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Morningstar | Bristol-Celgene Merger a Go; Maintaining Our FVEs and Bristol Looks Undervalued

Shareholders of both Bristol-Myers Squibb and Celgene have voted to approve the merger between the two companies, which should close in the third quarter. We're maintaining our $65 fair value estimate for Bristol, which had already assumed that the merger would be completed, as well as our $120 fair value estimate for Celgene, which uses Bristol's fair value estimate as the value of the shares distributed to Celgene shareholders as part of the cash and stock deal. We think that the combined company has clear therapeutic area overlap in oncology and immunology and that Celgene's strong cash flow from operations over the next few years--growing north of $10 billion a year in 2021-22 in our model--will help Bristol reduce leverage and prepare for commercialization of Celgene's late-stage pipeline, as several launches are on tap through the end of 2020. Celgene's near-term pipeline still looks significantly undervalued, and our estimate of $5.2 billion in sales from its late-stage pipeline in 2022 is roughly $1.5 billion higher than consensus.

As we discussed in "No Drug Industry Moat Impact From Rebate Overhaul, but Firms With Lowest Reliance on Rebates Look Most Undervalued," we think companies with less rebate exposure are on balance in a better position to retain strong pricing power if rebates are eliminated in Medicare and Medicaid (Health and Human Services proposal in January) and in the private market (Senate bill proposed in March). Specifically, Celgene's Revlimid, while part of the pharmacy benefit channel, has minimal rebating, given its significant differentiation from the competition, and much of Celgene's late-stage pipeline involves highly differentiated therapies that won't require massive rebating to establish or maintain uptake.