For Celgene the unthinkable suddenly looks less improbable

Celgene stock falls 9%, suggesting that an activist campaign to derail its takeover by Bristol-Myers Squibb is reaching critical mass.

Publicly announced big pharma megamergers have fallen apart before, it’s true. Looking back over the past 20 years they have foundered because of unexpected political pressure, last-minute tax reform, the emergence of a white knight, or even because the two companies’ chiefs failed to get along.

But a revolt by the acquiring company’s shareholders is virtually unheard of, largely because these are precisely the people who are consulted at length before a megadeal is announced. Yet an activist campaign to stop Bristol-Myers Squibb’s $74bn buyout of Celgene is gathering speed, and yesterday the possibility that it might succeed looked for the first time like it might become reality.

In an initially predictable pattern the activist fund Starboard Value opportunistically built a stake in Bristol after the deal was announced. But on Wednesday events took an unexpected twist, as Wellington Management – an 8% Bristol holder and the group’s largest institutional investor – came out against the Celgene acquisition.

Pricing in

Yesterday Celgene stock fell 9%, showing that the market was starting seriously to price in the risk of the deal falling through. In its short statement Wellington said the takeover was too risky and gave away Bristol stock too cheaply, and that “alternative paths” could be more attractive.

It is not clear what might have changed between the time Bristol pitched the Celgene idea to its biggest holders in December, presumably getting their support, and now. If Wellington had always been lukewarm this would imply a major failing on Bristol’s part.

One version of events has it that the Celgene bid was cobbled together in a matter of weeks, apparently because there was fear of an imminent rival approach. If Wellington was insufficiently consulted this could have been because Bristol was under pressure to move quickly.

It is also unclear to what extent Wellington has been influenced by Starboard, which yesterday spelled out its own reasons for opposing Bristol’s decision. In essence these boil down to Celgene’s Revlimid facing a huge patent cliff, and the fact that there is no agreement on sales forecasts for five other Celgene assets.

Fundamental disagreement? Five key Celgene assets
  2024e sales ($m) 2028e sales ($m)
Product Via EvaluatePharma Range, via Starboard consensus Via EvaluatePharma
Luspatercept 1,089 900-3,400 1,576
JCAR017 1,466 500-2,800 2,348
bb2121 559 1,000-1,800 973
Fedratinib 353 300-500 527
Ozanimod 1,612 1,800-3,400 2,484

Like Wellington Starboard claims that Bristol has alternatives, either by continuing on its own with a low-risk strategy and doing “tuck-in” deals, or by selling itself “at a substantial premium”.

A takeout of Bristol has been mooted for a while, but none of the supposed buyers – think Pfizer or Abbvie – has shown its hand, and it is hard to see why anyone should pay a large premium. The reality is that Bristol faces patent expiry problems too, as well as having embarrassingly lost the immuno-oncology race to Merck & Co.

The company and its dissident shareholders alike use the flimsy argument that Bristol is in a strong position. In fact the Celgene acquisition is a clear example of a struggling company moving from a position of weakness to buy another whose own valuation has come sharply off earlier highs.

What now?

Those looking nervously at the developing situation will note that shareholder revolts at an acquiring pharma company are rare, though of course a target investors’ opposition has scuppered hostile moves like that of Pfizer on Astrazeneca and Mylan on Perrigo.

Even where a bust-up between executives has sunk a deal, as famously happened when Jan Leschly and Sir Richard Sykes failed to merge Smithkline Beecham with Glaxo Wellcome in 1998, all it took was a management change to remedy the situation; Glaxosmithkline came about just two years later.

Should the unthinkable happen with Celgene a $2.1bn termination fee would be the least of Bristol’s problems. Its C-suite would struggle to survive such a humiliating outcome, and all Bristol investors must realise that the chances of a lowball buyout of their company would go up.

Bristol has now publicly responded to Wellington and Starboard, expressing its disappointment but basically digging in its heels. It presumably still has the support of other key holders, but there is potential for horsetrading between now and the April 12 vote, at which a simple Bristol shareholder majority is required.

While most investors probably understand the inevitability of buying Celgene perhaps some have now spotted the opportunity of a discount to the initial price tag.

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