Mehta Analysis: BMS/Celgene Merger Shows Big Pharma Is Stuck In Wrong Groove

Bristol-Myers Squibb executives are justifying the acquisition of Celgene in terms that have been well-rehearsed through the history of big pharma mergers. But they are failing to consider radical changes to the environment in which pharma operates, argues Viren Mehta of Mehta Partners LLC.


Bristol-Myers Squibb executives are justifying the acquisition of Celgene in terms that have been well-rehearsed through the history of big pharma mergers. But they are failing to consider radical changes to the environment in which pharma operates, argues Viren Mehta of Mehta Partners LLC.

In Gujarati, we have a saying, ‘Kona Bap-ni Diwali?’, or KoBaDi for short. It translates as‘Whose father may end up paying for this folly, such wishful thinking?’

Enter the mother of all biopharma deals, Bristol-Myers Squibb Co.’s proposal to acquire Celgene Corp. for about $90bn, which will also see close to $1bn paid to financial and legal advisors. Why is this transaction being opposed by some of the investors who have broadly embraced most of the preceding value-destroying mega-mergers?  (Also see “Celgene/Bristol: Happy Union Or Runaway Bride?” – Scrip, 28 Feb, 2019.)

These savvy investors, and others that might join them, seem afraid that even the short-term savings from synergies may no longer be guaranteed amidst intensifying pharma-political scrutiny. Perhaps the time has finally come for biopharma managers to face the reality that the short-term gains do not justify longer term value destruction predicated on wishful projections. 

Improving Pharma-Political Outlook?

 If the US Senate Finance Committee hearings at the end of February are anything to go by, the US Congressional hearings to publicly grill and shame biopharma executives are likely to be staged as election cycle theater, rather than with any skilled legislative intent. (Also see “Big Pharma At The Senate: When It Comes To Yes Or No Questions, There Are Still A Few Maybes” – Scrip, 28 Feb, 2019.)

Several other Congressional hearings are scheduled in coming months, but both sides and especially the Democrats have more to gain by seizing the opportunity for persistent rhetoric about the industry practices than by taking any tangible action. To be sure, some action to streamline generic and biosimilar approvals and market adoption seems possible, as do a couple of other modest proposals, but these are all too small to move the needle on US healthcare spending, which is dangerously close to 20% of the country’s GDP. Any serious anti-biopharma legislation will probably not happen until the next US president is inaugurated in January 2021.

This unexpectedly swift transition from 2018, when the biopharma industry faced gathering dark clouds on all fronts amid stagnant R&D productivity, to today’s relatively benign landscape seems to have convinced industry executives that their business may chug along as usual. The well-crafted justification of the BMS-Celgene combination reads no differently from the slide decks justifying the ‘marriages made in heaven’ that have preceded it, especially when it comes to management assumptions about forward projections on the outlook for the companies and industry in 2025. With the assumption of superior pipelines and market successes, and barely a nod to the massive and potentially disruptive shifts swirling all around the biopharma and healthcare industries, the ‘business as usual’ mindset is on full display.

Aren’t There More Meaningful Justifications? 

That the Celgene valuation used to be much higher is the core tenet BMS management is focusing on in justifying this merger. (Also see “Bristol Approached Celgene Nearly Two Years Ago, Got A Better Deal Later” – Scrip, 1 Feb, 2019.) It also believes that by taking lower than average projections of investment bank analysts, it has safely buffered against any unexpected downside. However, most astute investors never find forecasts from such sources very helpful. And then there are the R&D success and revenue assumptions that are based on the current environment prevailing, despite shifting science and the complex competitive landscape.

One can’t help but wonder why the mindset of merger-mania sticks to the tired formulaic justifications in this CRISPR age. When such transformative trends are afoot, why not ask bolder questions that may yield truly impactful justifications?

BMS and Celgene being two of the leading cancer innovators, the merged entity’s ambition could include ways to improve the outcomes of cancer R&D and tangible results achieved by their products. Rather than meager months of poor quality of life that most cancer drugs offer today, one of the more meaningful measures is the total number of cancer survivors, a figure that has barely budged over the past 25 years, up by only 20% to 16 million cancer survivors in the US. Cumulatively, several trillion dollars have been spent on treating cancer patients over these 25 years. The cost per cancer survivor would not present the cancer companies in a very favorable light. More disappointingly, recent analysis projects this number will grow to only 20 million cancer survivors in the US over the coming decade.

Wouldn’t it be refreshing to learn, for example, how the combined BMS-Celgene as a dominant cancer company aims to make a difference by increasing the number of cancer survivors in a dramatic way with profound impact? Another obvious measure would be assured access to cancer treatments by this cancer powerhouse to every patient who may benefit – not just in the US, but globally. And one can list many other impactful measures that add up to cancer leadership on every front, including superior profit growth with a continuing stream of value-enhancing products that do not depend on gaming patents and prices.

Valuable Innovations Come from Small Teams Not Afraid to Go Out of Business

Some mega-mergers of the past have been exceptions, solving both near- and longer-term challenges facing each company. But most combinations have ended up as marriages made in misery, while managers and advisors have swiftly collected their bonuses and fees and moved on – often to help the merged companies get out of their misery by doing yet another, even larger transaction, earning them even bigger bonuses and fatter fees. How does BMS-Celgene ensure that this heady deal would not fall prey to yet another mega-merger in a few years?

Innovative enterprises succeed by building focused, small teams that pave paths to new frontiers, cut false leads swiftly, and go all-in to ensure that promising leads yield value enhancing products. And repeat! It is these repeatable successes that continue to escape biopharma companies. Most large biopharma companies have grown quickly on one or two high-priced drug successes, and then they have stagnated, unable to repeat these successes. Enter mega-mergers, as tuck-in transactions are no longer enough to fill the gap. The merged entity ends up doubling its challenges, requiring twice the repeat rate, which is likely to remain elusive – even according to the BMS slide deck justifying this bold gambit. 

Large organizations are necessary for massive service providers, such as utilities and airlines, but as history continues to prove, they are not for sustainable, innovative biopharma companies. The innovation race is won by managements that can spawn a continuing stream of small, nimble teams that are designed to go out of business if they fail their primary mandate: to create cost-effective treatments – and not to play the cavalier game of KoBaDi.  Where does the BMS-Celgene proposal stand in this regard?

BMS and Celgene’s combination may still be completed as it offers near-term savings to help both companies ride out impending difficult patent expiries and growing competition, which could entice enough investors to vote in favor of the merger. But it would not be unreasonable for investors and indeed all stakeholders to ask “KoBaDi?”

This column originally appeared on Scrip Biopharma Intelligence, March 08th, 2019.

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