance sheet. I also wanted your opinion on the long term narrative of the company given the international competitive environment in the large appliance sector. Thanks for the comments. Cheers to Matt. I want to start with you Whirlpool. What is your take?

B (16:37)

My short answer is the market doesn't seem too convinced on the long term thesis for Whirlpool either. The stock is down more than 50% from its high, it's still a profitable business. IT has a 6.9% dividend yield as we're recording this, that's well covered by its earnings. And it trades for about 9.3 times trailing 12 month earnings and less than 9 times forward earnings. It has about $6.5 billion of debt. I don't view that as an unreasonable debt load and especially because it's steadily declined for the past three years now. Management has made some questionable decisions recently. I will say that they did a dilutive capital raise about a month ago. It caused the stock to drop 15%. That was a good portion of that decline I mentioned. It's a solid business, a nice dividend stock to own, but it's not one to buy and forget.

C (17:24)

I think I'm with the market on this one. The bull case is a recovering housing market plus continued tariffs boost sales. I think we're quite early in the recovery of housing and I'm not sure what to think on tariffs. Dividend does look okay for now, but remember they already cut it in half last year so they are willing to make the hard decisions and they did just raise capital in February. That makes things look better. But that speaks to a business that is not firing all cylinders. There's probably a trade to be done here, guys, because Matt's right. The business isn't going away and there is probably, you know, a bottom to bounce off of, especially with actives involved. But for me, I don't see this as an attractive long term investment. Too many the deck is stacked against them.

A (18:10)

As a company that we can say is sensitive to the economic headwinds or tailwinds of the housing industry, whether that be new construction or refurbishment or anything like that. It's going to take a while for something like Whirlpool to really turn around. All you have to do is look at, you know, mortgage originations or refinancing originations to see that the housing market is in a very, very slow space. And as long as that is kind of crawling along, it's hard to see Whirlpool making a really strong recovery. So I think we're all kind of in consensus here. There's probably a long term narrative somewhere. But with the headwinds that the company is facing, maybe just sit on the sidelines for a while. As always, people on the program may have interested in in the stocks they talk about and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks for producer Dan Boyd and the rest of the Motley fool team for Matt Lu and myself, thanks for listening and we'll chat again soon.