Stock of the week: Bristol-Myers Squibb

Summary:

• Bristol-Myers Squibb (BMY.US) announced the biggest biotech industry acquisition in history

• Bristol set to acquire a blockbuster drug generating over $8 billion revenue annually

• Complex portfolio of early-stage assets included in a deal

• The company expects transaction to result in huge free cash flow during the first three years

• Bristol-Myers Squibb shares reacted positively to the long-term support zone

2019 started with a big bang on the M&A market as Bristol-Myers Squibb (BMY.US) announced the acquisition of Celgene (CELG.US). If concluded the move would mark the best start of the year on the M&A market in history as well as the biggest merger in the biotech industry up to date. In this analysis we will take a look a terms of the deal as well as prospects for the combined entity.

Celgene, unlike Bristol, enjoyed a stable revenue growth throughout the past 6 years. However, Bristol-Myers’ earnings were less volatile as they manage to stay in the $0-1 range for the major part of the period. Source: Bloomberg

On 3 January Bristol-Myers Squibb announced that it will be acquiring Celgene in the healthcare sector biggest merger up to date. Bristol-Myers will pay $50 plus a share of the combined company for each Celgene’s share. Using end-day valuations from 2 January the deal would be worth $74 billion with this number rising to over $90 billion if we also include Celgene’s debt. Moreover, all Celgene’s stockholders will receive a tradeable contingent value right that entitles them to receive additional $9 in cash per each share in case three Celgene’s late-stage assets receive the US Federal Drug Administration approval during the next two or three years.

Both Bristol-Myers Squibb and Celgene constantly outperformed their peers when it comes to R&D expenses. Peer Group composes of Bristol-Myers Squibb, Celgene, Novartis, Pfizer, Merck, Gilead Sciences, AstraZeneca, AbbVie and Amgen. Source: Bloomberg, Bristol-Myers Squibb, Celgene

Following the acquisition Bristol-Myers Squibb shareholders will control around 69% of the combined entity while Celgene shareholders will control the rest. Giovanni Caforio, Chairman and CEO of Bristol-Myers, will keep top executive job at new Bristol-Myers while the company will also add 2 Celgene executives to its Board. The deal is expected to be closed in the third quarter of 2019. However, regulatory and shareholder approvals must be received earlier. The deal is said to provide combined entity with $2.5 billion cost synergies during the first three years after the acquisition. 55% of this figures is expected to come from operational and administration savings while 35% should result from R&D savings. The remaining 10% will be saved during the manufacturing process.

Bristol’s and Celgene’s revenue by drug. One can notice that Bristol derives a huge portion of its revenue from Opdivo and Eliquis sales while Revlimid accounts for over 60% of Celgene’s sales. Source: Bristol-Myers Squibb, Celgene

Each of the companies have one blockbuster drug in its portfolio - Opdivo for Bristol-Myers Squibb and Revlimid for Celgene. In the past few quarters Opdivo accounted for close to 30% of Bristol’s revenue while Revlimid made up as much as 60% of Celgene’s sales. Having said that, diversifying Bristol’s portfolio by acquiring Celgene with its money making Revlimid is more than needed. However, one may argue that dependance on two products instead of just one is still far from being “diversified”. This is where the real source of potential from this deal takes the stage. While Bristol-Myers Squibb is one of the biggest pharmaceutical companies in the world it suffered from the lack of promising late-stage trial assets. Along with acquisition of Celgene, the company will also acquire 6 drugs in third (final) stage of clinical trials. This would boost the number of Bristol’s late-stage assets from 4 to 10. Moreover, the amount of Bristol’s assets in the first or second phase of clinical trials will almost double following the deal and reach 50. Summing up, following the acquisition the portfolio of combined entity will include 9 drugs generating over $1 billion in annual revenue as well as 6 products with near-term launch potential.

After few years of constant dividend payouts, Bristol-Myers Squibb began to distribute more money to its shareholders. Note that the company stayed loyal to its dividend policy even despite significant free cash flow fluctuations. On the other hand, Celgene did not make a single dividend payout in its history. Source: Bloomberg, Bristol-Myers Squibb

Apart from synergies and complex drug pipeline the combined entity is likely to keep benefiting from upbeat outlook for the whole drug industry as the worldwide medicine consumption is forecasted to keep increasing. However, one thing of concern is the debt Bristol-Myers is going to accumulate through this transaction. Apart from issuing new equity, the deal will require Bristol to issue $32 billion of new debt. Moreover, the acquiring company will also take on $20 billion of Celgene’s debt. While the $52 billion of bonus debt may look stunning, companies expect combined entity to provide as much as $45 billion of free cash flow during the first three years following the acquisition. This will help the company uphold its current dividend policy as well as allow to quickly begin deleveraging process through debt repayment. In order to limit dilutive impact of issuance of $38 billion of new equity on company’s earnings, Bristol plans to conduct an accelerated share repurchase programme once the transaction is closed. Through the programme the company aims to buyback $5 billion of shares what - using today’s valuations - would reduce the number of shares outstanding by around 5%. Smaller number of outstanding shares is desired as it means that profits will be distributed between smaller number of shareholders therefore increasing company’s EPS ratio.

Bristol-Myers Squibb (BMY.US) had a hard time during 2018. Company’s stock took a significant dive in tandem with the US stock market twice last year. Bristol’s shares moved 24% lower throughout 2018 but the deal announced at the beginning of 2019 may allow the stock to recoup part of the losses. Note that the price reacted positively to the long-term support zone ranging $46.30-48.00. Source: xStation5