Bristol-Myers Squibb (NYSE: BMY) shocked everybody when it announced its $74 billion acquisition of Celgene (NASDAQ: CELG) earlier this year. Not everyone was happy, with the merger drawing the ire of some of the biggest institutional investors. Is this deal as bad as they fear?
A bit of background
Bristol-Myers' most important drug is the megablockbuster immuno-oncology drug Opdivo. But Opdivo faces stiff competition from cancer drugs that work similarly, and that's increasing pressure on Bristol-Myers to bolster growth. Meanwhile, Celgene is facing patent expiration on its best-selling drug, Revlimid, and it has suffered setbacks recently, raising questions about its future. Combining these companies could solve problems at both of them.
Opdivo inhibits PD-1, a protein that functions as an on/off switch on T-cells, a type of white blood cell responsible for destroying invading pathogens. Cancer cells can hijack this switch to avoid detection, so PD-1 inhibitors deactivate it, restoring immune system function.
It won Food and Drug Administration approval in 2014, but it's far from the only PD-1 drug available today. A handful of PD-1 inhibitors are on the market, including Opdivo's stiffest competitor, Keytruda from Merck (NYSE: MRK).
Keytruda and Opdivo have secured approvals in various cancer types, but only Keytruda has secured a regulatory green light as a monotherapy in first-line lung cancer, a multibillion-dollar indication. Opdivo's failure in that indication is a sore spot for Bristol-Myers investors because, unlike Merck -- which only enrolled patients expressing high levels of PD-1 in Keytruda's trial -- Bristol-Myers enrolled both low- and high-PD-1 patients, hoping for a big win. It proved to be a costly mistake.
Since Opdivo's failure, Keytruda's sales have grown more quickly. As a result, Keytruda's $7.2 billion in sales outpaced Opdivo's $6.7 billion for the first time in 2018, increasing pressure on Bristol-Myers to make a move.
The situation is arguably more dire at Celgene because it gets about two-thirds of its revenue from Revlimid, a multiple myeloma drug that loses patent protection in a few years. Authorized generics will begin chipping away at Revlimid's market share in 2022, putting nearly $10 billion in annual revenue for Celgene at risk.
To offset that threat, the company has a stable of promising therapies in its pipeline, but there's no guarantee those drugs will make it across the finish line. Historically, about 90% of clinical-stage drugs wind up in laboratory dustbins rather than on pharmacy shelves.
And therein lies the reasoning behind this merger. It diversifies Celgene's revenue away from Revlimid, while insulating it against possible pipeline failures. At the same time, it increases Bristol-Myers' pipeline, providing it with multiple chances to spark revenue growth if competition slows demand for Opdivo.
Details of the deal
If Bristol-Myers shareholders sign off on the deal, Celgene shareholders will pocket $50 per share and one share of Bristol-Myers Squibb stock.
They'll also receive a contingent value right (CVR) providing a one-time, $9-per-share bonus if three of Celgene's most promising drugs in development -- ozanimod, liso-cel, and bb2121 -- secure FDA approval by specified dates: Dec. 31, 2020, for ozanimod and liso-cel; and March 31, 2021, for bb2121.
Those timelines are achievable because each of these drugs has data already or is in late-stage trials that could support regulatory approvals. Nevertheless, there's uncertainty because ozanimod, a multiple sclerosis drug, had its initial application for FDA approval rejected last year for deficiencies more in keeping with an upstart than a biotech Goliath like Celgene, calling into question its ability to execute.
Not everyone agrees this is a smart deal
Many investors could be unhappy because this deal values Celgene below where it was trading between 2015 and 2018. But it's not Celgene investors who are balking. Instead, it's Bristol-Myers Squibb shareholders rallying for this merger to fall apart.
The biggest opponent is Boston-based Wellington, a money manager with $1 trillion in assets under management and a 7.7% stake in Bristol-Myers Squibb. In a statement, Wellington said it opposes the tie-up because:
- The transaction asks BMY shareholders to accept too much risk, and the terms offer BMY shares to CELG shareholders at a price well below implied asset value;
- Execution success could be more difficult to achieve than depicted by company management; and
- Alternative paths to create value for BMY shareholders could be more attractive.
Wellington's not alone. Bristol-Myers' fifth-largest shareholder, Dodge & Cox, isn't pleased, either, according to Reuters. Also, Starboard Value, an activist investor, plans to vote its 1 million shares against the merger when votes are tallied on April 12. Not only does Starboard Value believe the merger is "ill advised," it's advocating for Bristol-Myers Squibb to scuttle the deal and put itself up for sale instead. In a letter to Bristol-Myers' board and investors, it went as far as to suggest that the merger was "hastily construed' to potentially thwart advances from a suitor.
Will it matter?
Probably not. Wellington, Dodge & Cox, and Starboard Value only own about 10% of Bristol-Myers Squibb's shares, so this deal could still go through unless they secure more support. Bristol-Myers' management is nervous, though. To prevent more defectors, it's meeting with shareholders to convince them that buying Celgene makes sense.
Management outlined its argument in a statement released on March 6. It claims the combination will "enhance our leadership positions across our portfolio, including in oncology, immunology and inflammation and cardiovascular." It added, "We will also benefit from an expanded early and late-stage pipeline highlighted by six expected near-term product launches, including five from Celgene, representing more than $15 billion in total revenue potential."
Bristol-Myers also forecast $45 billion in free cash flow in the first three years post-merger, plus $2.5 billion in annual cost savings, and revenue and EPS growth "every year through 2025."
What could happen now
If more Bristol-Myers shareholders side with Wellington, then this merger could fall apart. If it does, then Celgene's shares could tumble and Bristol-Myers shares could rise on hopes it will wind up becoming an acquisition target.
Any dip in Celgene shares, however, could be short-lived. Bristol-Myers will have to pay Celgene a shareholder-friendly $2.2 billion breakup fee if it scuttles its acquisition. Plus, Celgene has a slate of market-moving news coming, including its refiling of ozanimod for approval and results from its liso-cel and bb2121 trials.
If the deal does go off without a hitch, then it wouldn't necessarily be bad news. Celgene's currently trading about 13% below the buyout price based on Bristol-Myers' current share price, and that doesn't include the potential $9 per share payout from the CVR. For this reason, a good argument can be made for owning Celgene regardless of how Bristol-Myers' investors vote in April.
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