BMY: Investment Thesis
As of market close on Tuesday, July 16, 2019, Bristol-Myers Squibb (NYSE:BMY) share price was $44.45, and Celgene (CELG) share price was $91.53, a difference of $47.08. Under the takeover terms, Celgene shareholders receive one Bristol-Myers Squibb ["BMS"] share, plus $50 cash, total value $94.45, $2.92 higher than the current Celgene price. It might seem like holding on for the $2.92 gain would be the way to go. I will ignore the $9 CVR for Celgene shareholders at this point. Firstly, because I believe it has a low probability of being triggered, and secondly, if the conditions were met, and all of the drugs involved were approved, the benefit to BMS and its shareholders would likely be far greater than the cost of the $9 CVR. BMS have provided BMS/Celgene pro-forma post-merger consolidated balance sheets and earnings statements for both FY 2018, and for Q1 2019. These are provided to give shareholders a picture of what the financials might look like post-merger. But the pro-forma earnings statements are presented on a GAAP basis, only. I think it would be fair to say the market looks primarily to adjusted non-GAAP earnings and EPS, and largely ignores GAAP results, in arriving at share prices for any stock. Analysts forward estimates are also based on adjusted non-GAAP earnings and EPS. BMS reported actual FY 2018 adjusted EPS non-GAAP of $3.98. I have converted BMS/Celgene combined proforma GAAP based earnings statements for FY 2018, to an adjusted non-GAAP basis, and arrive at an adjusted non-GAAP EPS of $4.67, up 17.3% on the pre-merger EPS. A similar exercise for Q1 2019 results in pre-merger EPS of $1.10 increasing to $1.32 post-merger, an increase of 20.0%. These increases are before taking into account any synergistic cost savings in the future. It is reasonable to think these 17% to 20% increases in adjusted non-GAAP EPS will translate into similar share price increases, of 17% to 20%, once BMS commences reporting on this basis post-merger. One caveat is the increase in BMS debt to debt + equity ratio, from nil pre-merger, to ~48% post-merger. However, this debt is very manageable, and BMS post-merger
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