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Bristol-Myers to Sell Otezla for Celgene Merger, Shares Down

Zacks Equity Research

Shares of Bristol-Myers Squibb Company BMY declined 7.42% after it announced plans to divest one of Celgene Corporation’s CELG blockbuster drugs, Otezla, to complete the impending merger. The company also announced dismal results from a liver cancer study.

Bristol-Myers is planning to divest plaque psoriasis and psoriatic arthritis drug, Otezla, to be able to close the acquisition on a timely basis in light of concerns expressed by the U.S. Federal Trade Commission (FTC).

We remind investors that the company has tyrosine kinase 2 (TYK2) inhibitor, BMS-986165, in its pipeline, which is being evaluated in several autoimmune diseases, including psoriasis. The regulatory agency was concerned about a possible overlap between Otezla and BMS-986165 in the pipeline.

Hence, Bristol-Myers decided to sell Otezla.

However, investors were clearly disappointed by the decision as Otezla raked in more than $1.6 billion of sales in 2018 and was one of the key growth drivers for Celgene, while BMS-986165 is still in development.  Sales of the drug are expected to come in around $1.9 billion in 2019 and retaining the same would have enabled Bristol-Myers to develop a strong inflammation portfolio along with its rheumatoid arthritis drug, Orencia.

Moreover, the impending acquisition will be delayed as the company now expects to complete the merger by the end of 2019 or beginning of 2020, assuming the FTC accepts the consent order and other customary closing conditions are satisfied.

The divestiture is subject to further review by the FTC and requires Bristol-Myers to enter a consent decree with the commission. The proceeds of the divestiture will allow the company to accelerate its post-closing deleveraging plans.

On the other hand, Bristol-Myers might not be able to sell Otezla at a lucrative price, given the regulatory constraints.

Shares of the company have lost 12.2% in the year so far against the industry’s growth of 4.3%.

 

We remind investors that in January 2019, Bristol-Myers announced that it will acquire Celgene for $74 billion to boost its oncology portfolio, given the stiff competition for Opdivo from the likes Merck’s MRK Keytruda. However, the acquisition has hit a few road blocks, with a few large shareholders of Bristol-Myers opposing the merger.

The shareholders thought it to be risky and may add significant debt to the balance sheet. Moreover, Celgene’s growth-driving oncology drug, Revlimid, is expected to lose patent protection soon. The acquisition was finally given a green signal a couple of months back.

The divestiture of the drug also puts question mark on the targeted synergies and anticipated sales of the combined company, per Bristol-Myers.

Concurrently, it announced that a randomized phase III study CheckMate-459, evaluating Opdivo versus Bayer’s BAYRY Nexavar as a first-line treatment, in patients with unresectable hepatocellular carcinoma (HCC) failed. Nevertheless, Opdivo is being studied by the company across multiple settings and lines of therapy for HCC, including as monotherapy in the adjuvant setting and in combination with Yervoy (ipilimumab) for previously treated patients.

Zacks Rank

Bristol-Myers currently carries a Zacks Rank #3 (Hold).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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