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Bristol-Myers' Celgene Buyout Still Uncertain Amid Opposition

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Bristol-Myers Squibb Company BMY is facing strong criticism from activist investors for the proposed acquisition of another large pharmaceutical company, Celgene Corporation CELG. Bristol-Myers investors have expressed multiple concerns related to growth of the company following the merger.

We remind investors that Bristol-Myers announced in January that it will acquire Celgene for an equity value of approximately $74 billion or more than $90 billion including debt. The deal is expected to close in the third quarter of 2019.

Bristol-Myers’ stockholder, Starboard Value LP, has urged all shareholders to support its proposal to vote against the deal.

Starboard Value has posted a presentation on its website detailing the reasons for its opposition. In late February, the investment firm had informed all shareholders of Bristol-Myers in a letter about its intention to oppose the mega acquisition. The investment firm has requested all shareholders to vote against the acquisition deal at the Special Meeting of Bristol-Myers scheduled to be held on Apr 12, 2019.

Wellington Management Company, one of the top stakeholders, is also not supportive of the proposed acquisition and had informed the same to the board of Bristol-Myers in February.

Bristol-Myers’ Expectations

Bristol-Myers expects the combined entity to generate more than $45 billion in cash flow over the first three full years post-closing and cost synergies of approximately $2.5 billion by 2022. Moreover, Bristol-Myers expects the acquisition to be 40% accretive to the bottom line on a standalone basis in the first full year after closing.

The company expects the merged entity to have a market leading oncology portfolio in both solid tumors and hematologic malignancies led by Opdivo and Yervoy along with Revlimid and Pomalyst. The cardiovascular, immunology and inflammation franchise will be strengthened with the presence of Eliquis, Orencia and Otezla, respectively. Moreover, the entity will also have a deep pipeline including six expected near-term product launches with potential sales of $15 billion.

Starboard’s Argument

Starboard Value believes that the deal is overpriced. The investment firm believes that the acquisition of Celgene will increase shareholders’ risk significantly without generating enough rewards. It believes that initiatives for cost management within the standalone Bristol-Myers will produce better returns than the proposed acquisition.

Starboard Value stated that Celgene has produced only three blockbuster products in 15 years, which raises concerns about Bristol-Myers’ assumption of significantly higher number of new blockbuster products in lesser time from Celgene’s current pipeline. Moreover, Celgene’s major revenue generator drug, Revlimid, will lose patent protection in 2026, which is likely to dent its sales.

The investment firm has also raised questions on Bristol-Myers’ current management as the company’s share price has been on a decline over the past three years and it has underperformed other large pharmaceutical peers.

Starboard Value believes that the abovementioned factors along with several others stated in the presentation makes the deal look bad. It also believes that there can be better alternatives than the proposed acquisition to fuel growth at Bristol-Myers.

Our Take

Bristol-Myers was on the lookout for an acquisition for quite some time now to bolster its portfolio. The company’s top drug, Opdivo, has fallen behind Merck’s MRK Keytruda in capturing market share in the anti PD-1/PD-L1 category. Moreover, competition is rising in the category with the presence of Roche’s RHHBY Tecentriq. Both Keytruda and Tecentriq are approved for first-line non-small cell lung cancer (“NSCLC”), which has the largest patient population among all cancer indications.

Meanwhile, Opdivo is yet to gain approval for the same indication, which is denting its prospects. In January, Bristol-Myers had withdrawn a label expansion application for Opdivo seeking its approval in combination with Yervoy in first-line NSCLC.

However, sales of Opdivo grew substantially in 2018. Moreover, cardiovascular drug, Eliquis is witnessing strong growth. Sales growth of Celgene’s Revlimid also remained impressive. While Revlimid generated global sales of $9.7 billion in 2018, Opdivo and Eliquis together recorded sales of $13.2 billion. Total product revenues of both the companies was $36.8 billion in 2018. The current product sales of both the companies and a strong growth rate of major drugs are positives that back the deal. However, successful development of pipeline into several blockbuster products will be necessary for long-term growth.

Although the acquisition will enable Bristol-Myers to diversify its portfolio and looks positive prima facie, any acquisition of this magnitude comes with its own set of integration risks. The deal will also add considerable debt to Bristol-Myers’ balance sheet.

With rising opposition from stakeholders the future of the deal is getting blurred. However, outcome of the Special Meeting is likely to provide a view of all shareholders, which will decide the future of the deal.

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Bristol-Myers Squibb Company (BMY) : Free Stock Analysis Report
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