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Bristol-Myers to Acquire Leading Biotech Celgene for $74B

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Bristol-Myers Squibb Company (BMY - Free Report) announced that it will acquire Celgene Corporation (CELG - Free Report) in a cash and stock transaction with an equity value of approximately $74 billion. The transaction has been approved by both the boards.

While shares of Bristol-Myers lost 13.3% on news of what will be one of the biggest acquisitions in recent times, Celgene’s shares gained 20.7%.

Financial Terms of the Agreement

Per the terms, Celgene shareholders will receive 1.0 share of Bristol-Myers and $50.00 in cash for each share held. In addition, shareholders will also receive one tradeable Contingent Value Right (CVR) for each share of Celgene whereby they will be entitled to receive a payment for the achievement of future regulatory milestones. The board of directors of both the companies have approved the combination.

The total value received by Celgene’s shareholders will be $102.43 per Celgene share and one CVR based on the closing price of Bristol-Myers stock of $52.43 on Jan 2, 2019.  The tradeable CVR will entitle its holder to receive a one-time potential payment of $9.00 in cash upon FDA approval of three candidates — ozanimod (by Dec 31, 2020), liso-cel (JCAR017) (by Dec 31, 2020) and bb2121 (by Mar 31, 2021) — in each case for a specified indication. The total consideration represents an approximately 51% premium to Celgene shareholders based on the 30-day volume weighted average closing stock price of Celgene prior to signing.

Upon completion, shareholders of Bristol-Myers will own approximately 69% of the company, while Celgene shareholders are expected to own approximately 31%.

The acquisition is expected to be 40% accretive to the bottom line on a standalone basis in the first full year, following close of the transaction. The combined company is expected to generate more than $45 billion in cash flow over the first three full years post-closing. Bristol-Myers expects to realize cost synergies of approximately $2.5 billion by 2022. The acquisition is expected to close in the third quarter of 2019.

Strategic Aspect of the Transaction

The merger will result in a specialty biopharma company with a strong oncology portfolio and diverse pipeline in the therapeutic areas of inflammatory, immunologic and cardiovascular diseases.

The combined entity will have a market leading oncology portfolio in both solid tumors and hematologic malignancies led by Opdivo and Yervoy along with Revlimid and Pomalyst. In addition, it will also have a strong immunology and inflammation franchise led by Orencia and Otezla and a leading cardiovascular franchise led by Eliquis. The combined company will have nine drugs with more than $1 billion in annual sales.

Moreover, the company will also have a deep pipeline that includes six expected near-term product launches (two in immunology and inflammation, TYK2 and ozanimod, respectively, and four in hematology, luspatercept, liso-cel (JCAR017), bb2121 and fedratinib), with potential sales of $15 billion. The early-stage pipeline includes 50 high potential assets across solid tumors and hematologic malignancies, immunology and inflammation, cardiovascular disease and fibrotic disease, leveraging combined strengths in innovation.

Concurrently, Bristol-Myers announced its earnings guidance for 2019. The company expects earnings per share of $4.10-$4.20. The guidance excludes the impact of the Celgene acquisition. The company expects to execute an accelerated share repurchase program of approximately $5 billion.

Our Take

Bristol-Myers was in the lookout of an acquisition for quite some time now to bolster its portfolio. While its blockbuster immuno-oncology drug, Opdivo continues to perform well on the back of label expansions, pricing concerns and stiff competition in the immuno-oncology space have limited market share gains. In particular, Merck’s (MRK - Free Report) Keytruda and Roche’s (RHHBY - Free Report) Tecentriq pose stiff competition in the promising first-line non-small cell lung cancer (NSCLC) space. The FDA extension of the PDUFA date for the company’s application seeking approval of Opdivo+Yervoy as a treatment for first-line NSCLC with tumor mutational burden greater than 10 mutations/megabase was disappointing, given the market potential

The acquisition will enable Bristol-Myers to diversify its portfolio. The combined company will have a dominant position in the oncology, immunology and inflammation spaces. Celgene expects total revenues of $19-$20 billion by 2020 from its key growth driver, Revlimid.

While the acquisition looks positive prima facie, any acquisition of this magnitude comes with its own set of integration risks. While the prospects of Revlimid looks solid, the drug will lose patent protection shortly resulting in a dent in sales. Moreover, it might be expensive and will add considerable debt to Bristol-Myers’ balance sheet.

Bristol-Myers’ stock has decreased 25% in the past 12 months, against the industry’s growth of 4.4%.

On the other hand, Celgene gets a reprieve from the acquisition, having faced a series of pipeline setbacks in recent times. A late-stage study on its lead cancer drug, Revlimid, in combination with Rituxan failed. Consequently, shares took a hammering. A phase III trial, REVOLVE, (CD-002) on pipeline candidate GED-0301 in Crohn’s disease and the extension trial, SUSTAIN (CD-004) were discontinued, following a recommendation from the Data Monitoring Committee, which assessed overall benefit/risk during a recent interim futility analysis. The company also suffered a setback in February 2018, when it received Refusal to File letter from the FDA regarding its New Drug Application (“NDA”) for multiple sclerosis candidate, ozanimod.

The company then acquired Juno Therapeutics and added JCAR017 (lisocabtagene maraleucel; liso-cel) to its lymphoma pipeline. JCAR017 is a best-in-class CD19-directed CAR-T candidate, currently in a pivotal program for relapsed and/or refractory diffuse large B-cell lymphoma. However, two leading CAR T therapies, Kymriah and Yescarta are already in the market. Hence, JCAR017 will have a tough time grabbing market share. Hence, the acquisition bodes well from Celgene’s point of view.

Quite a few large-cap pharma companies are on the look-out for strategic acquisitions, given the stiff competition looming on their high-profile drugs from biosimilars and generics. Swiss pharma giant Novartis recently acquired Endocyte to strengthen its leadership in nuclear medicine and radioligand therapy for treating cancer.

Zacks Rank & Key Pick

Both Bristol-Myers and Celgene carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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