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What Investors Need to Know About the Celgene, Amgen & Bristol-Myers Deals

Mitchell Moore

On Monday, Celgene CELG announced a sale of its psoriasis drug Otezla for $13.4 billion to Amgen AMGN. This deal will be all cash and is expected to clear before the end of the year. Celgene’s stock climbed 3.2% the day of the announcement and has risen another 0.5% since then.

The Sale

Bristol-Myers Squibb will buy Celgene contingent on Celgene’s sale of its Otezla drug to Amgen.

Celgene began looking for a buyer for Otezla after U.S. regulators raised antitrust concerns over a proposed acquisition of Celgene by Bristol-Myers Squibb BMY. Regulators are likely concerned about BMY’s psoriasis drug in late-stage development that would be similar to Otezla.

The sale is contingent on approval from regulators and the subsequent acquisition of Celgene by BMY. Amgen expects this deal to be worth about $11.2 billion after anticipated future cash tax benefits. This is much higher than the $8-$10 billion range that analysts expected. However, Amgen released a statement after the announcement saying “We’re doubtful investors will miss the additional cash required to bring Otezla on board from AMGN’s balance sheet … Recall, AMGN finished Q2 with $22B in cash.”

Impact

Last year, Otezla brought in $1.61 billion in sales for Celgene. Amgen anticipates sales to grow by low single digits over the next five years due to its compatible portfolio of other anti-inflammatory drugs. Otezla has already shown impressive growth since its 2014 approval, with sales up over 300% from 2015 to 2018, and Amgen does not expect this to stop. This will boost Amgen’s top line significantly and help offset recent pressure from copycats of its Neulasta and Sensipar drugs.

Currently, BMY’s acquisition of Celgene is expected to be worth about $74 billion. Bristol-Myers Squibb stated that it would use cash from Celgene’s sale of Otezla sale to pare down debt incurred as a result of its Celgene purchase. The company will target a better debt to EBITDA ratio of 1.5x by 2023, using this sale to start. BMY also announced it would increase its already-accelerated share buyback program from $5 billion to $7 billion.

Let’s now look at the individual financial estimates for Bristol-Myers Squibb and Celgene to gain insight into the combined company’s possible future.

Celgene

Celgene stock is up 51.7% YTD, beating the large-cap pharma market’s performance of -2.0%. Celgene is also a Zacks Rank #3 (Hold) at the moment, with earnings estimates having been revised in both directions in the past 60 days.

Earnings estimates show a current quarter growth of 19.21% to $2.73 per share. Next quarter is projected to come in 18.41% above last year, along with a full year estimate of $10.87 per share, a 22.55% jump. Fiscal 2020 is predicted to see earnings continue to rise 10.14% to $11.97 for the full year.

Bristol-Myers Squibb

For Q3 2019, our Zacks Consensus Estimates show earnings shrinking by 3.67% over the year-ago period, to $1.05. Investors should note that BMY crushed Q2 fiscal 2018’s $0.91 per share estimate when it posted $1.09. Meanwhile, full-year earnings are projected to grow 7.54%. Earnings for the following year are projected to jump another 18.67%.

BMY currently holds a Zacks Rank #1 (Strong Buy), due to positive earnings estimate revisions for full year fiscal 2019. It is also currently trading at a discount with a forward P/E ratio of just 9.7x compared to the large-cap pharma average of 14.1x.

Bottom Line

Analysts expect this deal to close by the end of the year, and for anti-trust regulators to approve it after the Otezla sale. Both companies look promising financially, making it likely that the deal will create a pharma powerhouse. Investors should look for more news on this deal as it approaches completion, as it is possible to make gains if the combined company operates successfully.

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