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Celgene Complications

Is Bristol-Myers Squibb going to buy Celgene or not? Most such deals go through, but the exceptions are big ones (such as Pfizer’s bid for AstraZeneca). The uncertainty has come in because of yesterday’s announcement from Wellington management, the largest institutional holder of BMY (8% of common shares) that they oppose the deal. You can tell that the markets took this seriously – Celgene’s stock went down 8% yesterday, while Bristol-Myers Squibb stock went up.

Why stand in the way? Wellington says that they don’t like the idea of the merger, nor the price at which it’s taking place. It comes down to “We’re fine with you guys doing deals, but not this one”:

While Wellington agrees that Bristol-Myers should be active in business development that secures differentiated science and broadens the future revenue base, Wellington does not believe that the Celgene transaction is an attractive path towards accomplishing this goal. Wellington’s conclusion is based upon three tenets: 1) the transaction asks BMY shareholders to accept too much risk and the terms offer BMY shares to CELG shareholders at a price well below implied asset value; 2) execution success could be more difficult to achieve than depicted by Company management; and 3) alternative paths to create value for BMY shareholders could be more attractive.

That’s not a vote of confidence, for sure. The shareholder’s meeting is coming up in April, and between now and then management has to keep holders of large blocks of shares from agreeing with Wellington. That will have some straightforward features – assuring everyone that they will too be able to execute, realize value, and all those other PowerPoint words, for example. And it will have some awkward features, too, because arguing against the above means that you will, in part, have to tell everyone that either no, they aren’t giving Celgene shareholders too sweet an offer, or (alternatively) that Wellington is overvaluing BMY shares. I don’t see the latter as an appealing line of attack; I would guess that Bristol-Myers Squibb would rather talk up all the great stuff that they’ll be getting by buying Celgene instead.

And there’s always the outside chance that someone else will be convinced by those arguments and jump into the bidding as well. I don’t see that happening, but hey, Celgene is 8% cheaper today than it was yesterday, so it is arguably on sale. One complication, though, is that no small amount of Celgene’s market cap is due to the company’s willingness to play all kinds of hardball when raising prices on its own drugs and limiting their generic competition. They’ve been good at those things, although how much pride one should take in those accomplishments is another question. Their own dealmaking, though, has been another thing entirely. But “someone has to step in before they squander even more money” is not a compelling M&A argument, either. Worth watching.

Update: another investment firm, Starboard Value, has also come out against the deal.

20 comments on “Celgene Complications”

  1. pv=nrt says:

    Scientifically, the combination of IO antibodies with CAR-T could be a total game changer. So this objection seems like the wall Street money tail wagging the innovation dog.

    BMY stock price has been hammered for 3 years because everyone wanted to know what the next IO or the next apixiban is. Well, it could be here. Certainly more scientific innovation here for BMY than there would be in getting eaten and digested by Pfizer, Novartis or Gilead.

    1. NPV < 0 says:

      The big issue in my mind is that because of the uncertainty, researchers at both companies are paralyzed. No one is going to try to be innovative or take risks when your job is existentially in question. And there are real opportunity costs associated with that uncertainty.

      Also because CELG has been active in partnering with smaller companies, that uncertainty will also trickle down to them.

  2. road says:

    It’s going to cost them $2.2B to back-out – that’s gotta be factored-in…

    Llink in handle

  3. road says:

    It’s going to cost them $2.2B to back-out – that’s got to factor-in, too

    See link in handle

  4. Earl Boebert says:

    This article gives me an opportunity to ask a question that has been bugging me for a long time. Now I’m an outsider and unwilling participant in Pharma (“Your money or your life”) but I spent 40+ years building and leading technical teams and my question is: how do you guys get any meaningful work done? How do maintain any kind of institutional memory or do any kind of mentoring in what appears to be an environment of constant corporate turmoil?

    By way of contrast, I look back at the first flight control system I worked on at (the old) Honeywell in 1971. I could sit down in the company cafeteria and have lunch with a person whose experience went back to the C1 autopilot on the B-17, and learn a ton of stuff that nobody had put in a book or technical paper. Does this happen in your business? Or does the press coverage give a misleading impression of the amount of churn?

    1. Derek Lowe says:

      Unfortunately, I think the churn is real. And that question is a very good one, and worth a whole blog post by itself! Look for one next week, and I think it’ll bring on a lot of comments. . .

      1. Chrispy says:

        It really is crazy. Every one of these mergers is associated with layoffs, and layoffs happen even without them. The first people to go are those that have experience (“too expensive”). In the Big Pharma I worked at, the early days were full of super experienced people who had been on many, many programs. I would learn so much over lunch with them, particularly about the failures. But the axe started to regularly swing, and the high-up people in the company were replaced by money-focused people who knew little about the business and nothing about the history. Sometimes they’d be a CEO from an acquisition; these people knew how to sell a company to a big pharma but did not have the breadth of experience that the people working in the big pharma had. The institutional memory was terrible, and there was no one left to even properly evaluate “bolt on” acquisitions which made no sense. You start to understand that the Big Pharmas are mostly milking their old patents, and that very little new is happening. The rush to just buy pipeline molecules with little internal R&D leads to the kind of fiascos we have seen with Sirtris and IDO. It does not bode well for the industry; I am glad that I am almost old enough to retire.

      2. Anonymous Researcher snaw says:

        The churn is very real; I am one of the many who has been through it. One acquisition by a previous company was a particular train wreck. There were several targets with programs at two sites a couple hundred miles apart, one of them an existing site with the acquiring company and one site they got as part of the acquisition. They closed down the programs at their old site and merged them into the new site, laying off most of these teams at their old site and moving a few key people to the site they were acquiring.

        Two years later they decided to close down the site they had got as part of the acquisition and MOVE THOSE PROJECTS BACK to their old site. You can guess the effect on morale and on institutional memory. I don’t have to guess: I knew some of those whose lives were disrupted either by getting laid off or by relocating.

    2. Emjeff says:

      Meaningful work? What a concept.
      You bring up an excellent point, and it is one that never gets talked about. When I came to GSK in late 2001 (just after the merger of GW and SKB) there were reports three years old waiting to be written. The amount of time lost in the labs and in the clinics was astounding. Because, everyone that could left. Those that were left had very little motivation to do anything other than fret. At the end of it, what did the merger accomplish? Is GSK a better company now that GW and SKB were? NO. So, all mergers do is make bankers and boards of directors rich.

      1. Diver Dude says:

        This issue gets talked about all the time by us. But it has no relevance to the short-termist C suite inhabitants and so no notice is taken at the organisational level that could do something about it. Pharma has been eating itself for 30 years and shows no sign of stopping.

        1. Emjeff says:

          It’s talked about by scientists, Dude, and on this esteemed blog. It is NOT talked about in the financial press; nor is it discussed in the board meetings where the decisions are made. And , as you point out, that is the problem.

      2. An Old Chemist says:

        Emjeff, I also used to work for GSK, many years ago. We were told that we should write papers only in our personal time. A few people who wrote/published a lot of papers were told that they were spending a lot of time on writing papers and not on working on their project. As far as I understand, most of the companies operate with this attitude. After all, companies are their to make money for their share holders and not to advance science!!! Lately, to everyone’s surprise and applause. Elon Musk of Tesla has said that anyone can use their patents to advance the development of electric vehicles.

    3. johnnyboy says:

      As everyone is saying, this is a question all pharma researchers grapples with. “Institutional memory” is really only the sum of the all the employees’ experience. You can store study reports on the company server, but really no one looks at old reports, unless they know what is in there. And you only know what is in there if you participated in the report yourself, which comes back to individual memory. Every time an employee leaves a company, some of its memory goes. If many employees leave at once (as in a merger), it’s like the company has a stroke. It can take years to recover from it.

      1. Dr. Manhattan says:

        “Every time an employee leaves a company, some of its memory goes. If many employees leave at once (as in a merger), it’s like the company has a stroke. It can take years to recover from it.”

        That is a great analogy!! I would only add that in mergers, both partners have strokes. Been there, did that, multiple times. After ore than a quarter century in 3 different big pharmas, finishing up back in academia, and loving it.

    4. Isidore says:

      There is certainly a lot of truth to what people have written regarding the loss of “institutional memory” as a result of departures (voluntary or not) of older staff. However, one has to take into account that modern technology does make at least a portion of this memory persist and accessible. Project related documents and information generated in the 1970s, 1980s and even 1990s may not be readily accessible, but more recent ones are and they are also searchable as electronic storage has progressed beyond making a poor quality pdf of a printed document. Having been in this business for several decades I am aware of a couple of situations pre-1990, when someone would leave and a lot of the stuff the individual was working on would not be easy or even possible to follow up. I don’t believe that this is the case anymore in pharma. I think the loss of institutional memory is more of a company culture issue (often detrimental, to be sure) rather than loss of technical R&D information.

      1. An Old Chemist says:

        Dr. Manhattan, Isador, and anon the II: There is a bad/very bad/sick bent to the loss of a company’s memory on the departure of its many employees. A few managers, who have knowledge of the departed employee’s good ideas/knowledge, then pass on these as their own ideas to the applause of their line managers. Then, years later, when the patents get filed, the departed employees are not able to take any action against the company. I have seen it happen MANY times. At my previous company, a few managers were famous for doing this!!!

  5. anon the II says:

    I spent my career in the Pharma industry and so, I’ll try to answer your 3 questions.
    1) They don’t.
    2) Not anymore.
    3) The press, including C&ENews, has grossly underreported the amount of churn and the negative impact it has had on drug research.
    How’s that?

    1. anon the II says:

      Sorry, I meant that as a reply to Mr. Boebert’s questions.

  6. a says:

    Starboard value’s statement makes it clear that the big investors would prefer to see BMS sold off. Presumably they bought in over the past couple of years while there were rumors (and I suppose diligence) going on about a sale to Pfizer, and now they are ticked that they can’t sell for a quick profit.

    The real shame here is that they don’t even have to pay lip service to caring about innovation or any long term strategy. The can cry about not being able to get paid based on their own bad bets, and everyone will agree with them except a few scientists.

  7. Old Timer says:

    I would have thought that after the Valeant debacle, C-suite types would wake up to the need for protecting and supporting R&D.

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