JANUARY IS a good time to go looking for a bargain, and Giovanni Caforio, chief executive of Bristol-Myers Squibb (BMS), has gone shopping. On January 3rd he announced his firm’s intention to buy Celgene, a slightly smaller American biotech company that has seen its share price fall by 57% since the autumn of 2017. Even though it is cheap, the company is a huge purchase for BMS, whose original constituent firm, Squibb, was founded in 1858. Its cash and stock offer values Celgene at roughly $90bn, including debt. If approved by regulators and by shareholders, the deal would be one of the largest-ever mergers in the pharmaceutical industry.
Winning over Celgene’s shareholders, who will be able to recoup some of their losses, should be fairly easy. BMS’s takeover offer, of $50 in cash plus a share in the combined entity, values Celgene at $102 per share, a 53% premium to the closing price on January 2nd. There is a sweetener, too. Celgene shareholders would also get a security called a “contingent value right”, which entitles them to more money if the company achieves certain milestones over time. These securities are sometimes used when volatile companies are being acquired and when a price is hard to agree on. The extra cash for BMS shareholders, of $9 a share, will be triggered if America’s drug regulator, the Food and Drug Administration (FDA), approves three of Celgene’s pipeline drugs by a certain date.
Mr Caforio is unlikely to face opposition from regulators either. The portfolios of the two companies overlap, in particular in the market for oncology drugs, where in 2017 Celgene and BMS were the third- and fifth-largest firms by revenue, respectively. But even once merged, their oncology market share, of 14.5%, would lag industry leader Roche, which supplies 21% of the market. Big pharmaceutical mergers that have been scuppered by America’s Treasury in recent years have usually come undone over proposed tax-avoiding arrangements in foreign jurisdictions. This deal, between two American-headquartered companies, will not draw their ire on those grounds.
It is shareholders in BMS that will take more convincing. There is some logic to acquiring Celgene. It will pad BMS’s thin drug pipeline and add promising new oncology drugs to its portfolio. There appears to be potential for cost synergies, too. Mr Caforio has said that these could add up to $2.5bn, almost a sixth of the combined operating expenses of the two companies, by 2022. But this did not stop the share price of the American drugmaker falling by 14% on the day the acquisition was announced, even though the company attempted to soften the blow by saying it would buy back $5bn worth of its own shares.
Naysayers have three big concerns. First, they claim that Celgene was extremely cheap for good reason. One of its promising gut drugs, GED-0301, failed in a late-stage trial in 2017. Another drug, Ozanimod, to treat multiple sclerosis, has faced much longer delays than expected to get FDA approval. As such disappointments mounted investors grew increasingly concerned that the firm relies too much on its best-selling blood-cancer drug, Revlimid, which may face generic competition as soon as 2021. This product accounts for nearly two-thirds of sales.
A second worry is the new firm’s debt burden. It would owe $50bn, a combination of debts already owed by Celgene and a $33.5bn loan that BMS has secured from Morgan Stanley and Mitsubishi UFJ Financial Group, a Japanese megabank, to finance the deal. But this may be a short-term problem for the new company. BMS expects the combined company to generate $45bn in free cashflow in the first three years after the deal’s completion, hopefully allowing it to pay down debt quickly.
A final reason for BMS shareholders to look askance at the merger is that it may scupper their chances that BMS itself might be acquired. As the drugmaker has stumbled with its own drug-trial failures in recent years, and its share price has suffered, stockmarket analysts have suggested that it could be an appealing acquisition for one of America’s pharmaceutical giants, such as Pfizer or Amgen. If BMS were to be acquired by either firm, shareholders would likely be paid a juicy premium. But the merged group would be too big for even Pfizer, worth $255bn, to swallow—before news of the deal came the two firms had a combined market value of $138bn.
According to Ronny Gal, an analyst at Sanford C. Bernstein, a research firm, a bid for BMs alone could still be forthcoming if Pfizer or Amgen could act quickly to stop the Celgene deal going ahead. Mr Caforio must hope his competitors are not eyeing up BMS as a bargain of their own.