The long-awaited drug company consolidation has begun and all I can say is that it is happening not a moment too soon.
I could say "oh my how the mighty have fallen" in that I have long said from my hedge fund days when an extraneous event, like some sort of foreign crisis occurs and everything goes down, then just reach for something big in pharma because "what does Iceland, or Cyprus or Turkey have to do with the price to earnings ratio of Bristol-Myers." I said it because Bristol had, for so many years, offered cutting edge products for a host of illnesses.
But in the last few years Bristol had become a premier anti-cancer company, with its amazing Opdivo formulation. Premier, that is until Merck (MRK) came up with Keytruda and BMY started getting beat head to head by what we used to call St. Merck.
I think that the superiority of Keytruda, still debated for various cancers, took Bristol by surprise and it has been trying to expand its pipeline to no avail, at least to Wall Street.
So it decided to go after one of the most undervalued companies in its universe, Celgene, which itself had once been a great growth juggernaut. Celgene's greatness has been based on Revlimid, a blood cancer drug that has produced about $4 billion in sales and has succeeded by being not only the drug of choice but because it has been able to raise prices pretty regularly.
The problem with Revlimid is that it will soon lose its patent protection, although because of the peculiar nature of the drug business, we can't be sure when that cliff will occur.
Like Bristol, Celgene has wanted to diversify away from one product but so far it has really failed to do so. It made what now looks to be a disastrous acquisition of Receptos for $7.2 billion in 2018 for its formulations to treat irritable bowel syndrome and MS, but the tests have been inconclusive. Then it shelled out $9 billion to buy Juno Therapeutics for its untested CAR-T cancer therapy.
When I discussed the combination with David Faber this morning on CNBC he surmised that, after I described these diversification failures, that perhaps these are two drunken sailors holding each other up. I countered by saying maybe they aren't drunk, but they have both fallen on hard times.
The issue for me, though, is that if you owned Celgene you made a boat load today and that there are others, including Gilead (GILD) and Biogen (BIIB) that could be similarly positioned. Moreover, there are simply too many drug companies out there that can be valuable to others more than Wall Street and when you think about Abbvie (ABBV) , for example, a largely one product company even as its one product, Humira, is the best selling drug in the world, perhaps it, too has to do some buying. It's a main reason why I am headed out west next week to the JP Morgan health care conference. I need to look these execs in the eye and see what they think of the possible combinations out there. Of course no one will ever admit that they must make an acquisition to prosper. But I hope I can figure out if they do.
Look I know today is Apple (AAPL) day. However, if it weren't this deal is all we would be talking about because it shows you that Bristol-Myers needed more than just Opdivo. It needed a suite of anti-cancer products and pipelines. With Celgene it hopes to have found one.