By Jack Briody, Lorraine Jiang and Tristan Yang (Columbia University) - Date: 26/01/2019
Overview of the deal
Acquirer: Bristol-Myers Squibb
Acquirer Advisors: Morgan Stanley, Evercore, and Dyal Co.
Target Advisors: JP Morgan and Citi
Estimated value: $74bn - Announcement date: January 2, 2019
Bristol-Myers Squibb’s acquisition of Celgene will serve as an important catalyst in the biotech market. Despite recent struggles, with Bristol-Myers losing to fierce competition from its rival Merck & Co. and Celgene’s stock falling more than 41% last year, the combined company is expected to have nine products with more than $1 billion in annual sales and six expected near-term launches representing more than $15 billion in revenue potential.
Bristol-Myers Squibb is offering $50bn in cash in addition to a 1:1 exchange of shares, representing an addition of $32bn in fresh debt to Bristol-Myers Squibb’s balance sheet.
The acquisition is expected to boost Bristol Myers Squibb’s earnings per share by more than 40% while achieving approximately $2.5bn of expected run-rate cost synergies by 2022. Bristol-Myers Squibb’s shareholders will own approximately 69% of the combined company and Celgene holders 31%.
“Bristol’s acquisition of Celgene looks smart and could turn out to be a bargain price. (It may even light a fire under AbbVie Inc. or other rivals to go after deals of their own.) But most buyers in transactions this large haven’t been so lucky. Shares of a majority of the leading acquirers of the last few years have fallen since their deals were struck.” - Angelica LaVito & Berkeley Lovelace Jr., Bloomberg Business
Company details (Bristol-Myers Squibb Company)
Bristol-Myers Squibb is an American pharmaceutical company that researches, produces, markets, licenses, and internationally distributes biopharmaceutical products for cancer, HIV/AIDS, cardiovasculars, diabetes, hepatitis, immunoscience, rheumatoid arthritis, and psychiatrics.
- Founded in 1887, headquartered in New York, NY
- Chairman and CEO: Giovanni Caforio, M.D.
- Number of employees: 23,700
- Market Cap: $76.5bn - EV: $77.1bn
- LTM Revenue: $22.0bn - LTM EBITDA: $6.3bn
- LTM EV/Revenue: 3.5x - LTM EV/EBITDA: 12.2x
Company details (Celgene Corporation)
Celgene is a pharmaceuticals company that researches, develops, and sells biopharmaceuticals worldwide. Celgene holds a 24.81% market share and specializes in cancer therapeutics and inflammatory disorders.
- Founded in 1986, headquartered in Summit, New Jersey
- Chairman and CEO: Mark Alles
- Number of employees: 7,467
- Market Cap: $59.5bn - EV: $75.4bn
- LTM Revenue: $14.7bn - LTM EBITDA: $5.9bn
- LTM EV/Revenue: 5.1x - LTM EV/EBITDA: 12.8x
Projections and Assumptions
Short term consequences
The Bristol-Myers Squibb & Celgene acquisition will lead to the formation of one of the largest pharmaceutical and biotech giants in the world. It will also go down as the largest pharmaceutical merger to-date. This seems to be good news for Bristol-Myers Squibb, as many analysts have predicted that it would be the takeout target of a future acquisition.
Due to the highly complementary portfolios of each firm, the combined company will create a market leader in oncology, immunology, inflammation, and cardiovascular disease. By joining forces, Bristol-Myers Squibb and Celgene will have short-term launch opportunities for new treatments that are projected to exceed $15 billion in revenue potential: two in immunology and inflammation, four in hematology. Aside from meaningful cost synergies, it is expected that the deal will spur strong returns and significant EPS accretion due to a sturdy projected balance sheet and cash flow from the anticipated innovations mentioned previously.
Even though Bristol-Myers Squibb is expecting to achieve run-rate cost synergies of about $2.5 billion by the year 2022, the deal is designed to bring immediate boosts in per-share earnings. The long-term success and competitiveness of the combined entity will largely rest on how efficiently and effectively the logistical and managerial tasks of the acquisition are completed to ensure that short-term market share slippage does not occur.
Long term upsides
In the long-term, the $74 billion deal between Bristol-Myers Squibb & Celgene has the potential for major upsides: with a projected future revenue of $37 billion, earnings per share could exceed $6. Revenue expansion will mainly be driven by Celgene’s status as an investment that enables Bristol-Myers Squibb to diversify its portfolio. For instance, Bristol-Myers Squibb has largely depended on the drug Opdivo to bring in sales. As of September, 2018, the product made up 30% of the firm’s total revenue. By acquiring Celgene, Bristol-Myers Squibb will be able to reduce its dependencies on such drugs.
Advances in experimental cancer CAR-T cell therapy is another long-term benefit to the acquisition of Celgene. Just last year, Celgene took over Juno Therapeutics in a $9 billion deal to become a leader in the field. The research and development of CAR-T cell therapy is seen to have a gigantic potential in the coming years, as it is proving to be more effective than conventional cancer treatments. In fact, the overall market is expected to expand over 63% in the next four years, which will be highly profitable for Bristol-Myers Squibb.
Due to the current oversaturation of the pharmaceutical market, the Bristol-Myers Squibb-Celgene merger will represent an important consolidative step, leading to the formation of a combined entity with a robust foundation and vast reach. With a combined total of nine blockbuster products, the joint firm will likely maintain global dominance.
Risks and Uncertainties
While the Bristol-Myers Squibb-Celgene deal does show a great deal of promise in distributing new strong-selling drugs, skeptical investors question whether the merger will meet lofty expectations. After all, Bristol-Myers Squibb stock sank more than 15% in 2018 and Celgene shares tanked more than 41%. This shows that even with cutting edge technology, the combination of the two firms does not guarantee that it will deliver on its goals.
In a highly competitive market, with strong rivals like Merck, the two companies are pressured to release new experimental drugs to stay on top. When Celgene was delayed in providing a successor to its top-selling blood cancer treatment Revlimid, its shares sank significantly. Even Bristol-Myers Squibb has struggled at times to put products on the table due to trial failures. If these patterns increase in severity and frequency, empirical evidence of stagnation will likely reemerge. An example can be seen with Bristol Myers-Squibb’s immuno-oncology drug Opdivo struggling to keep up with Merck’s Keytruda. However, brand names are not the only threat to the success of this deal, as patent expirations mean potential generics will soon be pushing down profit margins across the board and strong-arming the two firms to lower prices. With all this uncertainty, investor fear is a factor worth heavy consideration. Though Celgene investors were ecstatic to see the announcement of this acquisition, Bristol shareholders were less than pleased, as demonstrated by the immediate 12% dip in Bristol-Myers Squibb stock. In addition to the fact that many view the deal as overpriced, all of this is occurring at the same time that the Trump Administration has promised to bring drug prices down, which could spell danger for the combined firm.
“Overall, Celgene will help Bristol-Myers Squibb diversify its portfolio beyond Opdivo and Eliquis. The combined entity will have nine drugs with annual sales of over $1 billion, and a bubbling pipeline with potential peak sales of $15 billion.” - Trefis Team, Forbes
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