Bristol-Myers Squibb Co.'s $74 billion cash-and-stock acquisition of Celgene Corp. brings together two companies looking to compete in a crowded cancer market by joining forces.
The deal is valued at $95 billion including equity, assumed current liabilities and net of current assets, according to data from S&P Global Market Intelligence. For Bristol-Myers, the deal will be 12 times larger than any acquisition the New York pharmaceutical giant has made in the last decade, according to the data.
Under the terms of the deal, which is expected to close in the third quarter of 2019, CEO Giovanni Caforio will remain in his position and as chairman. Mark Alles is CEO of Celgene, a mantle he picked up from Bob Hugin, who ran unsuccessfully for the U.S. Senate in 2018. The companies did not disclose whether Alles will remain with the combined company following the transaction's close.
Troubled portfolios, combined
Celgene and Bristol-Myers enter the deal with their own shortcomings.
Bristol-Myers' cancer drug Opdivo faces stiff competition — namely from Merck & Co. Inc.'s Keytruda — and biosimilar entry in 2029, while its cardiovascular drug Eliquis is approaching a patent loss in 2027.
Meanwhile, Celgene's blood cancer treatment Revlimid, which represents a significant portion of the Summit, N.J.-based company's revenue, is expected to see generic competition in 2022. The company suffered a setback in early 2018 when the U.S. Food and Drug Administration rejected its multiple sclerosis treatment ozanimod outright.
But the Bristol-Myers and Celgene merger brings together nine products with more than $1 billion in annual sales and potential for growth. Caforio said on a Jan. 3 M&A call that the combined company would bank on six anticipated drug launches in the next year or two.
"We've always said that when we look at business development, it must be strategically aligned to our therapeutic areas of focus. It must bring compelling science, with the potential for transformational medicines. And importantly, it must create value for shareholders," Caforio said. "So when I look at this transaction, I believe it is clear we have met all of our criteria."
Caforio noted the current importance of Revlimid but said the upcoming product launches, as well as Celgene's early- and mid-stage product pipeline, will allow the combined company to be well-positioned for the short and long term.
Bristol-Myers and Celgene expect the six near-term products to rake in about $15 billion in annual revenues. These anticipated launches include liso-cel, a chimeric antigen receptor T cell therapy for diffuse large B cell lymphoma; and bb2121, another CAR-T cell therapy, for multiple myeloma.
Leerink analyst Geoffrey Porges said that if the deal is approved, Celgene investors should be pleased.
"This transaction dilutes investors' exposure to Celgene's patent cliff, relieves Celgene investors of the trials of the company's management decision-making and offers immediate upside that would otherwise take many months, or even years, to be realized," Porges said.
But Porges was less confident that Bristol-Myers investors would approve the deal, saying that Celgene investors would be wise to take advantage of the nearly 22% bump in Celgene stock as of 3:04 p.m. ET Jan. 3 to sell their shares in case the deal is rejected. Bristol-Myers' shares, meanwhile, had fallen more than 14.6% as of 3:04 p.m. ET Jan. 3.
"Bristol-Myers Squibb's offer to buy Celgene for $74 billion is a best case scenario that should be immediately utilized by Celgene shareholders, who we would recommend take advantage of the recent deal announcement upside before the deal closes," Porges said.
Ripe for M&A
The deal, which is the first major acquisition in the pharma space in 2019, could signal the beginning of a cascade of pharma mergers in 2019 stemming from 2017's tax reform and subsequent buybacks. M&A activity began picking up at the end of 2018 with GlaxoSmithKline PLC's $5.1 billion acquisition of Tesaro Inc., and Novartis AG's $2.1 billion purchase of Endocyte Inc. in December and October, respectively.
As a result, M&A deals such as the Bristol-Myers and Celgene deal are expected to ramp up as companies look to diversify their product lines with a bundle of cash in hand. This is especially true in the immuno-oncology sector, Credit Suisse analyst Vamil Divan predicted in October 2018.
"With 2018's tax-reform driven buybacks running their course, we anticipate M&A in the immuno-oncology sector to continue to ramp up as large-cap players look to boost their pipelines with the newest contenders," Divan said.
Before Bristol-Myers turned the tables, Celgene had been on a recent run of acquisitions in the cancer space. Celgene in 2018 bought up cancer specialists Juno Therapeutics Inc. and Impact Biomedicines Inc., deals in which the company spent $9 billion and $1.1 billion, respectively. In Celgene's latest earnings call, CFO Peter Kellogg said M&A would remain a top priority.
Bristol-Myers, meanwhile, has been growing its cancer pipeline in other ways, entering into a $1.85 billion collaboration with Nektar Therapeutics to develop immuno-oncology drugs in February 2018.
"I believe that this deal diversifies our current commercial franchises, brings strength to all of them," Caforio told analysts, responding to a question on the driver and timing of the acquisition. "And I think that, again, we are gaining the scale, the critical mass, the level of diversification needed in order to succeed in tomorrow's market ahead of many of those trends playing out."
In Barclays' 2019 industry outlook, released the same morning of the deal announcement, Celgene was named one of its favorites in the space. Despite Revlimid's uncertain future and the U.S. FDA's multiple sclerosis refusal, Celgene's five pipeline assets showed potential in the mid-to-long term, according to Barclay's analyst Geoffrey Meacham said.
"We think it will take some time before investors warm up to the potential positive implications from today's announcement," Meacham said. "However in our view, Bristol paid a fair price for Celgene and we think that Celgene is poised to undergo a significant re-rating in 2019."
Celgene had said it will push to launch five late-stage products to offset the potential revenue loss from the looming generic-drug competition for Revlimid, also known as lenalidomide. Celgene said Revlimid's $2.45 billion global sales contributed to an 18% year-over-year rise in its net product sales for the third quarter of 2018.
And the companies' pipelines are aligned, according to Bristol-Myers Chief Scientific Officer Thomas Lynch. He said Celgene's cell therapy platform will complement Bristol-Myers' immunotherapy approach. Thomas Daniel, former chairman of Celgene Research, noted that combining cell therapies with checkpoint inhibitors could open up new immunologic approaches to treating critical tumors.
Caforio said there is a significant opportunity for growth for Opdivo and blood clot drug Eliquis — both of which helped the drugmaker increase sales in the third quarter of 2018 — dismissing the threat of generic competition amid looming patent expirations and analysts' uncertainty on Opdivo's chance against Keytruda.