Celgene Shareholders Should Take the Money and Run, Says Wall Street

(Bloomberg) -- Bristol-Myers Squibb’s $74 billion plan to acquire Celgene Corp. came as a surprise to the Street. “Take it!” Leerink analyst Geoffrey Porges advised Celgene investors, while Jefferies analyst Michael Yee called it a “great exit strategy” for battered shareholders. As the deal is in cash and stock, the premium will rise or decline in line with Bristol’s valuation.

After a year in which Celgene lost almost 40 percent of its market value, shares rose as much as 32 percent Thursday, their biggest intraday gain since 1988. But there’s a chance holders of Bristol shares, which are down as much as 15 percent, could reject the bid, Porges wrote in a note to clients. Others are debating whether it will be a sign of more deals to come.

Jefferies health-care trading specialist Jared Holz writes that the deal could put Bristol “in play,” while the Street may view other drugmakers like AstraZeneca Plc., GlaxoSmithKline Plc., Eli Lilly & Co. and Sanofi as “more viable take-outs today than yesterday.”

Here’s what analysts are saying:

Leerink, Geoffrey Porges

“Bristol-Myers Squibb’s offer to buy Celgene for $74 billion is a best case scenario that should be immediately utilized by Celgene shareholders, who we would recommend take advantage of the recent deal announcement upside before the deal closes.”

“Sell into the liquidity” as Celgene shares rally, Bristol’s drop could lead to premium erosion, Porges advised.

“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 contingent value right (CVR), and +67 percent with the CVR. However, if Bristol’s stock remains at the pre-market price of ~$44, then the premium falls to 41% and 55%, respectively.”

Downgrades Celgene to market perform from outperform, lowers price target to $102 from $112.

Jefferies, Michael Yee

Celgene holders getting a “great exit strategy” at a 50 percent premium. “It seems the market was not going to get clarity on how the next 3 years would ‘change’ the problem and hence get the stock up sustainably” Yee wrote. “Investors had lost confidence in the strategy with stock trading at all-time low P/E at 6x.”

Pfizer Inc., Novartis AG and Merck & Co “are other players that could have or would be a possible acquirer,” he said, although none of them would have major overlap with Celgene except Novartis.

With biotech trading at historical lows, “mega M&A” could be on the horizon. Gilead Sciences Inc, Biogen Inc., Vertex Pharmaceuticals Inc. and Alexion Pharmaceuticals Inc. are the main large-cap biotechs that may trade higher as investors see them as potential targets. Amgen Inc. is more likely to be a “consolidator” over an acquirer.

Celgene rated buy.

Piper Jaffray, Christopher Raymond

“This deal would seem to follow a familiar pattern of pressured large-cap biotechs finding an exit through acquisition by a larger buyer.” Despite investor quibbles about Revlimid’s loss of exclusivity starting in 2022, “the market is likely to ask ‘who’s next?”’

“We’re not good at predicting M&A,” Raymond said, but among large-caps, Alexion, Biogen and BioMarin Pharmaceutical Inc “make sense.” He singled out Aimmune Therapeutics Inc., Deciphera Pharmaceuticals Inc. and Rigel Pharmaceuticals Inc. among small to mid-caps that would make sense to a strategic buyer.

Rates Celgene neutral.

Baird, Brian Skorney

“We were as surprised as anyone to wake up to see news that Bristol will be acquiring Celgene for $50 in cash and one share of BMY (not covered) plus a CVR.” This is a “very good deal” for Celgene, “which has been in free-fall without a clear landing.”

The deal’s success will hinge on the outcome of Revlimid patent litigation but for Celgene holders “today, it’s a big win.”

A $15 billion prediction of peak sales from five products from both companies “is a bit of an oversell to the Street and such a magnitude is unlikely to be realized.”

“The choice to combine revenue and cut costs is not a good reflection on the state of the sector. However it also has signs of 2009, where Pfizer, Merck and Roche absorbed Wyeth, Schering-Plough and Genentech. That didn’t exactly kick off the bull market but it did seem to come after the 2008 trough. With large caps, generally, falling under pressure the last few years, one has to acknowledge the potential for additional consolidation of profitable companies.”

Celgene rated neutral.

Barclays, Geoff Meacham

“We expect investors to view Bristol’s acquisition of Celgene negatively at first glance,” Meacham wrote. “The biggest concern is likely to be the dilution from the deal and strategically what the announcement implies about Bristol’s positioning across the I/O space.”

“We think it will take some time before investors warm up to the potential positive implications from today’s announcement, however in our view Bristol paid a fair price for Celgene and we think that Celgene is poised to undergo a significant re-rating in 2019.”

Maintains Bristol equal-weight.

BMO, Alex Arfaei

Bristol-Myers “is an attractive takeover/merger candidate at ~$45 because of its leadership in the large IO market,” and could see competing offers for before a shareholder vote on the deal. Arfaei expects shares to be supported at $45 on the potential for a deal.

The next key trials for Bristol in immuno-oncology are expected in mid- to late-2019 and will “have a high probability of success.” Therefore, companies that may have previously contemplated a deal with Bristol “have a window given the stock’s weakness and upcoming shareholder vote,” Arfaei wrote.

Among possible Bristol buyers, “Pfizer has indicated that it is not looking for major M&A, but will remain opportunistic. AbbVie is facing significant headwinds with its immunology franchise, and needs to diversify.” Of course, an AbbVie play for Bristol may have less support than the Bristol-Celgene combination, Arfaei wrote.

To contact the reporter on this story: Cristin Flanagan in New York at cflanagan1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Morwenna Coniam, Richard Richtmyer

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