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Very good news for the merger
Bristol-Myers Squibb or "BMS" (BMY) has agreed to acquire Celgene (CELG). Each CELG share will be paid with $ 50 in cash, a BMS share and a contingent value right, or CVR, with a cash payment of $ 9 if three CELG drugs are approved on time.
My initial reaction in January was that CELG was attractive as an arbitrage game and I moved into a full position, then at an average price of about $ 88. While I was further studying the agreement, based on a more complete disclosure of the thought to the BMY, I started to like it more. My position has evolved from thinking that when the large-cap market (SPY) started to recover but the BMY started falling again below the $ 50 mark, the BMY started to look like a stock cheap value providing the buyer with his means several means alpha. Initially, one of the reasons for owning BMY was that even though I did not think there would be a limited acquisition interest, and in any case I thought the operation would succeed, the fact BMY was a paid protection against dividends. and BMY suddenly considered "at stake".
I would like to summarize the sequence of events on Friday indicating that the agreement will be passed. The first big news was summed up Friday by Looking for alpha:
- CELG is up 6% on pre-market light volumes, in response to proxy advisor ISS, which supported its announced merger with BMY (-1% before sale).
- The shareholders of both companies will vote on the merger on April 12.
The service of institutional shareholders is quite influential. Mr. Market felt that their support was critical to BMY's shareholders voting in favor of the transaction. In addition, as Internal business reports, another influencer left Friday for the transaction (my emphasis):
Institutional Shareholder Services and Glass Lewis, two influential advisory companies, recommended the deal, which was faced with an unusual level of resistance from Bristol-Myers shareholders, including its major shareholders.
ISS has described the logic of the agreement as "its" overall, while Glass Lewis has described it as an "attractive" combination.
"Based on our research, reviews and analyzes, we believe that the proposed merger is strategically persuasive and offers the potential for potentially significant returns to the shareholders of the combined company, including existing Bristol-Myers holders, "Glass Lewis report says.
Finally, in response to this and the lack of further support against the agreement, Starboard Value withdrew its proxy requesting a "no" vote.
I think it is very likely that the shareholders of each company approve the agreement and that the regulators also approve it. But I'm not sure of the timing, and I would say that the month of December rather than the third quarter would be conservative.
In this context, I wish to update and modify my reflection on CELG and make some preliminary comments on a post-merger BMY.
CELG – fully evaluated
Here are the share prices at the close of Friday:
- CELG: $ 94.34
- BMY: 47.71 USD.
Before adding the CVR, the value of the transaction is $ 97.71 at current prices. It's so close to $ 94.34 that I think it's now a "arb" game unless the CVR is worth it. I do not think that's the case. here are the terms, taken from the press release announcing the transaction:
Each share will also receive a negotiable CVR, which will entitle its holder to receive a one-time cash one-time payment of $ 9.00 upon FDA approval of the three ozanimods (no later than December 31, 2020). -cel (JCAR017) (no later than 31 December 2020) and bb2121 (no later than 31 March 2021), in each case for a specified indication.
So suppose that in December 2019, each CELG share represents $ 97.71. What is the CVR worth? I would target a one – year weighted average for it to pay off if it pays for it; that it is worthless could be learned at any time if one of the drugs is rejected by the FDA. So I will consider the CVR as a one – year coin worth $ 4.50 on average from December. This would represent about 5% additional yield in about a year (maybe a little longer). This is less than the required yield that most of us assume for a stock. So unless I'm particularly optimistic about BMY, I consider that CELG is fully valued – but in this case, it would be acceptable to buy BMY anyway. Tax considerations may come into play, so please do not take this for any real advice.
I will review, next week, the call prices and the open interest in the negotiation between CELG and BMY before deciding if a call-by-sales strategy is interesting.
Now is the time to carefully consider BMY in association with CELG.
Business value of a BMY post-merger
I use 1,637 diluted BMY shares and the 715 MM shares that CELG indicated in its fourth quarter press release would constitute the average number of diluted shares for 2019. I also assume that soon after the closing, BMY will redeem 100 million shares for $ 5 billion (at $ 50 / share) and make it from the net cash reserves. This would give BMY a diluted number of shares of $ 2.262 billion. Multiply by the proposed share price of $ 50 and add $ 60 billion of net debt due to the merger would give a business value of $ 172 billion. My estimate is $ 45 billion in revenue in 2020, based on a consensus of $ 19.3 billion for CELG and $ 25.1 billion for the BMY; I end because the CELG generally beats the consensus.
These figures would give a potential price-to-revenue ratio of 3.8X for 2020 at US $ 50 for the BMY.
The $ 60 billion net debt is estimated as follows:
- CELG has about $ 20 billion of net debt to date; suppose no change
- $ 36 billion in cash to CELG shareholders
- $ 4 billion later paid to CELG shareholders for the CVR; note that it is a weighted average, as the actual number would be either zero, or about $ 6.3 billion.
Why do I like BMY here
# 1: quick repayment of debt
CELG's assets are excellent cash flow generators available. BMY also generates a good FCF. But the two companies this year, considered as a single company, could devote 30% of their revenues to R & D. Reducing R & D spending is a way to reduce debt and invest in many product launches up to 2021. In addition, some pipeline assets may be sold, not simply abandoned. Finally, regulators may not allow BMY to control both Otezla for psoriasis and its advanced-stage inhibitor TYK2 for the same disease. If forced to choose, BMY could choose to sell Otezla. I model $ 8 billion for this asset.
The point of assessment for the quick repayment of the debt is as follows. Suppose Revlimid's sales reach $ 14 billion in 2022, then fall to $ 2 billion and then disappear to zero. If the peak of sales reaches $ 50 billion in 2022, the company could still reach $ 38 billion or more and if the net debt is reduced to $ 35-40 billion with a stable stock count, the value of the company will fall by the amount of net debt reduction. .
Investors could then turn to the income from the troughs, which would give free rein to the imagination as to the P: S ratio that would be attributed to this company. It could easily be 5X or more, giving a business value of $ 200 billion and allowing a very nice price appreciation for BMY.
# 2: massive scale and focus
After the merger, the BMY will be the world leader in oncology and the 5th largest player in immuno-science. He has also Eliquis and research in cardiovascular and fibrotic diseases. However, BMY will be a very big niche player with all the benefits it offers. Strong management, and BMY 's independent Board of Directors, in my view positive, will effectively create synergies across the company, including:
- basic scientific research
- Clinical R & D
- Sales and Marketing
- general and administrative.
It is also important that the combined company be so large that it can be approached to market oncology or immuno-science drugs on the market or in parallel, simply because of its knowledge of market and its global reach. It will be like Pfizer (PFE) in this regard, which bodes well for its resilience during periods of slow development of new products.
# 3: Focus on hot areas of the pharmaceutical / biotech industry
Advances in oncology and immuno-science have highlighted what 30 years ago in the past. Being a leader in growing regions is a big advantage. The advantage relates to both the prospects for real growth and the valuation that investors will attribute to the company. The vision that BMY's management paints for the post-merger is reasonable: huge cash flow in the short term, many short-term product launches to replace Revlimid's revenue when the time comes, and then the pipeline into upstream and business development activities enable long-term growth.
There are many other points that could be raised about this, but your time is precious, so I will end here.
Risks
If, unexpectedly, the merger is not approved by the shareholders of both companies, or if the regulators pose unforeseen obstacles to the conclusion of the transaction that led to its cancellation, I would expect that CELG is trading from here and BMY is trading (all other things being held). unchanged).
After the merger, of course, everyone wonders when Revlimid will fall into the credits. A growing drug making perhaps $ 11 billion in sales this year is so important that every additional month of sales counts. An early collapse of sales is a risk. Many others exist. Pipeline assets, such as liso-cel, have unpredictable start-up costs and revenues. Of course, until they are approved by the FDA and other regulators, they are only cost centers and not drivers of profitability.
There are so many risks right now that I am just going to suggest to any potential investor or investor in CELG or BMY to get acquainted with them by reviewing the information provided by one or the other of the companies.
End Points: BMY Long Term
When Bristol-Myers merged with Squibb in 1989, the transaction had fewer synergies than the offer from BMY-CELG. The title was nonetheless a star, recording a rise of about 6X over the next 10 years (helped by the sector's uptrend). I like this precedent. It is a transformative agreement. In more than half a century of business analysis – starting with the craziness of the conglomerate in the 1960s – I may never have witnessed a peer-to-peer harmonizes as well as CELG and BMY. I therefore agree with Glass Lewis, quoted above.
I also appreciate the fact that the acquirer is a Big Pharma name whose board of directors largely comprises independent directors.
I am confident that BMY's CEO and R & D Director, both physicians, will make smart decisions on how to shape the new company.
My current price target at the end of 2020 for a post-merger BMY is $ 60. This implies a total return of about 30% over the next 21 months, or annual return in mid-adolescence. Given the secure dividend that BMY hopes to increase steadily through the merger and the current yield of 3.44%, the purchase of the last BMY decline related to arbitrage seems logical to me. Conversely, I do not see a lot of benefits between CELG and BMY here, and it's mostly around $ 94 that we've traded out of CELG to buy more BMY in the $ 48 range. A strategy of short selling covered on CELG can be useful.
Thank you for reading and sharing your thoughts on this evolving story you want to contribute.
[Author’s note: Submitted Sunday morning.]
Disclosure: I am / we are long BMY, CELG. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose actions are mentioned in this article.
Additional information: No investment advice. I am not an investment advisor.
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