Now that shareholders have voted for the deal, Bristol-Myers Squibb faces some serious pressure to prove its Celgene buyout will actually pay off. So it's no wonder analysts are demanding to know just how BMS executives plan to deliver the "value creation" they've been promising ever since they announced the $74 million deal.
Fact is, Bristol-Myers' shares have dropped nearly 13% since that announcement just after New Year’s. And some analysts weren't amused when CEO Giovanni Caforio opened the company's first-quarter call by saying he and his colleagues are “enthusiastic” about the deal—and that they are certain it will create “a stronger more diversified company that is poised for growth and value creation.”
Analyst Tim Anderson of Wolfe Research, for one, asked Caforio to explain why the stock “has been in free fall” and which of investors’ concerns might be “misplaced.” The CEO responded by repeating the same “value creation” line he's turned to again and again over the past four months, when outrage from a few key institutional shareholders threatened to scuttle the deal.
“So our focus right now is really on making sure that the integration is successful and that we deliver the full value of the combination,” Caforio said.
Which brings up the obvious question—and one that investors really want answered. How?
At the start of the call, CFO Charlie Bancroft said that because the two companies have complementary rather than overlapping business lines, he expects they “can ring-fence key teams and functions to minimize distractions.”
He offered oncology as an example. BMS is mostly focused on solid tumors and Celgene on hematology. That means the integration team won't need to intervene as much there as they might in functions where there's a lot of overlap. The team should be able to “minimize disruption for the research and commercial function in each company," Bancroft said.
He gave the same minimal-disruption answer when Barclays analyst Geoff Meacham asked how BMS plans to put its own stamp on two of the big launches expected soon from Celgene: the beta-thalassemia treatment luspatercept and the highly anticipated multiple sclerosis med ozanimod, which the FDA sidelined last year for shortfalls in its data package. Celgene refiled for approval a few weeks ago.
Apparently, not much of a stamp. Bancroft said the “ring-fence” approach applies there, too. BMS won't change Celgene’s investment strategy for those products, he said, vowing that the integration would “not distract the organization from those launches.”
During the months-long battle with dissenting investors including Starboard Value and Wellington Management, Caforio talked up luspatercept and ozanimod as two of a half-dozen product launches that could be worth a combined $15 billion in near-term revenues. During Thursday’s earnings call, BMO Capital Markets analyst Alex Arfaei asked Caforio if he’s still confident in that estimate. The CEO stood by the numbers and said he'll offer more guidance after the merger closes.
Investors are clearly still fretting about the merger, not least because BMS and Celgene are each grappling with a variety of problems. Celgene’s multiple myeloma blockbuster, Revlimid, for one, still faces patent challenges, even after two recent wins. Celgene inked a deal allowing Natco Pharma to launch its generic in 2022, and the U.S. Patent and Trademark Office threw out Dr. Reddy's Laboratories' attempt to invalidate three patents, which could pave the way for a settlement there.
Revlimid raked in $9.7 billion in sales last year, accounting for a third of Celgene’s total and making the product one of the crown jewels of the BMS acquisition. But dissenting investors pointed to it as a potential Achilles’ heel, noting that any earlier-than-expected generics would be a serious threat to BMS-Celgene’s top line.
During Celgene’s first-quarter earnings call, Evercore ISI analyst Umer Raffat asked CEO Mark Alles whether investors should expect more Revlimid patent deals before the BMS merger closes. "[U]nder the right conditions we have already demonstrated we are willing to settle,” Alles said—which didn't quite answer the question.
And obviously, Alles wasn't the only one giving out cloudy responses to direct queries. Anderson griped in his note that Caforio’s vague answer to his question about the stock’s free fall “did not at all address what investor concerns are.” And with fears about a successful integration still an overhang on BMS’ share price, that's a problem.