A technician inspects vaccine vials for defects during a screening process at a pharmaceutical plant in Pune, Maharashtra, India. (Photographer: Sanjit Das/Bloomberg)

Biggest Pharma Deal Ever Faces Aging Patents, Tough Politics

(Bloomberg) -- A record pharmaceutical deal between Bristol-Myers Squibb Co. and Celgene Corp. will face obstacles on several fronts, including expiring patents on Celgene’s cornerstone drug, critical politicians and investors wondering if the takeover is the right move.

Bristol-Myers said Thursday that it would pay $74 billion in cash and stock for Summit, New Jersey-based Celgene, grabbing a blockbuster cancer drug and what it described as a promising pipeline of experimental therapies that will help broaden its business. But with at least six months before when the companies expect to complete the deal, plenty could happen.

Shareholders from Celgene and Bristol-Myers will have to approve the transaction, and there are early signs they have doubts. There’s an almost $15 spread between where Celgene’s stock is trading and Bristol-Myers’s offer -- the third-widest spread among more than 100 active deals being tracked by Bloomberg. Options trading is also indicating a potential snag.

“Given where Celgene is trading, there has to be some sizable discount that the deal doesn’t get done,” said Brian Skorney, an analyst with Robert W. Baird & Co.

Both companies said Thursday that they expect the deal to rapidly add to earnings. “My focus is on creating shareholder value for the long term and I think this deal does that,” Bristol-Myers Chief Executive Officer Giovanni Caforio said in an interview.

Patent Risks

Celgene’s biggest drug is Revlimid, a cancer blockbuster that in 2017 brought in an estimated $9.7 billion in sales -- almost two-thirds of the company’s revenue. While it has a thicket of more than 20 patents that could protect it until as late as 2028, they’re under assault by generic-drug makers eager for a slice of Revlimid’s sales.

Celgene reached a settlement with generic drugmaker Natco Pharma Ltd. to allow for a limited number of Revlimid pills starting in March of 2022. But there’s a risk that another generic-drug maker, India’s Dr. Reddy’s Laboratories Ltd., could upend that agreement and flood the market with cheap rivals much sooner.

Dr. Reddy’s has been locked in a legal battle with Celgene over its own generic form of Revlimid, arguing that its version doesn’t infringe Revlimid’s patents. If a judge agrees, Dr. Reddy’s could be in a position to launch a generic drug as soon as late 2020, according to Bloomberg Intelligence analyst Aude Gerspacher. In that case, Natco would likely be able to start selling their version sooner too, she said.

“Everyone thought they were going to settle over a year ago and they haven’t,” Gerspacher said, calling the Dr. Reddy’s litigation “the big legal overhang for Celgene right now.”

Bristol-Myers said Thursday that it had modeled for a variety of scenarios around Revlimid and was using conservative assumptions about the drug’s future.

Politics in Washington

The megadeal could also get caught up in the national debate over drug prices.

President Donald Trump isn’t the only one in Washington who has targeted drugmakers. While Congress doesn’t have power to stop the merger, it can call in CEOs for hearings, subpoena documents related to the deal, or take other steps to paint the companies in a negative light. Hours after the merger was announced, senior Democrats in Congress were criticizing it.

“Mergers that mean more money for drug company CEOs while patients pay the price are not a solution to skyrocketing drug costs,” Senator Elizabeth Warren said on Twitter. The Massachusetts Democrat is exploring a run for the Democratic nomination for president.

Democrats, now the majority in the House of Representatives, are expected to pressure pharmaceutical companies over drug costs with a flurry of bills and hearings. Celgene’s name often comes up in the drug pricing debate given tactics it’s taken to protect its blockbuster cancer drug Revlimid from generic competition while repeatedly raising its price.

“Revlimid is a prime example of the unsustainable path that drug prices are on,” said Maryland Representative Elijah Cummings, the likely incoming chairman of the House Committee on Oversight and Government Reform. “I plan to take a hard look at the entire process to determine why drug companies continue to raise the prices of critical drugs at the expense of the American people.”

Closing Surprises

The takeover still has to be approved by shareholders, and the 14 percent drop in Bristol-Myers’s shares Thursday -- the biggest one-day loss since August 2016 -- is an indication they may not love the idea of making Celgene a part of the New York-based drugmaker.

But they might be open to a different option, said Alex Arfaei, an analyst with BMO Capital Markets -- Bristol-Myers becoming a target for an even bigger buyer.

“We could see competing offers for Bristol-Myers before the shareholder vote,” Arfaei said in a note to clients. “Other companies that may have previously looked at a merger with Bristol-Myers now have a window given the stock’s weakness and upcoming shareholder vote.”

Bristol-Myers has faced struggles with its own drugs, and its stock was down 15 percent last year.

“Did Bristol do this deal as a poison pill and to prevent them from getting acquired?” said Skorney. “Could someone like Pfizer come in and appeal directly to Bristol shareholders and say your share price is down, we will take you out but you have to vote against the Celgene deal?” He called such a scenario unlikely but not impossible.

Laura Hortas, a spokeswoman for Bristol-Myers, declined to comment on that speculation. The deal has a $2.2 billion breakup fee, according to people familiar with the matter who asked not to be identified because it hasn’t been disclosed yet.

Antitrust

Mergers between brand-name drugmakers usually sail through Washington’s antitrust authorities.

While the deal will be investigated by antitrust enforcers in the U.S. and EU for any potential harm to competition, merger investigations in the pharmaceutical industry follow a familiar playbook and are typically resolved by selling product lines where the two companies compete. That was the case, for example, when Teva Pharmaceutical Industries Ltd. agreed to sell 79 products in order to win U.S. approval in 2016 to buy Allergan’s generic-drug business.

Yet not everyone in Washington is satisfied that enough is being done. Antitrust enforcers at the Justice Department and the Federal Trade Commission have faced a barrage of complaints from lawmakers about market power wielded by pharmaceutical firms leading to rising prices for consumers.

Representative Peter Welch, the lead sponsor of an effort to allow Medicare to negotiate drug prices, plans to circulate a letter for lawmakers to sign on asking the U.S. Federal Trade Commission to “look really skeptically at this proposed merger.”

“It has to be with conditions to keep the company from raising prices on drugs,” Welch, a Democrat from Vermont, said in an interview. “My hope is that President Trump will be our ally on this,” said Welch, who met with the president on the issue in 2017.

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