Giovanni Caforio, chairman and CEO of Bristol-Myers Squibb Co. (BMS), cut to the chase in unpacking the New York-based pharma's proposed acquisition of the granddaddy of biotech, Celgene Corp., calling the match "a historic day" for both companies with "many compelling benefits."

The combined company, Caforio said, would hold the world's No. 1 oncology franchise, with major oncology franchises in both solid tumors and hematologic malignancies led by BMS blockbusters Opdivo (nivolumab) and Yervoy (ipilimumab) and Celgene's Revlimid (lenalidomide) and Pomalyst (pomalidomide). The combined portfolio would create a top five immunology and inflammation franchise, led by Orencia (abatacept, BMS) and Otezla (apremilast, Celgene), according to Caforio, who also committed to "maintain our position as the No. 1 cardiovascular franchise, led by Eliquis" (apixaban).

"We will have nine products with more than $1 billion in annual sales and significant potential for growth in these areas," he added.

Such prospects helped drive a cash and stock transaction with an equity value of approximately $74 billion. The deal calls for Celgene shareholders to receive one BMS share and $50 in cash for each share of Celgene along with one tradeable contingent value right (CVR) per share.

Based on the Jan. 2 closing price of $52.43 for BMS shares (NYSE:BMY), the pharma valued the cash and stock consideration realized by Celgene shareholders at closing as $102.43 per Celgene share (NASDAQ:CELG), or a premium of approximately 51 percent based on Celgene's 30-day weighted average closing price prior to signing and approximately 54 percent based on the stock's closing price of $66.64 on Jan. 2.

Each tradeable CVR entitles its holder to a one-time potential cash payment of $9 apiece upon FDA approval of three development programs: the relapsing multiple sclerosis (MS) drug ozanimod (by Dec. 31, 2020), liso-cel (JCAR-017) (by Dec. 31, 2020) and bb-2121 (by March 31, 2021) – in each case for a specified indication.

The FDA's refuse to file (RTF) letter on the new drug application for ozanimod was one of a string of embarrassments last year for the Summit, N.J.-based biotech. (See BioWorld, March 1, 2018.)

Celgene gained the CD19-targeting CAR T-cell candidate JCAR-017 last year in its $9 billion takeover of Juno Therapeutics Inc. and is partnered with Bluebird Bio Inc. in a development deal for anti-BCMA CAR T candidate BB-2121 for relapsed/refractory multiple myeloma. (See BioWorld, Dec. 12, 2017, and Jan. 23, 2018.)

BMS shareholders are expected to own approximately 69 percent of the combined company and shareholders of Celgene, the rest.

BMS said the transaction is not subject to a financing condition. The cash portion will be funded through cash on hand and a debt financing, secured through a fully committed arrangement with Morgan Stanley Senior Funding Inc. and MUFG Bank Ltd. Following the transaction's close, BMS said substantially all debt in the combined company will be on an equal footing.

BMS also expects to execute an accelerated share repurchase program of up to approximately $5 billion, subject to closing of the transaction, market conditions and board approval.

Caforio will remain as chair and CEO of the combined company. Two members from Celgene's board will be added to the BMS board, and BMS said the combined company would retain a strong presence in New Jersey.

The transaction, subject to approval by shareholders of both companies, is expected to close in the third quarter. Morgan Stanley & Co. LLC is serving as lead financial advisor to BMS, with Evercore and Dyal Co. LLC as financial advisors. J.P. Morgan Securities LLC is serving as lead financial advisor and Citi as financial advisor to Celgene.

'This transaction is financially compelling on day one'

The deal, if it closes, will become the largest M&A in biopharma history, topping Actavis plc's 2015 acquisition of Allergan Inc. for $70.5 billion. (See chart, below.)

The pending $62 billion acquisition of Shire plc by Takeda Pharmaceutical Co. Ltd., which received regulatory approval this week and is expected to close Jan. 8, will weigh in at No. 3 on the current list, knocking off Sanofi SA's 2011 acquisition of Genzyme Corp., currently ranked No. 10. (See BioWorld, May 9, 2018.)

Ironically, the highest value M&A that actually closed in 2018 was the $13 billion purchase by Glaxosmithkline plc of its consumer health care joint venture with Novartis AG, noted BioWorld analyst Karen Pihl-Carey. That transaction was followed in value by more conventional deals: Sanofi's acquisition of Bioverativ Inc. for $11.6 billion and the Celgene/Juno deal. Should Shire/Takeda and Celgene/BMS both close as expected, 2019 could become the first year in a decade for back-to-back top five M&A deals.

In fact, some observers likened the agreement to Roche Holding AG's 2009 pick-up of Genentech Inc., whose combination has a current market cap of about $215 billion, according to Peter Winter, BioWorld Insight editor and long-time industry analyst. Pfizer Inc. outflanks Roche, with a market cap of $244 billion. The union of Celgene and BMS would produce a company with a market cap of about $130 billion, although combined revenues might push the pair closer to Roche, Winter suggested. Either way, the tie-up is likely to put pressure on big pharmas such as Eli Lilly and Co., which was content in 2018 to craft several bolt-ons.

Meshing the Celgene and BMS product pipelines and portfolios was a key to the deal, according to Caforio, who pointed to an "industry-leading late-stage and early stage pipeline" that includes six potential launches over the next 12 to 24 months in addition to lifecycle readouts, mostly in immuno-oncology (I-O).

"Our expertise in small molecules and biologics will be complemented by Celgene's expertise and their discovery platforms in protein homeostasis, cell therapy and more," he added, expanding the company's internal capabilities and external partnerships to provide access to additional modalities.

Caforio also predicted strong return on investment from the transaction.

"This transaction is financially compelling on day one," he said. "We will deliver strong returns with immediate EPS accretion."

Charles Bancroft, executive vice president of global business operations and chief financial officer at BMS, predicted the deal will generate returns "in excess of both companies' cost of capital and deliver more than 40 percent accretion in the first full year." Although more than half of those savings are expected to come from commercial efficiencies, central support functions and geographic optimization, the BMS slide deck left no doubt that R&D will take a hit, generating approximately 35 percent of post-acquisition synergies through research and early stage portfolio optimization and reduction of "overlapping resources" – descriptions likely to produce angst among scientists throughout both organizations, including those at Celgene's Juno subsidiary.

The estimated $2.5 billion in synergies by 2022 will constitute roughly 13 percent of pro forma combined spend, in line with previous transactions of similar size and scope, Bancroft said.

'Not the way we would have drawn it up'

Although the boards of both companies approved the combination, BMS shareholders weren't exactly enthusiastic. The company's shares fell to five-year low of $44.30 before closing at $45.12 for a loss of $6.90, or 13.3 percent, with nearly 80 million shares exchanged.

Celgene's shares climbed as much as 31 percent before closing at $80.43 for a gain of $13.79, or 20.7 percent, far short of the company's 12-month high of $109.98.

For the most part, analysts advised Celgene shareholders to take the money and run. Leerink Partners LLC's Geoffrey Porges called the BMS offer "a best-case scenario that should be immediately utilized by Celgene shareholders," noting the offer value is contingent on Bristol's stock price.

"If Bristol's stock remains flat with yesterday's closing price at deal closure, the offer price premium for CELG shareholders is +54 percent without the CVR, and +67 percent with the CVR," Porges wrote in a flash note following the deal's disclosure. "However, if Bristol's stock remains at the pre-market price of ~$44, then the premium falls to 41 percent and 55 percent, respectively. Given this potential premium erosion, and the risk that Bristol shareholders may reject this deal if the BMY price drop sticks, we would recommend the current pre-market CELG upside of ~30 percent as an exit opportunity for CELG shareholders."

A successful transaction, he added, would dilute exposure to Celgene's patent cliff, relieve Celgene investors of "the trials of the company's management decision-making" and offer immediate upside that would otherwise take months or years to realize. "While Celgene's shareholders are unlikely to reject the offer, Bristol's could," Porges cautioned.

"This profile potentially compounds the risk of similar erosion for other Bristol assets in the same time frame, and puts even more onus on Bristol to find more deals to boost revenue in that time period," he added in a second look at the deal. "Bristol does get huge additional cash flow to finance its oncology development expenses, but nothing described on the call seemed a 'deal-maker' in terms of the value created by the combination."

Jefferies LLC's Michael Yee generally agreed, calling the offer a "great exit strategy at [a] 50 percent premium." Although another suitor could potentially emerge, the deal made the best strategic sense for BMS, he reasoned, where "there is complementary synergy particularly in oncology and I-O (hematology for CELG and solid tumors BMY)."

Based on its stock price, Celgene represented an opportunistic buy, he added.

"We've said previously that 'mega M&A' is one of the things that can happen when biotech trades so cheap, specifically CELG trading at all-time low P/E of 6x and the profitable large biotechs at 10-12x, which is an all-time historical low."

Yee, like others, immediately turned to prospects for other takeouts on the tail of the BMS offer.

"We see GILD, BIIB, VRTX, ALXN as the primary [three to four] large biotechs that could trade up as similar situations that could be targets based on valuation and depressed stocks performance (GILD, BIIB, ALXN), or deal size and blockbuster growth (VRTX)," he wrote.

Piper Jaffray analyst Christopher Raymond also was bullish on prospects for more big M&A. Although the BMS move on Celgene was "not the way we would have drawn it up," a Celgene acquisition represents "a big positive for the sector," he wrote.

"The initial reaction we are getting (essentially, 'two turkeys don't make an eagle') would seem to be evidenced by Bristol's initial stock reaction," Raymond added. "To be clear, CELG has its challenges with ~64 percent of its revenue facing generic entry beginning in 2022, but we think this is clearly positive to the sector in that it reminds investors of upside potential in the space."

A quick read of the history books would have predicted the deal, he pointed out, noting that "when large-cap biotechs find themselves under duress, more often than not the exit is a take-out." He cited Celgene's recent history of setbacks, including the ozanimod RTF, the failure of mongersen (GED-0301) – gained in the $710 million up-front acquisition of privately held Nogra Pharma Ltd. – and lowering of the company's long-term guidance on slowing Otezla sales. (See BioWorld Today, April 25, 2014, Oct. 23, 2017, and Oct. 27, 2017.)

"Subsequent share price decline certainly fits this pattern," he said.

While eschewing hard predictions, Raymond suggested Alexion Pharmaceuticals Inc., with a long-tailed asset in its Soliris (eculizumab)/Ultomiris (ravulizumab) franchise, and Biogen Inc., with "a more stable and longer-lived MS franchise than we think the Street is modeling," as potential large-cap targets. He also pointed to "perennial takeout candidate" Biomarin Pharmaceutical Inc. as "an immediate bolt-on rare disease business for any strategic buyer."

Among the small to midsized caps, "we think virtually any name is on the table," he added, singling out Aimmune Therapeutics Inc., Deciphera Pharmaceuticals Inc. and Rigel Pharmaceuticals Inc. as strategic plays "as all three have assets with clearly defined clinical profiles which could fit nicely within established commercial infrastructures."

'M&A in the space will pick up considerably in 2019'

RBC Capital Markets analyst Brian Abrahams also predicted that 2019 could be a big year for biopharma M&A.

"While large-cap deals tend to be one-offs, driven by specific synergies/complementarity as in this case, with large-cap bio and pharma flush with cash, capital relatively cheap, a strong need to diversify around maturing franchises with cliffs and biotech valuations having come down, our thesis remains – reaffirmed by today's deal – that M&A in the space will pick up considerably in 2019," he wrote.

Abrahams zeroed in on prospects by indication, calling cancer and inflammation "most ripe for innovation and potential synergies" but adding therapeutic areas like neuro and modalities like gene therapy as deserving of acquisition interest. Nine of 11 of biotech deals since 2017 that exceeded $1 billion were focused in oncology, he pointed out, "and as BMY's call highlighted, the cancer space offers the relatively unique potential for drug combinations among different companies' platforms (e.g., checkpoints + cell therapy) that further enhances potential synergies in a merger/acquisition."

Abrahams cited rheumatology/inflammation as another area with similar potential, and "we view neurology as a key emerging area, with attractive valuations owing to residual risk perceptions that could be ripe for M&A interest," he noted, naming Sarepta Therapeutics Inc., Sage Therapeutics Inc. and Alder Biopharmaceuticals Inc. as "particularly attractive acquisition targets for larger companies with established or growing neuro franchises."

Others in the M&A mix included Fate Therapeutics Inc., which Piper Jaffray's Edward Tenthoff labeled as a potential acquisition target for its rich cell therapy pipeline and platform, reasoning that BMS was drawn to Celgene, in part, by the long-term potential of cellular therapies to treat cancer.

Tenthoff also dubbed the BMS-Celgene deal as a "short-term negative and long-term positive" for Sutro Biopharma Inc., noting that Celgene holds rights to four preclinical programs, including a BCMA ADC and I-O bispecific scheduled to enter the clinic in the first half of this year. "While the acquisition may push out IND filings and associated milestones, we believe Sutro's Xpresscf cell free and biotherapeutic programs could be of value to Bristol," he wrote.

One big name that did not share the glow from the M&A sunshine was Beigene Ltd., partnered with Celgene in the development of tislelizumab to treat solid tumors. (See BioWorld, July 7, 2017.)

"We see pressure on shares of BGNE, as investors weigh the future prospects of tislelizumab, as well as the commercial partnership for Celgene's products in China," wrote Leerink's Andrew Berens. "We have spoken with Beigene management, who indicated that they expect tislelizumab will be returned if the deal closes along with a termination fee from Bristol. Management also indicated that they are currently running and operationalizing all of the ongoing registration-enabling studies, including those studies in the Celgene territories, limiting the impact on program operations."

Rights to Celgene's commercial products in China also were likely to be negotiated, Berens added, and could be returned to Beigene, whose shares (NASDAQ:BGNE) fell as low as $108 Thursday before recovering some ground to close at $128.30 for a loss of $7.73, or 5.7 percent.

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