Nov. 16 (Bloomberg) -- Bristol-Myers Squibb Co. will split off its 83 percent stake in Mead Johnson Nutrition Co., the maker of Enfamil infant formula, to focus on biotechnology medicines. The company’s shares gained the most in eight months.

Bristol-Myers investors will receive $1.11 of Mead Johnson stock for each $1 tendered in Bristol-Myers shares, the New York-based drugmaker said. Mead Johnson has risen 89 percent in the nine months since the stock was first sold publicly, helped by speculation it may eventually be acquired.

About a third of Bristol-Myers’ drugs in development are biotechnology compounds, the company said. Chief Executive Officer James M. Cornelius has been selling assets to raise money for acquisitions and cutting jobs to lower costs by $2.5 billion by 2012, when the blood-thinner Plavix faces generic competition.

“Mead Johnson’s stock has been behaving like a rocket ship so the stars lined up,” Cornelius said in a conference call with analysts. “We are much more confident about the mid- and long-term.”

Cornelius said last month he was considering a sale or spinoff of Mead Johnson. The move came sooner than planned because of Mead Johnson’s rising stock price and Bristol-Myers’ expanded pipeline of experimental drugs, Cornelius said.

Bristol-Myers rose $1.12, or 4.8 percent, to $24.30 at 4 p.m. in New York Stock Exchange composite trading, the biggest one day gain since March 12. Glenview, Illinois-based Mead Johnson declined $2.04, or 4.5 percent, to $43.21, the biggest percentage decline since Feb. 23.

Drug-Development Focus

While many drugmakers have been diversifying into medical devices, over-the-counter pills or animal medicines, Bristol is taking the opposite approach. Cornelius said his aim is to make the company more “flexible and nimble” by narrowing its focus on drug development. In July, the drugmaker bought Medarex Inc. to double its pipeline of biotechnology drugs.

“Although this business composition is more in line with Bristol-Myers Squibb’s stated long-term strategy, it removes Bristol’s last source of earnings diversification,” said Catherine Arnold, an analyst at Credit Suisse, in a note to clients. “The split-off of the Mead Johnson Nutritionals business makes Bristol-Myers Squibb a more pure biopharma story.”

Bristol won’t get any proceeds from the cashless transaction, spokesman Brian Henry said. The deal will reduce the number of Bristol shares outstanding, increasing the amount of earnings per share in 2010, he said.

Potential Buyers

Analysts including Andy Smith of London-based ICAP Plc have said Mead Johnson may attract bids from food companies such as France’s Groupe Danone SA, the yogurt maker and bottler of Evian water. Danone has been bulking up in medical and infant nutrition and bought Royal Numico NV of the Netherlands, one of its fastest-growing units, two years ago.

“The spinoff makes an acquisition of Mead Johnson by another company much easier,” said Claudia Lenz, an analyst at Vontobel Bank in Zurich, who covers food companies including Danone and Nestle SA, which she also named as a possible bidder. Lenz said Mead Johnson may eventually sell for as much as $15 billion, compared to its current $9.2 billion market value.

For Danone, Mead Johnson “would be a very good complementary fit in terms of products as well as geography,” with strength in the U.S., Latin American and Asian baby-food markets, Lenz said. “Mead would be interesting for Nestle as well.”

The Financial Times’ Alphaville blog wrote in September that Danone was considering a bid. Danone subsequently denied the report. A Nestle spokesman declined to comment, and Danone wouldn’t immediately respond to e-mailed questions.

Nutritional Supplements

Along with formulas including Enfamil that generated 61 percent of the company’s 2008 revenue of $2.88 billion, Mead Johnson sells nutritional supplements for pregnant and nursing women and people with metabolism maladies.

Bristol-Myers owns 170 million shares of the nutrition business’s Class A and B stock, composing a 97.5 voting interest and an 83 percent economic interest, the drugmaker said. The offer expires at midnight in New York on Dec. 14, and is subject to some conditions, according to the statement. The transaction is expected to be tax-free, Bristol-Myers said.

In the deal, Bristol-Myers’ Mead Johnson Class B stock will be converted into Mead Johnson Class A stock.

Cash Flow Benefit

Bristol-Myers’ cash flow will also benefit from the deal because the company will retire 280 million of its own shares, on which it paid a $1.25 a share dividend for a total of $347 million. That gain will be offset by $100 million it will no longer receive from Mead Johnson’s dividend.

Last month, Bristol-Myers raised its earnings forecast after third-quarter profit rose 64 percent on lower costs and higher sales of Plavix and the mood stabilizer Abilify.

The Medarex acquisition, for about $2.4 billion, gave Bristol-Myers full ownership of the skin cancer drug ipilimumab, which it had been developing jointly with that company.

Ipilimumab, which targets metastatic melanoma, is in the final of three stages of testing typically required for U.S. Food and Drug Administration approval. The drug is also being studied in lung and prostate cancers. Additionally, Bristol- Myers gained rights to seven experimental antibodies owned by Medarex and stakes in three more drugs the company shares.

Cornelius told investors in July the drugmaker will continue to acquire products and companies, and while acquisitions of about $2 billion are “digestible,” Bristol- Myers “wouldn’t rule out” deals costing $4 billion to $6 billion.

Bristol-Myers also said it has postponed its Dec. 2 investor meeting until 2010 because it is limited in what it can say while the exchange offer is open.

To contact the reporter on this story: Meg Tirrell in New York at mtirrell@bloomberg.net; Shannon Pettypiece at spettypiece@bloomberg.net.

Last Updated: November 16, 2009 16:16 EST