Six burning Otezla questions

Planned divestment of Celgene’s psoriasis blockbuster means instant cashback for Bristol, a result the markets see as a win-win-win.

Analysis

Yesterday’s announcement that Celgene’s Otezla would be sold to Amgen for $13.4bn to enable Bristol-Myers Squibb to buy its maker was greeted with a sigh of relief.

All three stocks climbed 3%, as Amgen added a product to reinforce its Enbrel franchise, Bristol secured a generous price for it, and a risk to Celgene’s buyout was removed. As sellside analysts adjust their financial models to reflect the deal here are six considerations investors should bear in mind as they assess who has come out on top.

1. Is the price fair?

EvaluatePharma’s consensus of sellside analysts sees Otezla delivering 2024 revenue of $2.9bn, and applying typical margins and a 6.5% discount rate this translates into a product NPV of $9.6bn. At first glance, Amgen looks to be overpaying by around $4bn.

However, Amgen claims that it can generate tax breaks worth $2.2bn in NPV terms, making its net acquisition cost $11.2bn, though it is not clear why similar tax benefits would not have accrued to Celgene/Bristol. Amgen is therefore overpaying by about $2bn.

2. What assumptions is Amgen making?

On the other hand, thanks to its Enbrel franchise Amgen has an established inflammatory disease sales force that should now go into overdrive to wring maximum sales out of Otezla, a novel oral psoriasis therapy. Thus perhaps current sellside forecasts do not reflect the bull case.

Amgen said yesterday it expected Otezla to generate “at least low double-digit sales growth, on average, over the next five years”. At a minimal 10% CAGR this puts Otezla’s 2024 revenue at $3.1bn – above sellside consensus. Amgen also said it expected the drug’s US patent to hold through 2028, which is in line with analysts’ assumptions.

Sellside consensus for Otezla
  2018 2019e 2020e 2021e 2022e 2023e 2024e
Sales ($bn) 1.6 1.9 2.1 2.3 2.5 2.7 2.9
Growth   19% 10% 10% 9% 8% 6%
Source: EvaluatePharma.

3. What will the FTC say?

This must be the biggest question hanging over the divestment right now. It was, after all, the FTC that had in June made Otezla’s divestment a condition of the Celgene takeover, presumably on antitrust concerns over Bristol’s phase III Tyk2 inhibitor BMS-986165.

It is hard to understand why Amgen owning Enbrel and Otezla (as well as a Humira biosimilar) causes a less significant monopoly than Bristol owning Otezla and BMS-986165. In fact, Leerink analysts suggest that the former scenario is more anticompetitive.

4. What does it all mean for Tyk2?

The issue will also have caused some concern among fans of the Tyk2 approach, of which BMS-986165 is the most advanced exponent. It could be argued that Otezla being in the hands of an immunology powerhouse like Amgen will squeeze the opportunity for BMS-986165.

Consensus sees the Tyk2 project generating 2024 sales of $1.1bn, an expectation that has climbed from just $207m a year ago, according to EvaluatePharma archived forecasts.

5. What could Amgen have bought instead?

It became clear from Pfizer’s $11.4bn acquisition of Array that a $10-15bn deal value represents the sweet spot for biotech acquisitions by big pharma. It is noteworthy that hardly any companies fall into this sweet spot – which incidentally does not include Alexion, the group linked with Amgen last week.

In the sweet spot? Biotechs that might be bought for $10-15bn
Company Market cap ($bn)
Neurocrine Biosciences 9.1
Alnylam Pharmaceuticals 9.1
Galapagos 9.2
Ionis Pharmaceuticals 9.5
Seattle Genetics 12.8
Genmab 13.4
Biomarin Pharmaceutical 13.6

6. What does this say about how much Bristol is paying for Celgene?

From the start the markets have not been wildly enthusiastic about Bristol’s $74bn Celgene takeout. On the face of it, offloading for $13.4bn an asset thought until now to have been worth $9.6bn represents an unexpected $4bn of cashback for Bristol investors.

This explains why Bristol climbed 3% yesterday, though the stock had fallen 7% when the FTC demanded Otezla’s divestment. According to sellside forecasts Celgene’s marketed products carry an NPV of $76bn, so one view is that Bristol is now paying $61bn net for a business worth $67bn without Otezla.

Valuing the Celgene business without Otezla
Product Patent expiry Today's NPV ($bn)
Revlimid Mar 2022 49.3
Pomalyst Jun 2025 8.8
Idhifa Jan 2033 3.7
Abraxane Mar 2022 2.6
Inrebic Jun 2027 1.7
Vidaza May 2011 0.8
Total marketed 67.0
Liso-cel Jul 2032 7.1
Ozanimod Dec 2029 6.2
Luspatercept Dec 2028 4.6
Ide-cel Jan 2032 2.5
Total R&D 20.5
Total Celgene 87.5
Source: EvaluatePharma.

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