January 3, 2019 / 8:17 PM / 9 months ago

Breakingviews - Bristol-Myers takes $74 bln bet against the market

Logo of global biopharmaceutical company Bristol-Myers Squibb is pictured on the blouse of an employee in Le Passage, near Agen, France March 29, 2018. REUTERS/Regis Duvignau

NEW YORK (Reuters Breakingviews) - Bristol-Myers Squibb is taking a $74 billion bet against the market. There are good reasons to buy rival oncology giant Celgene. But cost cuts don’t cover the 54 percent premium, and the target’s owners get the financial benefit. Bristol is hoping for luck in the courts and multiple regulatory approvals that Celgene’s shareholders were skeptical of.

The two cancer specialists fit well together, so it shouldn’t be too difficult to find a promised $2.5 billion in annual cost savings. Blood-cancer medicine Revlimid brought in about $10 billion in 2018 and has an extremely high margin. And the combination bolsters Bristol’s pipeline significantly, with the company projecting approvals for six new drugs soon.

Celgene has had a rough few years, though. Revlimid accounts for more than 60 percent of revenue. But generic rivals are challenging the patents protecting it and Celgene’s efforts to acquire replacements hit snags: One drug failed in late-stage trials, while regulators said an application to sell another was inadequate.

Sales of new medicine grew more slowly than expected. The shares fell by over half from their high in the summer of 2017, while the biotech index lost just 15 percent over the same period. At close of trading on Wednesday, Celgene shares were trading at just 6.4 times estimated consensus earnings for 2019, according to Refinitiv data, half of its new parent’s multiple.

However, Bristol is paying a premium of more than $25 billion. The current value of the cost cuts, once taxed and capitalized, is some 20 percent short of this, and some of this value will be captured by Celgene stock investors given the deal contains stock. That implies Celgene shareholders are accruing the obvious benefits.

Bristol’s shareholders aren’t impressed, eradicating almost $11 billion, or 13 percent, from its market value in midmorning trading.

Boss Giovanni Caforio has a reasonable shot at proving the skeptics wrong. At slightly less than 10 times earnings, it’s still paying a remarkably cheap price for control of a big pharma company. Celgene’s repeated missteps mean investors have largely given up hope that it will be able to defend Revlimid for an extended period and that new drugs will do well. Bristol’s purchase has the luxury of remarkably low investor expectations.


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