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Morningstar | Celgene Gives Bristol a Pipeline Beyond Opdivo

Bristol-Myers Squibb and Celgene 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 SG&A and likely commercial overlap and overhead), we think the deal is positive strategically and financially. Prior to the deal, we saw Celgene's near-term pipeline as significantly undervalued, and our estimate of $5.2 billion in sales from the firm'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) but several other generics launching in the 2024-26 time frame.

Bristol plans acquire Celgene for a combination of $50 in cash per share and one share of Bristol stock per Celgene share, for a total value of $102.43 per share, giving Bristol shareholders 69% of the combined firm. There is an additional CVR worth $9 per Celgene share if ozanimod, liso-cel, and bb-2121 all receive FDA approval within reasonable time frames. The deal has board approval from both firms and is expected to close in the third quarter of 2019.  We expect to slightly lower our $116 per share Celgene fair value estimate to match the offer price, and we don't expect any major changes to our $61 per share Bristol fair value estimate after factoring in the upfront deal price and the CVR.

In oncology, Bristol's portfolio is heavily dependent on Opdivo for growth, and competition from Merck's Keytruda, particularly in the largest lung cancer segment, has limited Opdivo's growth potential. The Celgene deal diversifies Bristol's oncology portfolio, and we think this reduces 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 CML 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 NHL, with a filing expected shortly). Bristol's early-mover advantage with Opdivo could also help the combined firm's evaluation 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 v Bristol's TYK2 BMS-986165 in progress (data expected 2020), Bristol will have a foundation in psoriasis prior to 986165's launch. Ozanimod's entry into MS (launch expected in 2020) will be a new market for both Celgene and Bristol, and ozanimod and 986165 both have potential in IBD (ozanimod is in phase 3 in UC and Crohn's, and 986165 is in phase 2 in Crohn's).

As we discussed in October in "Celgene: Winning the Fight to Preserve a Post-Revlimid Moat," we have 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.