Bristol Broadens Pipeline With Celgene Buy

Bristol-Myers Squibb BMY and Celgene CELG are merging in a $74 billion deal that we think represents a very logical buildout of Bristol’s pipeline in oncology and immunology. With obvious therapeutic area overlap and $2.5 billion in annual cost synergies expected by 2022--the majority from selling, general, and administrative expense and likely commercial overlap and overhead--we think the deal is positive strategically and financially. Before the deal, we saw Celgene’s near-term pipeline as significantly undervalued, and our estimate of $5.2 billion in sales from the company’s late-stage pipeline in 2022 is roughly $1.5 billion higher than consensus. Bristol’s management has noted its conservative stance on Revlimid’s U.S. patent expiration, and we think this could fit with our own view, which assumes a single generic entry in 2022 (Teva TEVA) but several other generics launching in 2024-26.

Bristol plans to acquire Celgene for a combination of $50 in cash and one Bristol share per Celgene share, for a total value of $102.43 per share, giving Bristol shareholders 69% of the combined company. There is an additional contingent value right worth $9 per Celgene share if ozanimod, liso-cel, and bb2121 all receive approval from the Food and Drug Administration within reasonable time frames. The deal has approval from both companies’ boards and is expected to close in the third quarter. We expect to slightly lower our $116 Celgene fair value estimate to match the offer price. We don’t expect any major changes to our $61 Bristol fair value estimate after factoring in the up-front deal price and contingent value right.

In oncology, Bristol’s portfolio depends heavily on Opdivo for growth, and competition from Merck’s MRK Keytruda, particularly in the largest lung cancer segment, has limited the drug’s growth potential. The Celgene deal diversifies Bristol’s oncology portfolio, which we think reduces the risk around the significant number of first-line lung cancer data readouts for Opdivo expected through 2019. We expect Bristol’s experience with Sprycel in chronic myeloid leukemia could overlap with Celgene’s significant blood cancer exposure (Revlimid, Pomalyst) and help Celgene expand its reach into new markets, such as Revlimid’s expansion into non-Hodgkin's lymphoma, with a filing expected shortly. Bristol’s early-mover advantage with Opdivo could also help the combined company’s evaluation of potential combination regimens with several different modalities, from CAR-T (Celgene’s liso-cel, bb2121) to small molecules (next-generation IMiDs in early-stage testing). Bristol appears to be pressing hard with Celgene’s early-stage pipeline, with several phase 1 programs (BCMA therapies JCARH125 and CC-93269 as well as IMiDs CC-92480 and CC-90009) entering pivotal studies in 2019.

In immunology, Bristol’s success with Orencia could support Celgene’s Otezla marketing efforts, and with a head-to-head trial of Otezla versus Bristol’s tyrosine kinase 2 inhibitor BMS-986165 in progress (data expected in 2020), Bristol will have a foundation in psoriasis before 986165’s launch. Ozanimod’s entry into multiple sclerosis (launch expected in 2020) will be a new market for Celgene and Bristol, and ozanimod and 986165 both have potential in inflammatory bowel disease (ozanimod is in phase 3 in ulcerative colitis and Crohn’s disease, and 986165 is in phase 2 in Crohn’s).

We had modeled Celgene’s cash flow from operations growing north of $10 billion a year by 2021-22, ahead of the Revlimid patent expiration, and we think Revlimid’s strong growth prospects over the next four years will help Bristol reduce leverage and prepare for commercialization of several drug candidates by the end of 2020.