Celgene Corporation (NASDAQ:CELG), which is going through the process of getting bought out by Bristol-Myers Squibb (NYSE:BMY), rose 7% on Friday, March 29. A major BMY stockholder gave its support for the deal while another firm will drop its opposition to the deal. With the stock getting another step closer to closing, the discount on CELG stock should narrow further.
Buyout Terms
Bristol-Myers agreed to buy Celgene for $74 billion on Jan. 3. The terms of the deal are as follows:
“Under the terms of the agreement, Celgene shareholders will receive 1.0 Bristol-Myers Squibb share and $50.00 in cash for each share of Celgene. Celgene shareholders will also receive one tradeable Contingent Value Right (CVR) for each share of Celgene, which will entitle the holder to receive a payment for the achievement of future regulatory milestones.”
With BMY stock trading at $47.70, the deal is worth $94.77 plus a Contingent Value Right for each Celgene share. That CVR is worth $9, assuming Celgene meets future regulatory milestones. So after considering the buyout value of $101.77, investors could still earn $9 in milestone payments for each Celgene share held until after the deal closes. Given the underperformance in drug stocks in general, CELG shareholders need not look elsewhere at this time. Celgene, once it is under the Bristol-Myers Squibb umbrella, should meet its milestones and reward longtime shareholders.
The $9 CVR payment schedule for each CELG share is as follows: FDA approves all three of ozanimod by March 31, 2020, liso-cel (JCAR017) by Dec. 31, 2020 and bb2121 (by March 31, 2021).
Opposition to BMY-CELG Deal Ends
Last week, proxy adviser ISS said it supported the deal. The end of Starboard’s opposition clears a path for both firms to move forward on the deal. Investors who played the arbitrage, buying calls and selling puts on March 1 when the deal was questioned, will get rewarded.
BMY shareholders will also look forward to the stock price recovering back to the March 1 levels of $54. In the month of March, BMY stock fell 7.6% due to uncertainties the deal would go through. But the stock’s drop created an entry point for patient value investors who believe in the synergies between the two firms.
BMY Stock Recovery in the Short-Term
Under the terms of the deal, BMY will get Celgene at a very good price. Management believes it may find synergies worth $2.2 billion by 2022. Celgene strengthens BMY’s oncology franchise, with the Opdivo, Yervoy, Revlimid and Pomalyst drugs. Orencia and Otezla will lead in the immunology and inflammation segment.
Upon closing, Celgene immediately adds 40% to BMY’s earnings-per-share in the first full year as a combined firm. And with management forecasting $45 billion in free cash flow within three years after close, the company will have no problem managing its debt. Investments in R&D and sales and marketing efforts will not change. If anything, these activities will increase as the combined firm ramps up new product sales.
Furthermore, thanks to the expected cash flow strength, the Bristol-Myers dividend of 3.44% will not change.
Bottom Line on CELG Stock
Speculators who bought CELG stock betting the deal would go through need not continue holding the stock. An easy 14% monthly gain was made. But value investors with a timeline of at least two years will need to consider holding the stock post-merger to get the CVR payment.
The stock performance of Bristol-Myers is a medium-term risk for Celgene investors. Management will no doubt cut costs after the deal is done but any underperformance in the existing business or setbacks in its clinical studies may hurt its share price. Still, BMY is confident that the Celgene portfolio will thrive under its leadership. And in 2019, its own products like Eliquis will grow as adoption based on the superior profile in atrial fibrillation increases.
Ultimately, Bristol-Myers is expecting a doubling in its Phase 1 and 2 pipelines. Adding Celgene complements its existing business and basket of products. By buying CELG stock, which is still at a discount to the buyout price, investors could get ~ $7 in upside plus $9 in CVR payments by 2021. In the end, it will pay to patiently hold CELG stock.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
