Bristol-Myers to acquire Celgene for $74 billion: Is it time for the M&A biotech boom?

On January 3rd, Bristol-Myers Squibb announced their intention to acquire Celegene, one of the largest biotech companies in the world, for $74 billion. This takeover will create a powerful company with leading positions in both immune-oncology and the treatment of blood cancers. 

In the past year Celgene's value has slowly eroded as their market capitalization dropped by $70 billion and investors became concerned by scaled back financial forecasts and clinical setbacks. However, the dropping share price combined with an impressive pipeline of products in development have clearly raised Celgene's value to Bristol-Myers. 

According to Celgene CEO, Mark Alles, this deal will create a "pre-eminent global biopharmaceutical company", both a leader in cancer and a scientific powerhouse

Under the terms of the deal, Bristol-Myers will buy Celgene with a combination of cash and stock. Shareholders in Celgene will receive one Bristol-Myer share  along with $50 in cash. Celgene shareholders will also receive one tradable Contingent Value Right (CVR) for each share of Celgene. Each CVR will entitle the holder to a one-time potential payment of $9 in cash upon FDA approval of three drugs.

Related: Why UK big pharma are ready to pursue deals and acquisitions despite Brexit uncertainty

Budding product pipeline for the merged company

The merged company will have nine products, bringing in more than $1bn each in annual sales. Most notably, Celegene's multiple myeloma drug Revlimid and Bristol's lung-cancer treatment Opdivo. 

At the J.P. Morgan Healthcare Conference, Bristol-Myers CEO Giovanni Caforio said he was excited about the 'doubling' of Bristol-Myers' pipeline. The acquisition would give the combined drugmaker 10 phase 3 programs, six near-term potential launches and a broad early-stage pipeline. 

Bristol Myers projections estimate a $15 billion increase in peak revenue from the new pipeline of drugs

This includes three of Celgene's medicines, a multiple sclerosis drug and two CAR-T cell therapies, which are expected to acheive regulatory approvals in coming years. Bristol-Myers have projected that their acquired pipeline has the potential to add more than $15bn in peak revenues. 

Increased risk and shareholder concerns

However, Bristol-Myers will take on the risk of generic challenges to Celgene's Revlimid. This drug currently accounts for about 60 percent of the biotech's revenue. However in 2022, Natco will launch a generic version with volume limited sales, a deal brokered following a 2015 settlement with Celgene. This deal expands in 2026 to allow for open generic sales, which would drastically lower Revlimid's revenue. 

Concerns have been raised on the investment and analyst front as to the overall strength of this deal. The decision was met with a 13 percent share drop for Bristol-Myers. Bernstein analyst Ronny Gal also said that by simply doing the deal, the "two companies are communicating a lack of confidence in their own position".

Bristol-Myers has also struggled this year, losing their advantage in the immunotherapy treatement of lung cancer to Merck & Co and facing a delay from the FDA on their new drug application. This has lowered market confidence.

Analysts speculate that by doing the deal, both companies showcase their lack of confidence in their own position

However, the company remain positive that the upcoming deal will boost their earnings per share by more than 40 percent on a standalone basis in the first full year after the deal closes. 

Pending shareholder approval and regulatory review, this deal should close in the third quarter of 2019.

Is it time for the awaited biotech buy-outs?

Gemma Mills, Online Business Development Lead, Pharma IQ

Since 2016, we've seen analysts predict an M&A led biotech boom for the pharmaceutical sector. While it seemed like 2018 would be the year to deliver this, with smaller biotech firms looking like attractive choices and big pharma removing M&A caps, the result was a bit of a disappointment. 

2018 did have its fair share of billion-dollar-deals. This includes Celgene's own purchase of Juno Therapeutics for $9bn and the $62bn mega-deal buyout of Shire. But, considering how strong the first quarter was, the rest of the year failed to reach such heights. 

Still, analysts are calling 2019 the "Year of Biotech M&A". With a number of attractive biotech options and patent cliffs coming closer, they could be right.

It will be interesting to see whether Bristol-Myers move kickstarts other big pharma companies to make large scale acquisitions to compete. Or if instead we'll see small-cap biotech companies play a significant role in the market as they develop new, novel and profitable drugs. 

It's clear that the big pharmaceutical companies have the cash needed to support M&A activity and that there are a steady stream of good value options. However, this could be yet another year that starts off strong but fails to deliver. 

At Pharma IQ, we forsee big pharma focusing their attention on building future drug pipelines, bringing in multiple small-cap biotech companies as opposed to more deals similar to Bristol-Myers. Although the Celgene deal has set the bar for biotech buy-outs, we expect it to be a standalone high value deal, with a steady stream of smaller, strategic deals coming throughout 2019.