Last 6th January, US drug manufacturer Bristol-Myers Squibb (NYSE:BMY) and Celgene Corporation (NASDAQ:CELG) announced that they have entered into a definitive merger agreement under which BMY would have acquired Celgene for an equity value of approximately USD 74bn.
The board of the two firms welcome the acquisition which will imply that Bristol-Myers Squibb’s shareholders will own about 69 percent of the merged company, while Celgene’s owners account for the remaining 31 percent. After the merger, the company will have nine blockbuster products with sales exceeding USD 1bn annually. The companies also see “significant growth potential” in the core areas of oncology, immunology, inflammation and cardiovascular diseases.
Celgene stock price decline on drug’s sluggish sales
Celgene is a biotechnology company based in New Jersey with around 8’000 employees. The firm develops, discovers and commercialises medicines for inflammatory disorders and cancer. Celgene had a troubling year 2017 as the stock price declined 37 percent from October to September. In the same year, the firm decided to abandon a late-stage Crohn’s disease drugs as well as two clinical trials along with it. Also, during the period the firm encountered lawsuits associated with its patents which suggested possible jeopardies in revenue. The firm had a troublesome 2017 missing its revenue expectations for the last two quarters and disappointing sales for the drug Otezla. Bad sentiment and business continued in 2018 as the shares lost nearly 40 percent in value during the year. Lately, the stock price has been trading 39.5 percent under its 52 week-peak value and changed 13.94 percent from the 52 week-bottom stock prices.
Figure 1: Celgene Stock price’s slump in 2017
The buyer’s rationale of the deal
The deal creates a new pharma company with numerous blockbuster cancer drugs and many enhanced strengths to respond to the competition in the immunotherapy market. In fact, the competition has grown as Mercks’s rival treatment Keytruda has gained market share in the lung cancer treatment which is the most lucrative oncology market. Giovanni Caforio, chairman and chief executive officer of BMY explains that: “Together with Celgene, we are creating an innovative biopharma leader, with leading franchises and a deep and broad pipeline that will drive sustainable growth and deliver new options for patients across a range of serious diseases”. The acquisition creates a firm with nine drugs, each of them generating more than USD 1bn in annual sales, as well as a large pipeline of treatments which expect the potential peak sales of USD 15bn. Some analysts claim that the acquisition will address the importance for Bristol-Myers to diversify from immunotherapy with the opportunity to generate enhanced margins, strong combined cash flows as well as robust EPS accretion. Mark Alles, Chairman and Chief Executive Officer of Celgene explains that: “For more than 30 years, Celgene’s commitment to leading innovation has allowed us to deliver life-changing treatments to patients in areas of high unmet need. Combining with Bristol-Myers Squibb, we are delivering immediate and substantial value to Celgene shareholders and providing them meaningful participation in the long-term growth opportunities created by the combined company”. Furthermore, he adds that: “Our employees should be incredibly proud of what we have accomplished together and excited for the opportunities ahead of us as we join with Bristol-Myers Squibb, where we can further advance our mission for patients. We look forward to working with the Bristol-Myers Squibb team as we bring our two companies together”.
Figure 2: The greatest pharmaceutical deal summarised in key points
The largest healthcare deal ever: a financial overview
According to data elaborated by Bloomberg, Bristol-Myers Squibb takeover of Celgene Group values the target at USD 88.8bn, including net debt, even surpassing the Pfizer’s acquisition of Warner-Lambert, a deal occurred in 1999 for a total value of USD 87.14bn in stocks. With a forecast of achieving annual cost synergies of USD 2.5bn by 2022 and generating future earnings of over $6 per share, the Bristol-Myers acquisition became the largest pharmaceutical deal in history.
This transaction has been financed by a bridge loan of USD 33.5bn, the second highest US bridge loan recorded in the healthcare sector: Bristol has obtained fully committed debt financing from Morgan Stanley Senior Funding and MUFG Bank, while, on the other hand, JPMorgan Chase and Citi served as Celgene’s financial advisers.
Figure 3: Top deals in Pharma consolidation (Deal value: $B)
One of the most relevant aspects of this deal, for Bristol-Myers Squibb, is access to a promising experimental CAR-T therapy. Celgene, indeed, acquired in 2018 Juno Therapeutics in a USD 9bn takeover deal: Juno Therapeutics is a biopharmaceutical company specialized on CAR-T cell therapy, a cancer therapy in which a patient’s own immune cells are genetically engineered to make them attack specific proteins on cancer, and infusing them back into the patient. CAR-T could become a highly profitable market over the next four years, with an estimated growth at a CAGR of 63 percent within 2023. Therefore, Bristol-Myers through this deal will have the potential for growth especially in oncology diseases, meanwhile taking advantage from the CAR-T market expansion.
Specifically, Bristol-Myers acquired Celgene through a cash-and-stocks deal, in which Celgene stockholders will receive one Bristol-Myers share and $50 cash for each Celgene share held. According to the boards of the two Companies, the deal, which they hope to finalise in the third quarter of 2019, will represent a 53 percent premium to the average closing price of Celgene shares over the past 30 days.
Besides this, the takeover is expected to generate 3 main financial benefits:
- Strong Returns and immediate EPS accretion. The transaction’s internal rate of return is expected to be well in excess of Celgene’s and Bristol-Myers Squibb’s cost of capital. The combination is expected to be more than 40 percent accretive to Bristol-Myers Squibb’s EPS on a standalone basis immediately after the finalisation of the deal.
- Strong balance sheet and cash flow generation to enable significant investment in innovation. With more than USD 45bn of expected free cash flow generation over the first three full years post-closing, the Company is committed to maintaining strong investment grade credit ratings while continuing its dividend policy for the benefit of Bristol-Myers Squibb and Celgene shareholders.
- Meaningful cost synergies. Bristol-Myers Squibb expects to realize run-rate cost synergies of approximately USD 2.5bn within 3 years.
However, the days following the merger’s announcement showed a negative market reaction: investors indeed rewarded Celgene’s shares at a limited extent of 22 percent to $81.28, while shares in Bristol-Myers fell over than 16 percent to $45.1, that is USD 11bn of capitalization in less than 2 days (from USD 86.4bn to USD 76.5bn).
According to Brian Skorney’s words, senior research analyst at Robert W. Baird & Co., “this deal has not been driven by enthusiasm or excitement on either end”: Celgene investors were not thrilled after the deal, and Bristol investors were less than enthused. In this respect, Mizuho Securities USA after conducting a quick survey of about 100 clients, concluded that Bristol investors think the Company is overpaying for Celgene, therefore not approving the acquisition. This could be a possible justification for the slipping of Bristol’s shares.
Figure 4: Bristol-Myers Squibb share price trend
Figure 5: Celgene Group share price trend
What drives M&A in the Pharma industry?
The approval of US tax reform in late 2017 led to speculation that merger-and-acquisition activity would soon surge among pharmaceutical companies, due in part to tax-cut benefits accruing to sellers. In the first quarter of 2018, indeed, there were 212 deals in the sector worth more than USD 200bn. Bristol-Myers takeover follows a spree of tie-ups in the healthcare industry over the past four years: Japan’s Takeda last year has won shareholder approval for its USD 58bn megamerger with Shire, and a month ago GlaxoSmithKline announced it was buying Tesaro, a cancer-focused US biotech, for USD 5.1bn. According to some senior investment bankers who presented at the Forbes Healthcare Summit in NY last November, 2019 will be another active year for live science M&A deals, particularly in the biotech, payer, outsourced services and healthcare IT arenas.
Thomas Sheehan, head of global healthcare investment banking at Bank of America Merrill Lynch, stated that we are in a “biotech bubble” which is difficult to predict how long it will last.
We showed in the chart below the climb of the number of M&A transactions implemented in the pharma industry over the last 20 years.
According to this graph, we can point out that the pharmaceutical industry probably sees more M&A activity than any other industry, both in the number of deals and the amount of money spent on mergers-and-acquisitions operations. There are two main key drivers which justify the large amount of M&A activities in this industry:
- Lowering R&D expenses. Most companies can no longer afford to carry out R&D to find innovative drugs: today, a company needs to invest between USD 2bn and USD 4bn per year in R&D to have a meaningful portfolio of drug development programs. In the long-term, only companies with revenue of US 10bn or higher can afford to have a substantial drug development program. The growing cost for the development of a new pharmaceutical drug drives large pharmaceutical companies in using M&A to exploit innovation sources outside of Big Pharma.
- Capture synergies by scaling up. Pharma companies adopt such transactions in order to implement strategic changes: expanding their pipelines, broadening their product portfolios or reducing their investment costs.
In conclusion, deal-making is a fundamental tool to implement game-changing strategic moves to build companies fit to master future challenges, but M&A is essential for pharma companies also to get access to innovation, to prune business portfolios and to streamline operations in manufacturing.
Authors: Giovanni Cola, Edoardo Hähnel
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