Bristol-Myers Squibb Stock Issued For Celgene: I Plan To Keep It

Jan. 15, 2019 2:28 PM ETBristol-Myers Squibb Company (BMY), CELG15 Comments
William Meyers profile picture
William Meyers
6.87K Followers

Summary

  • The Bristol-Myers Squibb acquisition undervalues Celgene.
  • Bristol-Myers would also be undervalued post-deal at current prices.
  • I am inclined to keep the BMY stock I receive.

Bristol-Myers Squibb (NYSE:BMY) is buying Celgene (NASDAQ:CELG), with the deal likely to close in Q3. I do not own BMY stock, though I have looked at that possibility on occasion. A substantial amount of my portfolio is Celgene stock. In this story I will examine whether I should keep the BMY stock I am issued, or possibly also take the cash payment and invest it in BMY. I assume Celgene will not go high enough before the deal closes to make selling it an attractive option.

My thesis is that I should keep the BMY stock I am issued. I have months to make a final decision and to make a more detailed study of BMY. My findings should apply to long-term biotech investors like myself, and the facts could be of use to investors with other strategies. I have owned Celgene stock since 2007.

The Bristol-Myers' offer for Celgene

Bristol-Myers Squibb to acquire Celgene, released on January 3, 2019, may prove to be the biggest pharmaceutical news of all 2019.

Celgene stock holders will receive one share of Bristol-Myers for each share of Celgene. They will also get $50 in cash per share. Before the press release BMY closed at $52.43, implying those components of the deal were worth $102.43 per share. However, BMY plunged when the deal was announced, recovering to close at $47.99 on January 11.

ChartBMY data by YCharts

In addition, for each acquired share of Celgene there will be issued a CVR (Contingent Value Right) that represents potential payments if milestones are achieved by drugs in the Celgene pipeline. That could be worth $9.00 per share. The details may become important further down the line, but for now I am just treating that as a potential bonus, with a worst-case scenario of being worth nothing.

There are many analyses of the deal at Seeking Alpha and elsewhere, so I will proceed to details that affect my thesis.

Bristol-Myers without Celgene

I only need a summary of BMY information at this point: recent revenue and earnings, cash and debt, patent expiration issues and pipeline potential. For this I will use Bristol-Myers Squibb Q3 2018 results and other sources.

Revenue for the quarter was $5.69 billion, up 8% y/y. GAAP diluted EPS was $1.16, more than double the year-earlier $0.51. Non-GAAP EPS was $1.09. It is unusual that the non-GAAP number is lower than the GAAP number. Normally I look at both accounting methods, but for this initial, simple analysis, just the GAAP numbers will do.

Bristol-Myers noted they did even better in revenue growth taking into account foreign exchange rates. Like Celgene, Bristol-Myers international sales are concentrated in Europe.

Both marketing and R&D expense decreased y/y. That could be an ordinary fluctuation, or a decision not to invest in growth. Given the acquisition of Celgene, I figure BMY to be looking for growth, but hopefully careful with investor money. The tax rate dropped significantly y/y, helping with earnings growth. That will not be repeated.

Cash ended at $8.8 billion, which is plenty for ordinary purposes. Subtracting debt there was $1.5 billion in net cash. After the Celgene acquisition things will be different, as I will detail further down.

Sales growth for leading drugs was exceptional. Opdivo, saw a 42% increase to $1.79 billion. Eliquis saw a 28% increase to $1.58 million. And Yervoy grew by 18% to $382 million. Opdivo and Yervoy should continue to grow as they are each, and in combinations, being tested for more cancer indications.

On the other hand, sales of older drugs are declining, with Baraclude and Sustiva as examples. That is what I would expect of companies that have assets subject to competition, especially generic drug competition.

Guidance for the full year 2018 was increased, a good sign.

My quick take is the basics seem to be in good order. At the closing January 11 price of $44.77, Bristol-Myers had a GAAP trialing P/E ratio of 17.95, implying an earnings return of 5.6%. It is higher than Celgene's P/E, which I will discuss below.

Note that BMY Q4 2018 results and the analyst conference call will be on January 24, 2019, at 10:30 AM Eastern Time. That will be a good opportunity to update my thoughts on the value of BMY. Management is likely to offer more insight into the deal.

Celgene as a stand alone

I started studying Celgene before I bought my first shares in 2007, so I have a good understanding of its parts. I have shared my opinion multiple times on Seeking Alpha, most recently with Celgene's Positives Greatly Outweigh Negatives on November 20, 2018.

Despite some 2017 and 2018 setbacks, I believe a reasonable price target for Celgene would have been $140 per share, about its 2017 high. That assumes continued strong sales growth in newer drugs like Pomalyst, a relatively slow decline in Revlimid sales after peeking some time later this decade, and continued successes in pipeline development that more than offset the eventual Revlimid decline. My view is considerably more optimistic than many investment bank, sell-side analysts, and other commentators.

ChartCELG data by YCharts

Combination of Bristol-Myers and Celgene

For those who might only keep the BMY stock they are issued for a few hours or a few months the key issue will likely be the P/E ratio.

As a simple test, add Bristol-Myers' trailing 12 month GAAP earnings to Celgene's: that would be $4.38 billion plus $4.16 billion, summing to $8.54 billion.

Celgene stock holders will get $50 per share in cash, but the combined companies will get the combined earnings. The share count will be the total of the two current share counts, approximately 700 million for Celgene plus 1.6 billion for BMY, or 2.3 billion. That would make the TTM GAAP EPS of the combined company $3.71 (as of Q3 2018, not at the future closing).

At Celgene's current PE of 15.7 that implies a BMY price of $58.25

At Bristol-Myers current PE of 18, that implies a BMY stock price of $66.78.

So, given that both of these are above where BMY was trading both before the deal was announced and since, either the combined company is going to trade at a lower P/E, or Celgene and Bristol-Myers should be trading at well above where they have been trading in early January.

There is another factor to take into consideration: the combined company will have much more debt because of the $50 cash to be paid per share of Celgene stock. That would be about $35 billion, or $15.22 per share of the combined share count. Back that out (a simple way of treating it, admittedly) and the share range would be $43.03 to $51.56. We are currently within that range. Indeed, debt and cash should be taken into account in pricing a stock, not just EPS.

Other considerations are relatively minor. Combining the two companies could result in substantial decreases in expenses. The caveat is that mergers do not always go smoothly or result in anticipated savings.

So Why Is Celgene Not Trading Higher Now?

My followers have already asked why Celgene is not trading higher given the known, or at least highly-likely, outcome of the acquisition. As stated above, Celgene should be worth $50 plus the share price of Bristol Myers, or about $98. Plus, perhaps up to another $9 in cash from the CVRs. But it has been trading around $87.50.

I can only guess. I know that when other companies I owned were acquired the equilibrium, pre-event stock prices were at smaller discounts to what one could receive by waiting.

First, note that the current price is at a considerable premium to where Celgene was before the announcement. Owners of Celgene may simply be happy with the higher price and unwilling to wait for the event or a narrowing of the discount leading up to the event.

Second, there is time value to money, which is the usual reason that the market price is somewhat below the acquisition price.

Third, the acquisition price is not firm, since it includes BMY stock that will be at an unknown price at the time of the event.

But my guess is the price reflects the current state of the market: very cautious. There is not a lot of cash being put to use in the market right now, and to the extent there is cash, there are a lot of undervalued stocks, including biotechs, to choose from.

Conclusion

If Bristol-Myers Squibb reports a strong quarter on January 24, with strong guidance, its stock price should go up. That would imply a higher value for Celgene stock. I believe Celgene stock is discounted enough to make it a buy for anyone wanting to pocket the short-term gain, but I am already above my portfolio limit, so I will not be buying more.

I think Bristol-Myers is now trading at a discount to where it should be when the merger completes, even taking debt into account. This is largely because I think Celgene should be worth more like $140 a share. My plan is to hold the BMY I am issued, unless the stock price goes substantially higher. I look forward to the dividend. I think the debt will be handled nicely out of cash flow.

It is certainly possible that Celgene or Bristol-Myers or both could suffer a setback before my BMY stock is issued. Today it looks as if that would need to be a significant setback.

My overall impression of Bristol-Myers Squibb is positive. Hopefully the merger will go well and Celgene's extensive pipeline and investments in small biotechs will help power revenue and earnings well into the 2030s. But I do not have a crystal ball. I will use the $50 per share issued to diversify.

This article was written by

William Meyers profile picture
6.87K Followers
I provided stock and bond research and analysis to a small cap specialist investor, Lloyd Miller, from 2002 until his death in January 2018. For my own account I invest mainly in technology and biotechnology stocks. My technology and investment web site is openicon.com, where readers can view the notes I take to make decisions and to write articles for Seeking Alpha.

Disclosure: I am/we are long CELG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of writing Celgene represents 9.9% of my portfolio.

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