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Is Biogen a Beat-Up Bargain? And Is Bristol-Myers' Mega-Merger on the Rocks?

Todd Campbell, The Motley Fool

Biogen's (NASDAQ: BIIB) bid to reshape Alzheimer's disease treatment was delivered a big blow last week when it decided to bail on its once-promising Alzheimer's drug aducanumab. The news shocked investors because Biogen was so encouraged by early-stage results that it skipped right over midstage studies to a pivotal phase 3 trial. Aducanumab's failure raises big questions about Biogen's future, particularly since sales for its multiple sclerosis drugs are slipping and its treatment for spinal muscular atrophy (SMA), Spinraza, could face stiff competition soon. Is Biogen a buy or are investors better off focusing on other stocks?

In this episode of The Motley Fool's Industry Focus: Healthcare, host Shannon Jones is joined by Motley Fool healthcare contributor Todd Campbell to discuss Biogen's disappointment and its impact on investors. Jones and Campbell also explain why Thermo Fisher (NYSE: TMO) is spending $1.7 billion in cash to acquire privately owned Brammer Bio, a manufacturer of viral vector gene therapies for drugmakers, and if Bristol-Myers Squibb's (NYSE: BMY) plan to merge with Celgene (NASDAQ: CELG) is on shaky ground because of angry investors.

A full transcript follows the video.

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This video was recorded on March 27, 2019.

Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Wednesday, March 27, and we're talking healthcare. I am your host, Shannon Jones. I'm joined via Skype by healthcare guru Todd Campbell. Todd, how are you? 

Todd Campbell: Doing well, Shannon. Looking forward to today's show!

Jones: I've been so excited! Of course, anytime biotech news drops, it's always the day after we record an episode. I was beating myself up with all the news that's been happening. It's like, "Oh, we should have gotten this in last week!" But it just made me more excited for this week, Todd. 

Today's show for our listeners is all about a big old pipeline blowup. We've also got some gene therapy M&A news. And, we're going to be breaking down the latest drama for the merger everybody is watching.

Todd, let's kick things off with the story that everybody's talking about, and that is none other than Biogen, BIIB. For our listeners, no other way to say it other than this is probably going to be the year's biggest pipeline blowup, no doubt. It was these late-stage trials for a drug called aducanumab being studied for Alzheimer's that Biogen and their partner decided to can. Todd, when I woke up last Thursday, my phone was going off about this trial. The only words that could really come to my mouth was, "Oh, Biogen!" [laughs] Tell me your thoughts on what happened and tell our listeners what actually went down.

Campbell: Bidding "adieu" to adu. We'll call it that instead of the long name. I'm glad you tackled that on the intro! [laughs] Aducanumab, oh, my word! Throw some more letters in there! 

Yeah, this is a really disappointing trial. It's funny, because the first thing I thought is: "Wow, that's shocking! They're actually holding this trial because an interim review says there's no way that they're going to deliver on the end point. I'm surprised by this." But really, I shouldn't be surprised by this. Right, Shannon?

Jones: Absolutely not! That's why I have so many mixed feelings about this, Todd. On the one hand, of course, I'm extremely disappointed for patients around the world who have no treatment options in terms of slowing down the progression of the disease. At the same time, I'm not surprised because they jumped from basically very early-stage phase 1 to phase 3. On top of that, going after a target that for the most part has been debunked. Biogen is now joining the ranks of Pfizer, Eli Lilly, in going after this amyloid hypothesis, and apparently still going after.

I'm definitely not shocked. I'm very disappointed. But ultimately, I'm just upset.

Campbell: Investors have to just be so disheartened. Step aside for a second from, obviously, how bad the news is for patients and for science itself. We're no closer to having a treatment that can tackle this devastating disease. 

But from an investor standpoint, it's just so disappointing. We've said this on the show before: 99% of Alzheimer's disease drugs that have gone into clinical trials have ended up into the dustbin rather than on pharmacy shelves. We don't know enough about what causes Alzheimer's disease. We were thinking that the buildup of these amyloid plaques on the nerves were interrupting the brain signaling. We thought that's what was causing the drop-off in cognition in Alzheimer's disease patients. Yet, every time we bring a new drug into trials that's targeting reducing these plaques, they seem to succeed in reducing them, but fail when it comes to actually beating placebo in helping patients or improving outcomes. That's incredibly disheartening. It makes it very difficult, as an investor, to put any credence in any company right now that's doing anything in Alzheimer's disease. 

That makes it especially hard for Biogen because a few years ago, they made this big pivot, right, Shannon? They're best known for their multiple sclerosis drug franchise. That's what made them this huge, megablockbuster biotech company. But a few years ago, they decided to pivot toward these Alzheimer's disease therapies. Now, investors have to be asking themselves: "Am I a fool to stick around with Biogen? What should I do now?"

Jones: That's the big question. Biogen, leading up to this point, I think it's safe to say, has probably had the riskiest pipeline. You mentioned the multiple sclerosis franchise. That's been in decline. That's really been their bread and butter. They also have, of course, Spinraza. Spinraza is their SMA drug that's really, for the growth they have been seeing, it's been coming from that drug. But even that drug has competition on the way in SMA. So, really, the question has been, how is Biogen going to grow? Where's the growth going to come from? This was a drug that some analysts were pegging $12 billion in peak annual sales. Right now, if you look at their pipeline, there isn't anything that you can safely say can make up the ground for that type of growth. They do have another Alzheimer's drug, BAN2401 [laughs] that they announced shortly after this announcement last week, that they were going to be canning this trial. They announced that they were going to be moving forward in "this" drug. So, now, you have more question marks than you have answers, Todd. What do you think about that, with BAN2401?

Campbell: Biogen's response was, "OK, we'll buy back $5 billion worth of stock because we believe that the sell-off is overdone." Just in case you weren't paying attention that day, the stock is now trading about 100 points lower, down about 30% following this news. Just a massive haircut. So, buying back $5 billion worth of stock. Then, they said, "By the way, we're going to bring BAN2401 into phase 3 trials!" You start looking at BAN2401, it's like, OK, I can't really get excited about this approach because it's the same thing again. A slightly different way of going about it, but you're still trying to improve outcomes by targeting these amyloid plaques that are building up in the brain. 

Then, just google last fall BAN2401, and look at some of the releases that came out and stories that were written. People don't know what to make of this drug because the phase 2 data was completely mixed. There's a lot of concern about who is enrolled in the trial, did they enroll people who ended up skewing the results toward efficacy? You don't even have a really clean phase 2 data set that you can lean on and say, "Oh, yeah, but... " It's more like, "Well, we think everything is going to be fine." And I don't know whether or not that's enough for me to want to go out and buy this stock. 

Then, add on top of that, you mentioned that their multiple sclerosis drugs are in decline. Their interferon drugs are losing market share to the oral drugs. And there's a generic version of Novartis' Gilenya, which is the second-top-selling oral drug. Those are on the horizon. The patent's expiring, those are going to be coming out soon. So there's a big threat still that exists to the MS revenue. Then, if you look at the SMA drug that they have, Spinraza, Novartis has a potential approval coming for a one-and-done gene therapy, I think in May. If that's approved, then who knows what happens to Spinraza's sales? We just don't know yet. 

So then you have to say, "Well, they'll have to acquire the growth." Well, they have $5 billion in cash. That's probably not going to be enough to get a game-changing deal done. They're going to have to either issue shares or take on debt to do it. That could be one of those situations where the stock sells off on the news of the acquisition, depending on what that acquisition is. I don't know. It's definitely a high-risk stock right now that I don't see a lot of reasons to be buying, even despite the sell-off. 

Jones: I was on a show earlier this week talking about Biogen. For me, I'm looking at, there are a lot of attractive smaller fish out there Biogen could go after -- hello, Neurocrine Biosciences, hello, Sage Therapeutics. I mean, there's a whole host. I think in terms of growth, they're going to have to really start thinking about, "Where can I acquire some late-stage assets at an attractive price?" To your point, they don't have a ton of cash on the books to be able to go out and do any sort of transformative deal. But I'll be looking for that. 

Ultimately, in this space, Todd, you're either being eaten by a bigger fish or you are prepared to eat another one. Biogen right now, to me, reminds me a lot of Celgene, reminds me a lot of some of these other bigger players that just fell on hard times and ended up being a prime buyout target. I would not be surprised if you saw the sharks starting to circle around Biogen. I think they always are. Wouldn't be surprised to see that happen. They lost about $20 billion in market value over the past week. Price gets a little more attractive, I think, for suitors. You do have a core franchise, you do have approved drugs on the market. I would not be surprised to see that happen. 

Campbell: Let's just throw names out for fun. One deal that might get investors excited if they were able to work it -- again, this is just a complete guess on my part -- would be if they were able to tie up with Vertex Pharmaceuticals. Maybe that would be a cool deal that would get investors excited because Vertex has this fantastic cystic fibrosis franchise that could really help re-spark interest in this company. Time will tell.

Jones: Time will tell, yes. In terms of our other stories to cover, I want to make sure we have time to dig into gene therapy. Todd, you and I did a gene therapy show not too long ago. We gave some predictions about the next buyout target. That did not happen yet. 

But, Thermo Fisher Scientific, TMO, is beefing up its powerhouse in genomics. A lot of people don't realize Thermo Fisher Scientific is a pretty large player when it comes to gene sequencing. Now, they just announced they are acquiring a company by the name of Brammer Bio. Am I saying that right, Todd?

Campbell: Yeah. Brammer Bio. 

Jones: It's a privately held company.

Campbell: Thermo Fisher, a $24 billion revenue company with 70,000 employees. Maybe one of the bigger companies in healthcare that people don't really pay much attention to. But it's got this huge, massive life sciences business. Basically, if you're in drug development or you're involved in getting a drug from petri dishes to the marketplace, you're probably doing business, in one way or another, with Thermo Fisher. You mentioned they're a player in gene sequencing. Yes. They bought Life Technologies back in 2014, spent $13 billion on that. They're the second-largest, in terms of market share, behind the goliath Illumina. This Brammer Bio deal is interesting, right, Shannon? They're paying $1.7 billion in cash. They're buying it from a private equity firm. What Brammer Bio does is, it makes those viral vectors. It manufactures the viral vector drugs that all of these companies are out there developing. This is a fascinating industry. 

I think the takeaway here is, this is just more evidence that drug development is moving toward gene therapy. Everyone's trying to get a foothold in it.

Jones: Yes. Brammer Bio, revenue is expected to be $250 million this year. Not going to be a huge needle-mover for a goliath like Thermo Fisher Scientific. But what makes this really interesting is the opportunity. You talked about this company servicing a lot of these cell and gene therapy companies. Some analysts are saying that's an opportunity worth a billion dollars and growing potentially more than 25% a year in the future. This is a huge opportunity for them. As cell and gene therapy, the regulatory landscape becomes much clearer, the pathways become clearer for companies to go after some more of these innovative therapies, I think this positions Thermo Fisher Scientific to really ride the wave of that. 

When I saw this headline over the past couple of days, immediately went back to our conversation. Todd, you are very bullish on a company who does something very similar, a company called REGENXBIO. So when I saw this buyout, if anything, I think it served as validation. Start thinking about investment opportunities that are ancillary to the cell and gene therapy space. 

Campbell: Absolutely! Think about these people who are supplying the intellectual property or the technology or the products necessary for that. That could go anywhere from the gene sequences themselves, to the people who are interpreting the data that's coming out of doing genetic screening to, obviously, the companies that are making these viral vectors that are so important. Think of viral vectors as the FedEx of gene therapies. It's what delivers the payload to the cell that allows these gene therapies to work. 

Over the last two years or so, we've had this explosion in clinical trial activity in gene therapies. What's happened there is, it's obviously boosted demand for these people who have the specialized infrastructure to be able to manufacture these gene therapies, like Brammer Bio. It's also made it very difficult for a lot of these gene therapy companies. They've had to ink some pretty aggressive deals or make commitments to build their own facilities because there's just not a lot of capacity right now based upon how much demand there is to create these therapies.

Jones: So, huge opportunity. Certainly a space to keep watching.

Alright, time to turn our attention to the latest drama capturing the world by storm. This is what I like to call the Real Housewives: Biotech Edition, starring Bristol-Myers Squibb, BMY, and Celgene, CELG. Basically, fresh off of a proposed multibillion-dollar marriage between these two biopharma companies, announced earlier this year, in January, I believe. Now, the kids are starting to revolt, Todd. They're starting to rebel, for lack of a better term here. Some shareholders are actually calling for this deal to be completely called off.

Before we dive into the latest news, maybe let's just get all of our listeners up to speed and give them some of the backstory here.

Campbell: In January, Bristol-Myers announced that it's going to merge together with Celgene in a $74 billion deal. This is a massive combination of these two companies. Not everyone's happy, like you said. When we were talking about this merger earlier in the year, I'd said, "Boy, there's going to be a lot of Celgene investors who aren't very happy," because Celgene was trading at a premium to where this deal got done from most of 2015 through 2017. But it turns out, it's not Celgene's shareholders who are rebelling. It's actually Bristol-Myers shareholders who are rebelling. And there's enough rebellion to have people wondering what's going to happen when Bristol-Myers shareholders get together on April 12th to vote on whether or not they approve of this deal going through.

Just to give people a refresher on what the deal entails, if the deal goes through, shareholders of Celgene will end up getting a share of Bristol-Myers stock, $50 in cash, and they'll also receive a contingent value right, CVR, which will give them an additional $9 if a few key drugs that Celgene has in development get approvals by a set timeline. That's the deal. 

Now, if you look at the deal value, that puts it at about $98 a share based on where we were this morning. Celgene is trading at a pretty big discount to that. I think it's trading around $89. Shannon, the rebellion is significant enough to have people wondering, one, whether or not the deal is going to get next by shareholders in early April when they get together; two, what's it going to mean for Celgene's future.

Jones: Let's talk about the shareholders in particular. You've got, as you mentioned, a massive backing. You've got hedge funds, Wellington Management, you've got Starboard Value, who are some of the largest shareholders of Bristol-Myers Squibb's outstanding shares. The concerns are varied. There's been a back-and-forth, a battle of PowerPoint slide decks and notes being passed around. 

But really, it comes down to, and the way that Starboard describes it, "We think this deal is poorly conceived and ill-advised." Very strong words. Specifically, Wellington is saying that Bristol shareholders are accepting way too much risk bringing Celgene on. It really doesn't give Bristol any differentiated science approach, and it really doesn't broaden their revenue base enough to make this an attractive deal. 

The other point, which I totally agree with, most pharma mergers simply don't work out. Of course, you don't have to look far. Actavis and Allergan is one example. Allergan shares have lost 50% of their value over the past four years. They do have a lot of historical data to back that point up. When you've got two management teams that have both had some questionable moves over the past few years, I can't say I'm surprised to see shareholders starting to stand up and say something. But I do think it makes April 12th, the day that is approaching, where they will actually vote on this deal, that much more interesting, Todd. 

Campbell: Yeah. Let's put this in perspective. Wellington is the biggest shareholder in Bristol-Myers Squibb, but it only owns about 8% of the shares. Starboard Value owns a million shares. That's nothing. A million shares? Big deal! That's nothing when it comes to how big Bristol-Myers Squibb is. Starboard did put out, I think was a 70-page slide deck. I don't know, around Page 50 I started to tune out. But, yeah, I think they probably could have summed it all up in one or two sentences. "We think Bristol-Myers should get acquired rather than acquire somebody." [laughs] Really, that is the objection here. When push comes to shove, I think that these shareholders would like to see Bristol-Myers be acquired by somebody else, and not go out and use its cash and its currency to take on a high-risk deal like this.

Now, Bristol-Myers will say: "No, this deal makes a ton of sense to us. Yes, we have this amazing immuno-oncology drug, Opdivo. Yes, it's raking in billions and billions of dollars a year in sales. However, at some point, the growth is going to level off for that drug. We are facing some patent expiration on a couple of other drugs in our portfolio. So we've got to figure out now how to make hay while the sun shines." Celgene, theoretically, would allow them to put that cash and that capital to work to buy something that could provide them with a lot of growth. Immediately, they become the No. 1 player in oncology thanks to bringing in Revlimid and it's $10 billion in annual sales. It'll still be a top player in cardiovascular because it markets the anticoagulant Eliquis. It has the potential to have nine blockbuster drugs as a combined company. It'll have 50 phase 1 and phase 2 clinical trial programs underway as a combination. And, and, despite the size of this deal, they think it's going to be accretive to earnings per share in year one by about 40%. This isn't even a dilutive deal from where they're coming from. They're looking at it and they're saying: "Listen, we're going to generate $45 billion as a combined company in a free cash flow. Our dividend isn't at risk. Our profitability is actually going to improve. What is it about this deal that you don't like?" [laughs] 

Jones: Bristol has been on what I would call a road show. They've been sending executives to New York and Boston to try to win them over to all the points you just made, Todd, to really solidify the fact that this is a huge opportunity for them that they think makes a lot of sense strategically, and to your point, will be accretive very, very early on. We'll have to wait and see what happens with that, though. You mentioned, of the shareholders that are revolting, it is a smaller percentage, but they do have a lot of influence. Having a huge significant portion of shares outstanding is one thing; influence is another. These are very well respected, especially in the biotech investing world, well respected advisers. We'll have to wait and see what happens here. I'm sure this won't be the end of our updates for listeners. We'll have to circle back on the next installment of drama in this reality show that continues to move on. 

But, assuming this deal closes, we're looking at maybe Q3. Is that right, Todd?

Campbell: Yeah. Third quarter is when they're hoping to get this deal all final. But, again, it's all going to depend on how that vote goes on April 12th. Celgene investors, if this deal doesn't go through, don't think you're going to get a big payday in the form of a breakup fee, either. Yes, there's a $2.2 billion breakup fee attached to it. But according to Starboard, that's only payable if somebody else were to come in with an offer and the deal broke up. it's not if shareholders vote this deal down. I think if the shareholders vote the deal down, Celgene is going to pocket about $40 million for the troubles. That's it.

Jones: And I think the probability of having another bidder come in at this point is probably pretty low. Not to say it couldn't happen, but probably pretty low. Just makes this even more interesting. Be sure to stay up to date on all the news by keeping up with us here at Industry Focus

That'll do it for this week's Industry Focus: Healthcare show. Thanks so much for tuning in! As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Todd Campbell, I'm Shannon Jones. Thanks for listening and Fool on!

Shannon Jones owns shares of Neurocrine Biosciences. Todd Campbell owns shares of Celgene and Pfizer. The Motley Fool owns shares of and recommends Celgene, FedEx, and Illumina. The Motley Fool recommends Biogen and Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.