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Bristol-Myers to Acquire Celgene: Healthcare ETFs in Focus

Sweta Killa

The healthcare space is witnessing a wave of mergers and acquisitions, which could change the landscape of the healthcare business. After a series of consolidation between health insurers and pharmacy benefits managers last year, biotech companies have been taking over the pharmaceutical sector as they have become attractive targets for big firms after their valuations declined in the recent months.

This is especially true as Bristol-Myers Squibb BMY agreed to acquire Celgene Corp CELG for $74 billion in cash and stock deal. The proposed deal came as both the companies are struggling in a crowded $123 billion cancer market (now one of the biggest pharmaceutical sectors) for innovative treatments (read: Beaten-Down Pharma ETFs to Buy Post Q3 Results).

Bristol Myers-Squibb's immuno-oncology drug — Opdivo — which accounts for roughly a quarter of its sales, has struggled to keep up with Merck's Keytruda. Meanwhile, Celgene has endured high-profile clinical failures and is looking for a follow-up for its blockbuster blood-cancer therapy —  Revlimid —  which will start being phased out in 2022.

Inside the Deal

Per the terms of the deal, Celgene investors would receive one Bristol-Myers share and $50 in cash for each Celgene holding, as well as a contingent value right of $9 if three treatments in development achieve timely approvals. These are the high-profile multiple sclerosis drug ozanimod, lymphoma treatment liso-cel by Dec. 31, 2020 and a CAR-T therapy for multiple myeloma known as bb2121 from a partnership with bluebird bio BLUE by March 31, 2021.

The deal values Celgene at $102.43 each, a 53.7% premium to Jan 2 closing price and would combine two of the world's largest cancer drug businesses in the biggest pharmaceutical deal ever. The combined company will be 69% owned by Bristol-Myers and will create a specialty biopharma company focused on treatments for cancer, inflammatory and immunologic diseases as well as cardiovascular disease. It will have a portfolio of nine drugs with more than $1 billion in annual sales.

The transaction would result in total cost savings of $2.5 billion by 2022, with 55% coming from cuts in sales, general and administrative expenses, 35% through reduction in research & development spending and 10% from manufacturing. As a result, Bristol-Myers expects the deal to add more than 40% to its earnings in the first year after closing.

Further, with more than $45 billion of expected free cash flow generation over the first three full years post-closing, the combined company is committed to maintain strong investment grade credit ratings while continuing its dividend policy for the benefit of Bristol-Myers Squibb and Celgene shareholders (read: A Dividend ETF Investing Guide).

The deal is expected to close in the third quarter of 2019 and is subject to approval of shareholders of both companies and anti-trust regulatory sanctions.

Apart from the acquisition, Bristol-Myers provided preliminary 2019 earnings guidance. It expects to achieve per-share earnings of $3.75-$3.85 for 2019, excluding any benefits from its takeover of Celgene. Adjusted EPS is expected in the range of $4.10 to $4.20.

Market Impact

Following the announcement of the deal, shares of Celgene climbed 20.7% to close the day and crushed its average volume as nearly 79.3 million shares moved hands compared with 6.6 million on average. Meanwhile, shares of Bristol-Myers dropped 13.3% (see: all the Healthcare ETFs here).

The news has put the spotlight on a number of healthcare ETFs, especially biotech and pharma, which could be the best ways for investors to tap the opportunity arising from the BMY-CELG deal. Investors should keep a close eye on the movement of these ETFs over the coming weeks.

iShares Nasdaq Biotechnology ETF IBB

This fund provides exposure to 224 firms by tracking the Nasdaq Biotechnology Index, with Celgene taking the fourth spot at 6.7%. IBB is the most popular fund is the biotech space with AUM of $7.5 billion. Expense ratio comes in at 0.47%. IBB has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Biotech ETFs in Focus on String of Q3 Earnings Beat).

VanEck Vectors Biotech ETF BBH

This fund offers exposure to 25 large biotechnology corporations by tracking the MVIS US Listed Biotech 25 Index. Here, Celgene is the third firm accounting for 6.1% share. BBH has amassed $372.3 million in its asset base and charges 35 basis points (bps) in fees per year. It has a Zacks ETF Rank #2 with a High risk outlook.

iShares U.S. Pharmaceuticals ETF IHE

This ETF provides exposure to 47 pharma stocks by tracking the Dow Jones U.S. Select Pharmaceuticals Index. Bristol-Myers occupies the fifth position in the basket with 6.8% allocation. The product has $366.5 million in AUM and charges 43 bps in fees and expenses. It has a Zacks ETF Rank #2 with a High risk outlook.

iShares Evolved U.S. Innovative Healthcare ETF IEIH

This actively managed ETF employs data science techniques to identify companies with exposure to the innovative healthcare sector. Holding 203 stocks in its basket, BMY takes the ninth spot at 4.3% while CELG occupies the 11th position with 3.7% exposure. The product has accumulated $4.7 million in its asset base since its inception in March last year and charges 18 bps in annual fees.

Invesco Dynamic Pharmaceuticals ETF PJP

This ETF targets the pharma corner of the broad healthcare sector and follows the Dynamic Pharmaceuticals Intellidex Index. It holds 30 stocks in its basket with BMY and CELG accounts for nearly 3% of assets. The product has AUM of about $465.5 million and charges 57 bps in fees and expenses. It has a Zacks ETF Rank #2 with a High risk outlook.

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