The mega-merger between Bristol-Myers Squibb (NYSE:BMY) and Celgene (NASDAQ:CELG) appears to be drawing closer to fruition. Despite staunch opposition from various hedge funds such as Starboard Value, the deal still looks like it has good odds of being a success. However, BMY stock has hardly responded to the news.
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It remains down in the dumps, near 52-week lows, even as the market as a whole had a phenomenal first quarter. Is it time to buy BMY stock ahead of the merger, or is the market on to something?
Don’t Count Chickens Yet: Will the Deal Close?
Before looking at the combined company, it’s important to remember that the merger hasn’t closed yet. Until last Friday, in fact, the market seemed fairly skeptical that shareholders would approve the proposed merger. Last week, CELG stock was trading at around a 10% discount to its value in the event that Bristol-Myers Squibb successfully closed the deal.
On Friday, however, Institutional Shareholder Services “ISS” announced that it supported the deal. The ISS is an important body because many passive funds, such as ETFs, usually vote in accordance with ISS recommendations.
That said, the deal still isn’t a sure thing, as both Celgene and BMY stock owners vote later in April. As of this writing, the market is pricing about a 4% deal discount, suggesting that there is a relatively low, but not zero, chance of the deal breaking down. If you are buying either stock today, CELG stock might be more attractive given the modest discount, though keep potential tax considerations in mind.
Bristol-Myers Squibb & Celgene Together
Now, let’s assume the deal closes. What does Bristol-Myers Squibb get for its purchase? For one thing, huge cost savings. It’s expensive having your own sales and marketing team, along with other costs of being a large independent pharma company.
Bristol-Myers estimates that it can save $2.5 billion per year once the two companies are combined. That’s a huge sum, amounting to nearly 5% of Celgene’s current market cap in annual cost reductions. This is a case where Celgene is worth much more to its acquirer than it was as a standalone firm.
It’s also important to note that Bristol-Myers offered to purchase Celgene after CELG stock had tanked. Since 2015, CELG stock had almost continuously traded above the $100 per share mark, and reached as high as $140 in 2017. It fell to $60 in late 2018, allowing Bristol-Myers to swoop in and buy the company around $90/share. That’s still a big discount to where it had been historically, while giving a healthy premium to the late 2018 share price.
Joining forces with Celgene accomplishes a lot strategically for Bristol-Myers. Perhaps most importantly, it broadens the company’s oncology drug portfolio. As Bristol-Myers has a lot of late stage cancer trials under way, bringing Celgene into the fold lowers risk for the overall firm as its oncology portfolio will still be well-stocked even if some of its trials come up short.
BMY Stock: The Price Is Right
Bristol-Myers got walloped during last fall’s correction. BMY stock fell 20% in a few weeks. And it’s hardly recovered since then, as investors remain nervous ahead of the Celgene merger. With Bristol-Myer’s market cap at $77 billion and Celgene at $61 billion, this is almost a merger of equals and will overhaul the company’s outlook going forward.
That said, there are good reasons for optimism. As it is, Brisol-Myers is currently selling for less than 15x trailing earnings. Celgene is selling at under 10x forward earnings. Combine them, and hack off several billion in redundant costs, and you have a profit dynamo.
Analysts, as a consensus, see the merged company trading at around 11x earnings, with earnings then growing at 8% per year over the next five years. Some analysts, however, suggest earnings will grow at a double-digit rate going forward, which would make BMY stock a huge winner starting off its cheap valuation now. Also, it’s worth noting that BMY currently offers a 3.5% dividend yield. That’s one of the better income sources you’ll get from the pharma/biotech space.
BMY Stock Verdict
Bristol-Myers Squibb stock isn’t the easiest one in the world to buy right now. I can understand why BMY has been trading weakly in 2019. There’s a great deal of uncertainty around the company’s merger with Celgene. And its own pre-existing oncology pipeline has some concerns of its own.
On top of that, you have rising political risk. President Trump has returned his focus to the pharma, suggesting that Republicans will be the “Party of Healthcare” going forward. He appears open to efforts that would lower drug prices. On the other side of the aisle, Democratic frontrunner Bernie Sanders wants to slash pharmaceutical prices by up to 50%.
You’re going to get a lot of troubling chatter and news headlines as the election cycle develops as it relates to BMY.
Look past all the uncertainty, however, and BMY stock looks like a clear value here. The company was already highly profitable, and is snapping up Celgene at a great valuation.
Once you cut redundant costs between the two firms here, there should be a great deal of upside in the combined company. The bull thesis for BMY stock could take awhile to play out, but shares should be trading nicely higher in a year or two.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
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