On 3rd January 2019, Bristol-Myers Squibb announced that it was buying its rival Celgene for US$74bn in a stock and cash deal in one of the biggest deals announced in 2019 so far. If approved by shareholders and regulatory bodies, this would be one of the largest pharmaceutical mergers in history. However, the deal has faced hurdles recently, with Bristol’s 2nd largest shareholder Wellington Management and activist fund Starboard Value LP voicing objections.
The woes of Bristol-Myers Squibb
Bristol-Myers Squibb’s main source of future growth can be attributed to a single drug - Opdivo (a cancer drug), which contributed to almost 30% of the company’s overall revenues in 2018. However, the drug has recently faced hurdles after being rejected by the UK’s National Institute for Health and Care Excellence(NICE) for preventing melanoma recurrence which saw analysts cut its peak sales forecast. At the same time, Opdivo’s key competitor in the field of immuno-oncology (a type of cancer treatment research) Merck & Co’s Keytruda, has powered ahead following the approval of a first-line lung cancer treatment it developed.
Apart from the uncertainties surrounding Opdivo’s future, Bristol-Myers Squibb’s ongoing R&D efforts and drug trials have failed to develop substantial new products in the increasingly competitive pharmaceutical industry.
Rather than growing organically through R&D, a horizontal merger with Celgene would allow Bristol-Myers Squibb to gain access to Celgene’s blockbuster blood cancer drug, Revlimid, which alone generated over $9.5bn in sales in 2018. Perhaps the real strategic value of this deal lies in the promising drug pipeline of Celgene which has been estimated to reap in peak annual sales of $15.0bn. Coupled with the experimental cell therapy technology obtained through Celgene’s recent acquisition of Juno Therapeutics, the merger makes strategic sense as Bristol-Myers Squibb look to diversify its drug base and focus on future growth potential from a series of premium-priced new drugs early in their lifecycle.
Why is the deal being opposed?
The main concern from shareholders and the activist investor Starboard Value LP is that Bristol-Myers Squibb appears to be overpaying for Celgene. This has manifested in the markets as Celgene’s shares have consistently traded at only around $85 per share in March, a $16 spread compared to Bristol-Myers’ Squibb’s $101 per share offer. While markets were initially optimistic following the announcement of the acquisition, subsequent concerns raised by key stakeholders have resulted in growing uncertainty which has been reflected in a rising spread.
The biggest risk of this deal is the patent of Celgene’s Revlimid which expires in 2022. With Revlimid making up the bulk of Celgene’s revenue, with estimations as high as 60%, it is unclear how sales will be affected once the patent expires. While the promising drug pipelines of Celgene could result in a series of new drugs that can reap earnings of over $15bn, it is extremely risky to count on a series of experimental drugs to offset the significant loss of revenues caused by the expiring patent of Revlimid. Due to these uncertainties, some investors believe that Bristol-Myers Squibb should remain independent or seek a buyer instead.
Bristol Myers’ Squibb’s pitch to investors
An interview with the CEO of Bristol-Myers’ Squibb, Giovanni Caforio, has revealed that the merger with Celgene makes the most strategic sense as the combined entity has the potential to launch 6 oncology drugs in the first 24 months of the merger alone. Furthermore, there is a potential for the further launch of over 20 products throughout first two phases of clinical trials. With development of new drugs ongoing, Caforio trusts the company to generate value for shareholders immediately after the merger.
Besides the cash flows generated by new drugs, Celgene’s complementary strategy with Bristol-Myers Squibb of creating a network of alliances with biotechnology companies further allows the creation of a R&D organisation that balances internal innovation with an extremely promising network with biotech companies. All these potential synergies has resulted in Bristol-Myers’ Squibb forecasting an enormous cash flow of $45.0bn post merger which would allow the company to pay off its debts quickly.
Despite disapprovals from shareholders, analysts believe that the push by both Bristol-Myers Squibb and Celgene will likely see the deal through the finish line. Coupled with the fact that there is little ground for derailment due to regulatory, clinical or intellectual property reasons, the deal is likely to be completed. Whether or not the deal is ultimately successful hinges on whether the synergies can be unlocked through successful clinical trials.
Nonetheless, this is perhaps the best bet for both Bristol-Myers Squibb and Celgene as both pharmaceutical companies face stiff competition from rivals like Merck & Co. With its flagship drugs, Opdivo and Revlimid, reaching the end of their lifecycle, and the entry of rival drugs into the market, the combined R&D capabilities of the two companies could pave the way for future growth.