When it comes to biotech stocks, the attitude from most investors really is “what have you done for me lately?” You’re always looking for the next thing or data point from a company. It’s what drives the stock action and future price. Get it right and your price surges. Get it wrong and you crash. That’s a problem established biopharma’s Bristol-Myers Squibb (NYSE:BMY) and Celgene (NASDAQ:CELG) know all too well. Both have suffered after several big misses and missteps.
But their fortunes could be changing for the better. That’s because BMY has decided to buyout CELG in one of the healthcare sector’s biggest deals ever.
With the deal, Bristol-Meyers eliminates many of its problems and becomes one of the biggest pharmaceutical stocks targeting cancer and oncology drugs. For Celgene, the deal represents one of the best outcomes for the struggling biotech.
All in all, the BMY/CELG merger could help produce plenty of long-term gains and dividends for years to come.
The Reason for the BMY Buy
Celgene’s woes started back in the fall of 2017, when it warned that a key Crohn’s disease medication failed in trials. That resulted in the firm writing down the drug’s costs and hindering its long-term predictions for revenues. And it needs those revenues. Right now, CELG receives the bulk of its sales from the blockbuster Revlimid. The problem is that Revlimid starts to lose patent protection in 2022. Naturally, shareholders of the biotech high flyer haven’t exactly been pleased and CELG has collapsed over the last few quarters.
For Bristol-Meyers, the situation isn’t as dire, but still not perfect. BMY was one of the first drug producers to introduce cancer medicines that use a patient’s own immune system to fight the disease. Opdivo has become a blockbuster and produces nearly $2 billion in quarterly revenues for Bristol-Meyers. The problem is that rivals have entered the space. Merck & Co.’s (NYSE:MRK) Keytruda is quickly eating Opdivo’s lunch, especially when it comes to lung cancer. Over the summer, Keytruda’s sales surpassed those of Opdivo’s.
With these two situations, you had two of the biggest cancer-focused drug companies floundering. Bristol-Myers shares declined more than 15% last year, while Celgene plunged by 39%. And with that, BMY saw an opportunity. For the price of a cool $74 billion in cash and stock, Bristol-Meyers is pulling the trigger on Celgene and buying it out.
BMY Is Getting a Heck of a Deal With CELG
Initially, investors weren’t too pleased with the buyout offer. Shares of BMY tanked nearly 14% on the news. However, the dip may be a great opportunity to snag-up Bristol-Meyers for the long haul. The reality is, BMY is going to become one of the names when it comes to cancer and hold the richest oncology portfolio in the healthcare sector.
With the buyout, Bristol-Meyers will now have top cancer medicines Opdivo, Yervoy, Revlimid and Pomalyst under its umbrella. These are all proven blockbuster money makers and despite the patent cliff for Revlimid, BMY should be able to pull billions in revenue from the drug before generic competition sets in. Moreover, there are some opportunities to potentially “kick the can” on the expiration for a few more years until 2026.
Adding in the rest of CELG’s rheumatoid arthritis portfolio and BMY’s top cardiovascular franchise, and Bristol-Meyers should have nine drugs making at least a billion in annual sales.
What really should make investors happy about the buyout is the future and CELG’s rich pipeline. As the firm sought to counteract the Revlimid problem, it has invested big time in its pipeline. This included Celgene’s $9 billion purchase of Juno Therapeutics last year and a lucrative partnership with Bluebird Bio (NASDAQ:BLUE). These moves created four more cancer-fighting medications, including a new CAR-T cell therapy. According to Celgene, these four drugs, as well as a Ozanimod- multiple sclerosis drug under review from the FDA, will produce roughly $15 billion in near-term revenue opportunities.
All in all, the deal sets up Bristol-Meyers to be the top dog when it comes to cancer research.
And there’s more to like. For one thing, the boost from CELG is expected to increase Bristol-Myers Squibb’s earnings-per-share by 40% or more in the first full year after the merger and produce an insane $45 billion in cash flows over the resulting three years after it closes. BMY announced an additional $5 billion share buyback along with the deal.
Time to Buy BMY Stock
The deal is truly a good one for BMY over the long haul. It creates plenty of synergies, pipeline potential and near-term revenue opportunities. Yes, they will have to deal with the Revlimid patent problem, which is investors’ main concern. But it’s not like the drug is dying today and it’s still seeing expanding sales and cash flows. And that pipeline is full of potential. With the CELG buyout, Bristol-Meyers is truly transforming itself into becoming the top dog in cancer.
Given the market’s reaction and the huge drop in BMY stock, investors with a long-term focus may want to start nibbling at shares of the biopharma. With the reaction dip, Bristol-Meyers can now be had for a forward price-to-earnings ratio of less than 11 and a dividend yield of 3.63%. That’s dirt cheap and it makes it a steal on its own. Even more so because it doesn’t account for anything Celgene adds to the equation.
In the end, the deal puts to bed the problems that were facing Celgene and boosts Bristol-Meyers long-term capabilities.
As of the time of writing, Aaron Levitt was long CELG and will vote in favor of the buyout. If BMY drops more, he’ll start a position.
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