Breakingviews - Bristol Myers deal gamble pays off twice over

Logo of global biopharmaceutical company Bristol-Myers Squibb is pictured on the blouse of an employee in Le Passage, near Agen, France March 29, 2018. REUTERS/Regis Duvignau

NEW YORK (Reuters Breakingviews) - Bristol Myers Squibb has landed two birds in the bush. When the $134 billion U.S. drug firm agreed to buy rival oncology specialist Celgene for $74 billion in 2019, it had to divest an autoimmune drug to satisfy regulators. Instead of keeping Celgene’s proven blockbuster Otezla, it sold the drug to Amgen for $13.4 billion, keeping an unproven candidate instead. Now a rare head-to-head trial comparing the two drugs suggests boss Giovanni Caforio got the better end of one, and possibly two big deals.

Drug companies are reluctant to sell blockbusters, which are relatively rare and tend to make up a disproportionate amount of industry profit. They are also reluctant to conduct head-to-head trials of their drug against a rival because of the Forrest Gump box of chocolates theory – you never know what you are going to get. There’s a chance the other drug will look better, either because it is, or because of statistical uncertainty. Bristol says, however, that the first of two late-stage trials shows its candidate did better than Otezla at clearing moderate and severe psoriasis. Otezla generates revenue of about $2 billion a year and rising. There’s a good chance Bristol’s drug will easily surpass this threshold should a second ongoing trial also show good results.

Caforio’s second gamble – buying Celgene – looks better too. That deal was incredibly cheap, at less than 10 times estimated earnings. But Celgene’s approved drugs were old in the tooth, and its pipeline uncertain. Selling Otezla means it got a big chunk of the $74 billion purchase price up front. Bristol’s news means its future is more assured. Its valuation, of 8 times estimated earnings over the next 12 months, is therefore probably far too cheap given rivals such as Eli Lilly are valued about twice as high. Caforio’s gamble is paying off.


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