Talk about adding insult to injury.
Celgene Corp.’s shares have lost 37 percent since October, hurt by a guidance cut and drug-development setbacks. Highlighting the extent of the drugmaker’s struggles, RBC Capital Markets analyst Brian Abrahams on Wednesday suggested in a note to clients that a leveraged buyout could cure its ills.
That’s not actually going to happen. Even in its current state, Celgene has a market cap of $69 billion. Adding the 30 percent premium Abrahams suggests in his note would make this the largest LBO in history, by a wide margin:
Abrahams concedes in his note that his suggestion is more thought experiment than actionable suggestion. But clearly the company has work to do to quiet such talk.
Along with its sheer size, other factors make going private problematic for Celgene. It would have less access to capital. Its overdependence on its leading drug Revlimid -- which is projected to account for 60 percent or more of its sales into the 2020s -- would make the super-heroic amount of leverage required to do such a deal particularly risky.
On the other hand, Abrahams notes, shareholders would see a near-term return they might not otherwise achieve. Celgene would realize value from Revlimid -- which is expected to generate more than $40 billion in sales over the next four years -- that the market won’t provide.
Celgene would also be insulated from market volatility as it works through some of its pipeline issues and concerns about Revlimid’s longevity. The drug will begin facing limited generic competition in the U.S. no later than 2022. A buyer would get the company at a relative discount, would benefit from its substantial projected cash generation, and could take the company public once more after Revlimid goes generic.
The compelling backdrop to all of those arguments is the extent to which the company’s valuation has eroded relative to its peers. That’s clearly a major issue for every Celgene stakeholder.
Investors are worried -- and rightfully so -- that Celgene won’t be able to make up for the eventual loss of Revlimid. Its current roster of FDA-approved drugs certainly won’t do the job.
Celgene has been an aggressive dealmaker and has made dozens of pacts with smaller biotechs to create a broad and interesting pipeline. But recent returns have been meager. An expensively acquired gastrointestinal drug failed in a late-stage trial last year, which helped prompt a damaging cut to the firm’s 2020 guidance.
A filing for an even more expensively acquired multiple sclerosis drug was rejected by the FDA in February. That will substantively delay the launch of one of Celgene’s most important potential revenue drivers, reduce its commercial potential, and could put even reduced 2020 guidance at risk.
Celgene’s $8 billion deal for Juno Therapeutics Inc. is very much a long-term bet, and its smaller purchase of Impact Biomedicines comes with serious risks (but a big payout if Impact’s lead asset succeeds).
By the time 2020 arrives, with Revlimid generic competition looming, Celgene needs to have turned more of its theoretical promise into actual results through additional deals and significantly improved execution.
Otherwise, the privatization conversation may become less theoretical, and could take place on less-favorable terms.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.
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