Shannon Jones: Welcome to Industry Focus,
the show that dives into a different sector of the stock market every day. Today is Wednesday,
January 9th. I’m your host, Shannon Jones, and I’m joined via Skype by all-around
good guy, Todd Campbell. Todd, how are you? Todd Campbell: I’m great, Shannon!
How are you doing today? Jones: I’m doing well! I must say, I was
so excited to record this show with you today because there’s been so much news coming out
of the biopharmaceutical space, which we’ll get into. Todd, what a way to start 2019!
Campbell: There’s going to be a lot of people listening to our show today who are going
to be thinking the same thing: what do I do now? Of course, we’ll get into that in a second.
Yeah, there was a quite a splash at the JP Morgan Healthcare Conference
beginning this weekend. Jones: Yes. For listeners who maybe are new
to the healthcare space, the JP Morgan Healthcare Conference is the Super Bowl of healthcare
conferences. It’s where literally thousands, maybe 30,000, scientists, business development
people, investors descend on San Francisco. That almost sounded like a plague.
Probably not too far from the truth. Campbell: For residents,
maybe it feels that way. Jones: Probably so! You’ve got hotel prices
going up, I’ve seen as high as $20,000 for four nights in San Francisco. But, for new
listeners, you get the idea — this conference is about companies presenting the latest on
their pipelines, giving updates, and more importantly, making some very strategic deals.
Let’s start the show with the deal of deals, the one everybody’s been talking about,
Todd, and that would be the mega-merger of Bristol Myers Squibb and Celgene. To catch our listeners
up, this was a deal that was announced on Thursday. You typically see that heading into
the JP Morgan Conference. You’ll see the bigger M&A deals announced sometimes right before
the conference starts on Monday, sometimes on that first Monday. This year did not disappoint.
A huge deal, Todd. A $74 billion deal. Actually, $95 billion if you factor in the debt. I have
to say, I did not see this one coming. Campbell: I was expecting Celgene
to be on the other side of that trade. Jones: You and me both!
Campbell: Yeah! I was expecting them to come out and say, “We’re going to buy _____, this
collaboration partner we’ve been working with!” Last year, we had that ImpactBio acquisition
that they announced. Then, a couple of weeks later, they announced the Juno Therapeutics deal.
There’s been a lot of talk and chatter that Celgene, to fuel further growth in the
future, maybe it would go out and do some additional acquisitions. But lo and behold,
it was not the acquirer! It was Bristol Myers Squibb that was the acquirer of it.
It’s a huge deal. You mentioned, not including the debt, a $74 billion deal. There’s a lot
of moving pieces to this deal, though. I’m sure that a lot of our listeners
are looking at this deal going, “Is that it?” Jones: Let’s break that down even further.
There are a couple of different components to the deal. Right now, what’s going to happen is,
Bristol will acquire Celgene. For every Celgene, you’ll basically get one share of
Bristol. You’ll also get $50 in cash. And then, they’ve got this really interesting
contingent value. It’s $9, it’s a tradable asset that’s contingent upon approval of three
products actually reaching the finish line. So, multiple components to this deal that
ultimately had Celgene valued at about $102 a share. Honestly, Todd, I think for a lot
of Celgene holders, that was not the price that they were expecting.
Campbell: No. Me included. I’m looking at this deal and saying, “Wait a minute… ”
Bristol Myers sold off on the news. That’s common, for the acquirer to sell off on the news. When you
take the $50 in cash, plus the Bristol Myers share, we’ll ignore the $9 contingent
value right, the CVR, for right now because it’s not guaranteed. We may or may not get
that in the future. And you’re talking about a sub-$100 price, for a company that, in 2017,
was trading around $140. Shares traded above $100 for most of the period from 2014 to 2017.
So, yeah, I think a lot of people are probably scratching their heads, going, “Geez.”
A lot of investors may even be sitting on a loss, even after this acquisition was announced.
Jones: Yeah, naturally. It’s worth noting here that both companies have floundered.
That $140 share price has certainly come down. Celgene has had a couple of missteps along
the way. Todd, you and I have talked about this in some of the previous shows.
Campbell: Just a few! [laughs] Jones: [laughs] Just a few. Bristol has certainly
taken a beating, has fallen behind rival Merck in the checkpoint inhibitor race. These are
two companies that have really been trying to find their footing, now coming together
to form this mega-conglomerate. For those healthcare investors out there that may not
be aware, oftentimes these big biopharma mergers don’t end up so well. So, there’s
a lot of uncertainty here. Speaking of uncertainty, Todd, we’ve gotten
quite a few questions. One that really sums up a lot of the uncertainty, a lot of the
head scratching, came in from Tom on Twitter. Tom, thanks so much for writing into The Fool.
He says, “What questions should Celgene owners be asking themselves in deciding to sell or hold?
It seems time for a new thesis or a reallocation.” Well, Tom, this is a great
question, we’re so glad you asked. Todd, what do you say to that question?
Campbell: I think the first question I ask myself is, is this deal enough? Celgene is
saying that their 2020 earnings per share will still be $12.50. If you take a look at
Bristol Myer’s current price, Celgene $50, that’s 7.8X forward earnings that Bristol
Myers is paying to land Celgene. And Celgene is a much faster growing company. It’s growing
its top and bottom line by double digits, while Bristol Myers is growing 7-8%.
So, that’s question No. 1. Is this enough. And, will any shareholders therefore balk?
And could that mean that some other company swoops in and says, “I’ll make a competing offer for you,
Celgene?” Or, maybe they go out and say, “I’m going to buy Bristol Myers now, and I’m
going to get Bristol Myers and Celgene altogether.” That’s been floated, as well,
although the likelihood of that’s pretty small because there aren’t that many companies
that could swallow a deal that big. Jones: Exactly. You’ve also got the financing
in play. It looks like this deal right now is set to close in the third quarter of
this year, but there certainly is the chance that someone could swoop in and maybe sweeten the
deal for Celgene shareholders. Like you said, I don’t see that likely. General consensus is,
Bristol got an awesome deal for Celgene, but Celgene shareholders
are still left holding the bag. Todd, you actually did an amazing series on
what this means for Celgene shareholders, and also what it means for Bristol shareholders.
I encourage our listeners to check out those articles on fool.com. Another good question
is deciding what kind of investor you are. Campbell: Right. Am I a growth investor or
an income investor? You want to know whether or not you’re going to buy, sell, or hold this stock.
Actually, we got a question to that. The question being, “What do I do now?”
I think you really have to figure out, do you want your portfolio to be focused on
double-digit growers who are plowing all of their money back into research and development to fuel
future growth? Or, are you more interested in owning a slower growing company that,
obviously, still reinvests some money into research and development, but also pays a
dividend? That’s one of the big differences between Bristol Myers and Celgene.
Bristol Myers pays a relatively healthy dividend. But you’re not going to get the same needle-moving
reaction from winning the approval of one drug in a combined Bristol Myers Squibb-Celgene
as you would with Celgene as a standalone. It just won’t happen. Bristol Myers Squibb plus Celgene,
however we want to do that mash-up name. They’re going to do about $40 billion
in annualized sales based on last quarter. You need to generate $4 billion,
drugs that create $4 billion in sales, just to move the needle by 10%.
Jones: Yeah. Combined, you’re looking at a pretty impressive portfolio, though.
This merger could potentially set up this company to have the second leading oncology
portfolio behind Roche, which is quite incredible. It takes a lot of the pressure off, for example,
concerns about Revlimid. That’s been Celgene’s bread and butter, makes up over two-thirds
of revenue for the company. There have been a lot of concerns about upcoming
generics starting to erode sales for that drug. This certainly takes the pressure off.
Now, you have I believe six potential new drugs coming on the market within the next five to
seven years, potentially another $15 billion in revenue that could be unlocked with that.
It certainly makes it intriguing moving forward, but yeah, I think it comes down to, will you
be satisfied with not having the high growth rates that you saw with Celgene as a standalone?
Campbell: Yeah. If you’re a growth investor, you’re probably going to want to focus on
other ideas. But if you’re a growth/ income investor, someone who will play in both,
like me — I do that, and I own Celgene, and I plan to continue to hold Bristol Myers
after this deal is done. I run a pretty diversified portfolio, and I’m fine with having a company
like Bristol Myers in there. You make a great point about the oncology franchise of the combined
company. If you look at the combined company, you’re going to have Opdivo, Sprycel, Yervoy.
You’re going to have Revlimid, Pomalyst, and Abraxane. Combined, those drugs generate
about $6 billion in sales per quarter. We’ve talked about the attractiveness of
oncology in the past. It’s an important market. Demand for those drugs is inelastic.
If you have cancer and you need treatment, you’re going to get treatment. You’re not going to put
it off because of economic concerns, necessarily. That makes them a big player in oncology.
Also, they get Otezla. Otezla is great for Bristol Myers because they have another drug
in autoimmune disease called Orencia. Orencia is losing its patent protection.
Now, it’s a biologic. There are no biosimilars that are about to launch for it. But eventually,
you could have biosimilars start to eat away at Orencia’s sales. Adding Otezla in to Bristol
Myers’ product portfolio offsets some of that potential risk for the company down the road.
So, yeah, you have drugs that can move the needle. You’ve got that CVR that we talked
about before. That applies to the approval of liso-cel, which is the lead drug that
Celgene acquired from the Juno Therapeutics. That’s a non-Hodgkin’s lymphoma drug.
That has to win approval by the end of 2020. You have to get approval for Ozanimod, which is the
multiple sclerosis drug that’s had some stumbles that has to win approval before the end of
2020. Then, you’ve got bluebird bio’s bb2121. Celgene is collaborating with them on that drug.
That has to win FDA approval by March 31st, 2021. If they don’t win approval,
then you don’t get the extra $9. That’s something that you have
to be thinking about, as well. Jones: Let’s dive into our second question that came in from Ahmet. He says, “Under the
terms of the deal, Celgene shareholders will receive one Bristol Myers Squibb share and
$50 in cash for each share held. Since the current price is around $81,” this was at
the time that he wrote, “for Celgene and Bristol is $45, does it not make sense to buy Celgene
now and get $45 in stock plus $50 in cash, which equals about $95, a profit of about
$14 per share? Am I missing something here?” Campbell: Kind of. You have to remember,
there’s always risk associated with a deal after it’s been announced to when it closes. In this case,
you’ve got two risks you have to consider. You have to consider not only what could go
wrong at Celgene between now and then, but also what could go wrong with Bristol Myers
Squibb between now and then. A stumble at either one of those companies could somehow
negatively impact that deal. If Bristol Myers shares sell off, the value of this deal falls.
So, you build in some protection. That’s why you get that arbitrage opportunity where
you have the difference between, as the listener pointed out, the value of the $50 plus the
BMY shares, while Celgene is trading today below that amount.
Overall, I like it. I would say, yeah, go ahead and do it. I feel pretty good about
the odds of this deal closing or something better happening between now and then.
But there is risk. That risk would be if something goes wrong with one of the drugs that Celgene’s
researching, one of the drugs that Bristol Myers is researching, who knows.
Jones: Fair enough. I have to agree there. It sounds like an awesome opportunity.
I, of course, am looking more long-term at what this deal means. One of the things that came
up in the conference call was the potential synergies — yes, I used that word, Todd.
There were synergies of potentially $2.5 billion. What that comes down to is cost-cutting
and layoffs. Ultimately, what it comes down to is, they’re going to start to shelve some
potentially promising candidates down the line. When you’ve got resources combined, yes,
you do have some duplication of functions and resources. But, they’re going to have
to make a decision about which products they want to move forward with. You can’t
win them all. It’ll be really interesting. There’s a lot of risk long-term in
what that looks like for these companies. Generally speaking, when you see large biopharma,
and large pharma in general, they do tend to be a little slower when it comes to innovation,
and a little more unwieldy when it comes to M&A. I mean, here you had Bristol and Celgene,
two of the most dynamic M&A players in the space, now joining forces. It’ll be sad to
me to not see a new press release about Celgene buying up a new company, Todd.
But, it’ll be interesting to watch moving forward. A lot of question marks, a lot of uncertainty.
For most investors right now, I think, let’s hold the line and see. Would you
agree with that, Todd? Campbell: I think so. Like I said, I own Celgene.
My plan at this point is to ride it out, take my $50 and my Bristol Myers share and hope
for the best on the CVR, and hope that Bristol Myers can execute on its plans. You mentioned
the synergies. They’re saying this is going to be immediately accretive to a pretty good tune.
The upside is that both of these companies are very profitable companies. It’s not like
integrating them together is going to create a very large drag. Bristol Myers as combined
company should see its operating metrics improve following this deal. Keep an eye on that.
Jones: Yep, keep an eye on that. No surprises that the next story on our list is also a big M&A
deal coming out of the JPMorgan Healthcare Conference this week, and that is none other
than Eli Lilly, ticker LLY, announcing that it will be purchasing the genetics
oncology player Loxo Oncology, ticker LOXO. It’s a deal worth $8 billion in cash, and one
that really adds to the string of deals Eli Lilly has been doing to try to beef up its oncology
portfolio. Todd, we’ve now got two big M&A deals focused on the oncology assets.
Campbell: Yep. Eli Lilly is probably best known for being a leader in diabetes. It makes Humalog
and a bunch of other important diabetes drugs. It’s also long been playing in oncology.
Its stated goal is to boost the amount of sales that it gets from those indications.
This deal certainly puts it on the cutting edge of what we’ll call the next generation,
perhaps, in how doctors treat patients who have cancer. Loxo Oncology actually has
won FDA approval for a really unique drug that works unlike most of the other cancer
drugs that are out there on the market. Jones: One thing I’ll mention is that this
deal actually represents a 66% premium to Loxo’s closing price of $139 a share on Friday
of last week. Unsurprisingly, we saw the shares of this company skyrocket nearly 66% on the
day that it was announced. It all comes down to this new innovative approach.
It’s targeted and focused in on precision medicine. You mentioned that they’ve got a drug out called Vitrakvi.
It focuses on fusion genes. It’s these genes that, when they fuse together, flip a switch.
And then, all of a sudden, now you have these cancer cells proliferating. Loxo Oncology
has come on the market with drugs that could potentially be game-changers
in this space moving forward. Campbell: We’ve talked on the show in the
past about what’s happening in cancer treatment. We’re moving increasingly away from treating
based on the origin of the cancer — so, breast cancer, prostate cancer, ovarian cancer, whatever
— and more to the biology or the genetic mutation that may be contributing to the disease.
What Loxo’s Vitrakvi — that’s not an easy one to say, is it! — what that drug does is,
it can be used in various solid tumor cancers. It doesn’t matter where it originated.
According to the companies, it’s not a ton of patients that have these TRK fusion mutations,
but it could still be thousands of patients that are eligible for treatment.
Lilly is going to have to split, in the U.S., any sales from this drug with Bayer. Bayer licensed
50% of the rights to any profit on the drug either one or two years ago. Prior to the
approval, anyways. Outside the U.S., what’ll happen is, Bayer will market it and pay
Lilly a double-digit royalty on sales. But that’s not the only drug that Eli Lilly
gets in this deal. It also gets LOXO-292, which potentially could be in the leadership.
It could get to the market before some of the other competitors that are also working
on drugs that work similarly. It inhibits something called RET. RET fusions are estimated
to be present in about 2-3% of non-small lung cancer patients, and, it varies depending
on the type of thyroid cancer you’re looking at, but still, again, thousands of patients
potentially for an addressable market for this drug. In trials, the results for LOXO-292
have been pretty good. That’s got some people thinking that that could be a major drug,
as well, and Lilly will own 100% of the rights to 292. 292 has not been licensed
out to anyone else, at least not yet. Jones: LOXO-292 is potentially the more lucrative
option here for Loxo and Eli Lilly, so certainly keep your eyes on that. But, I’m glad to see
Eli Lilly becoming much more aggressive in building out their oncology portfolio.
They were pretty late to the game when it came to cancer immunotherapy. You saw Bristol and Merck
getting out the gate with their checkpoint inhibitors. Now, Eli Lilly has had to play catch-up.
To see this deal — they also had a deal in May of 2018 for ARMO BioSciences
targeting the patients who weren’t responding to checkpoint inhibitors. So, you’ve now got,
potentially, an oncology portfolio that is not being addressed by a whole lot.
Granted, they are very small patient populations. But, it’s very intriguing to see Eli start to become
much more strategic and aggressive in their approach. Campbell: Yep. There are two other drugs, too, that are worth knowing about that they’re going
to get in this deal, LOXO-305 and LOXO-195. LOXO-305 is designed to overcome resistance that
can build up in patients taking the mega-blockbuster Imbruvica. LOXO-195 is a second-generation
TRK fusion drug. If we discover that people are starting to develop resistance to TRK
fusion medicines like Vitrakvi, then this drug could theoretically get used, as well.
So, yeah, there are some exciting things going on here. Like you said, interesting to see
both of these really big — Bristol Myers and Eli Lilly — big, traditional pharmaceutical
companies making big splashes that advance them into next-generation biologics.
Jones: Turning the page a little bit, let’s talk about a smaller player in the space that
also made headlines this week. That would be the clinical stage biotech SAGE Therapeutics Inc,
ticker SAGE. Shares skyrocketed nearly 43% on positive data coming out Monday related
to their postpartum depression drug, SAGE-217. Todd, as you know, we love to see good data,
especially in an indication like depression, which, historically, you see a lot of these
studies get overtaken by the placebo effect. This is one company that I think has figured
out multiple times how to make these clinical trials run well and also
have some impressive data results. Campbell: Yeah, central nervous system disorders
are extremely difficult to develop new drugs for. There’s been an absence of big advances
for these disorders for many years now. I was actually surprised when I looked at that
market cap for this company. It’s a clinical stage company. They don’t have any FDA
approvals yet. They have one potentially on deck. We’ll get to that in a minute. But it already has
a $6 billion market cap. It may be one of the bigger biotech companies that many listeners
may not be familiar with. They did, indeed, announce results for SAGE-217’s Phase III
trial in postpartum depression this week. That sent shares up 43% at one point on Monday.
They’re now up 35% over the past five trading days. This is an important drug.
You can’t deny this. Postpartum depression is underdiagnosed.
There’s a stigma associated with it. Yet, there are still 400,000 cases of it,
even though it’s under diagnosed. And there really aren’t any treatments that are specific to
postpartum depression. I mean, you can treat them using other things that are used in
depression and central nervous system disorders. But, this theoretically could become one of
the first — I’ll say “one of the” because we’re going to get to another drug in a second that
SAGE is working on — that targets postpartum depression outright.
Jones: One of the other things with SAGE is, it’s actually an oral drug. We’ve been talking
around it, but what looks like to be a very likely approval coming in March is their drug Zulresso.
Zulresso is the IV infusion, I believe it’s a 60-hour infusion for postpartum depression that did
get a positive nod from the Advisory Committee at the FDA. I believe it was 17-to-one vote
recommendation in favor of approval for this particular drug. We could
see that drug hit the market. But now, you’ve got SAGE-217 right on its
heels. It works very much the same, but has a much more convenient route of administration,
which could send the sales of the drug even higher than the first drug that they have
set to come out market in March. Campbell: Yeah. This whole Zulresso story
is interesting. The FDA originally had planned to issue a go/ no-go decision on December 19th.
However, in November, they pushed that decision back. So now, an FDA decision isn’t
coming until March of 2019, which, of course, leads investors to say, “Well, why did they
do that? Are they uncertain of something they saw following that AdCom vote?
What caused them to want to delay their decision?” It really just stems from the fact that the
AdCom was based on the ability for there to be a risk management system put in place for patients
who do receive this drug, because it’s going to be a controlled substance. That plan was
submitted to the FDA. Once you make a major change like that, like submitting this plan,
the FDA oftentimes will invoke its right to delay by three months its decision. So, yes,
the decision has now been moved to March 19th. I think there’s a very good chance that this thing
wins approval. You hit the nail on the head, though, when you said that it’s not
going to be a convenient treatment option. It’s going to be and inpatient option.
Like you said, it’s given intravenously. So, this is not an ideal solution for this patient
population, especially since it’s a stigmatized indication. A lot of patients that may be
feeling the effects of postpartum depression don’t actually go out and
tell their doctor about it anyway. So, yes, we could get the approval of that.
If we assume it happens, that’ll be in March. Then, the Drug Enforcement Agency has a 90-day
window to be able to schedule the drug, because, again, it will be a controlled substance.
Once they get that in place, then they say they’re good to go. So, if it’s going to get
approval, this company is most likely not going to see any sales coming in for this
drug until the back half of this year, starting in, say, Q3. Interestingly enough, that should also be when we get more insight into SAGE-217 and its
potential not only to be used in postpartum depression, but also to be used in major depressive
disorder. That’s even a bigger treatment market. That could be tens of millions of addressable
patients, if it gets approved eventually, for depression. Jones: Absolutely. The market is wide open for SAGE and their depression drugs. A lot
to watch here. I will say, with this particular company, in 2018, this is one of those companies
that was the talk of the town when it came to M&A targets. I would not be surprised,
especially coming off this positive Phase III data for SAGE-217, to also see that heat
back up in 2019, as well. A lot to look forward to, certainly a lot on the docket. But, it’s
encouraging to see some good positive study results coming out of JPM.
Campbell: The other thing investors should know is, they have a lot of cash.
They’ve got a billion dollars on the books coming out in September. They did file a mixed-shelf
offering, but it was for an undisclosed sum. They can tap investors for more money if they
need it for their research. I don’t know how much more they’ll actually need if they start
bringing in some sales before the end of this year. Then, as far as trying to think about, it’s already worth $6 billion, what could it be
worth in an indication? You have to do some guessing there. If you assume that they’ve
got a billion-dollar blockbuster on their hands, well, they’re already trading at 6X
that billion dollars at 6X sales. I usually think that deals should happen somewhere between
3X-7X projected sales. You want to factor that in as you’re doing the calculus in your
brain of whether or not you want to be buying this stock on the potential for M&A. Otherwise,
stay tuned. This company is going to have a lot of data points coming out in 2019 that
could move the stock up or down. Jones: Keep an eye on all of that. More importantly,
if you want to keep an eye on all the news coming out of the JP Morgan Healthcare Conference,
Todd and a whole host of other of our Foolish writers have been writing feverishly away
over these past few days. If you want to check out all of their coverage in one place,
we have put up a JP Morgan Healthcare Conference round up on our site. If you just google “The Motley Fool JP Morgan
Healthcare Conference round up,” you will find it. Be sure to check that out. That’s it for this week’s Industry Focus show.
Thank you so much for tuning in! Of course, as always, people on the program may have
interest in the stocks they talk about, and The Motley Fool may have formal recommendations
for or against, so don’t buy or sell stocks based solely on what you hear. This show is
produced by Austin Morgan. For Todd Campbell, I’m Shannon Jones.
Thanks for listening and Fool on!