Summary
- Bristol-Myers reported that it will divest Celgene’s psoriasis product Otezla to ease FTC’s anti-trust concerns.
- The divestiture will result in BMY pushing the BMY/CELG deal close to late 2019 or early 2020, a delay of 3-6 months from prior expectations.
- We expect Otezla proceeds to be $8 billion to $10 billion and will be channeled to accelerate deleveraging post-transaction close.
- Removal of Otezla assets will be covered by the BMY and CELG late-stage product pipeline.
- This modest near-term setback from BMY provides a window for long-term investors to acquire BMY shares.
Bristol-Myers Squibb Co. (BMY) disclosed that it needs to dispose of Celgene’s (CELG) Otezla to address US Federal Trade Commission (FTC) fears over the possibility of BMY/CELG dominating in the psoriasis space. As a result, the BMY/CELG merger finalization is expected to be pushed to late 2019 or early 2020 or a delay of 3-6 months from prior expectations.
This negative surprise has taken a toll on BMY’s share price amid concerns over the ability of BMY to close the deal. However, this represents a buying opportunity for long-term investors seeking value in the healthcare space – where our BMY valuation (excluding CELG) is at $58 per share or 19% upside from current levels.
Background
Bristol-Myers Squibb reported a few days ago that it plans to divest Celgene’s Otezla to address concerns raised by the FTC and allow the Celgene merger to close promptly. Recall that in January 2019, BMY disclosed that they would be acquiring Celgene in a cash-and-stock deal and was subsequently approved by the majority of the shareholders in April 2019. In terms of transaction timing, BMY expects the merger to be finalized in late 2019 or early 2020 (i.e., a delay of ~3-6 months from prior expectations) following the FTC’s concerns around Otezla. Assuming BMY could find a buyer for Otezla, the FTC will still review the potential sale and then revise the original BMY/CELG deal before giving the green light to proceed with the merger. Hence, this was one of the key factors in pushing the deal timeline.
Like Otezla, BMY is developing a late-stage oral drug called TYK-2 inhibitor BMS-986165, which also aims at psoriasis treatment. FTC concerns seem surprising given that 1) Otezla is only a $2 billion revenue drug for CELG and certainly not one of the core products of the BMY/CELG deal, 2) there are at least 5-7 other major psoriasis, implying that Otezla would not be a major player in the space, and 3) BMY’s oral TYK-2 is still a late-stage clinical development and its commercialization is definitely uncertain.
We feel that FTC is merely tightening up their regulatory enforcement amid criticisms of lax enforcement in past healthcare transactions. Noteworthy to mention also is that BMY does not have a choice in divesting a successful commercial product over a pipeline drug as we believe that the FTC prefers BMY to dispose of the less risky commercialized products.
