Breakingviews: Bristol-Myers passes $74 bln deal’s first big exam

Bristol-Myers Squibb boss Giovanni Caforio can heave a sigh of relief. The drugmaker, valued at $76 billion at Friday’s close, is stretching to buy Celgene for almost as much again. To smooth U.S. antitrust review, it put its target’s blockbuster psoriasis treatment, Otezla, on the market. Amgen has won that prize, for an unexpectedly rich $13.4 billion. That’s a boost for Caforio’s deal rationale – and timing.

Otezla is a rarity: a relatively young blockbuster drug available in a clean sale. Yet despite boasting $1.6 billion of revenue last year and solid growth – low double-digit percentages, by Amgen’s reckoning – analysts didn’t think it would fetch more than around $10 billion. Even stripping out the present value of future tax benefits, Amgen is paying $11.2 billion.

That’s a partial vindication of Caforio’s premise for the agreement he struck in January to buy Celgene for $74 billion, namely that his quarry was undervalued. The cash coming in from Amgen will help reduce the leverage Bristol-Myers needs to pile on, so much so that the company said it would ratchet up its share repurchases.

Monday’s announcement of the Otezla sale also allowed Bristol-Myers to bring forward its expected closing date for the Celgene transaction. That had slipped from the third quarter of 2019 when originally announced to early 2020; now it aims to wrap things up by the end of this year. The assumption is the U.S. Federal Trade Commission will now allow the deal, and Amgen’s purchase. Both companies sound confident, though the administration of President Donald Trump is far from predictable.

Amgen, meanwhile, has a conservative balance sheet and can afford to buy Otezla with cash on hand. Moreover, part of the high-looking price is offset by what amounts to a tax-related bonus. Chief Executive Robert Bradway reckons the investment will return more than his company’s cost of capital, an improvement on the usual focus on earnings per share.

Shares in Bristol-Myers, Celgene and Amgen were all up about 3% in mid-morning trade, adding roughly $8 billion to their combined market value. Interpreting the Otezla sale as a win-win-win result may be justified on this occasion. For Caforio at Bristol-Myers, though, it’s only the first big test of his ambitious dealmaking.

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