Is Celgene Considering Going Private?
Despite a deep pipeline and a market cap of $69.4 billion, Celgene shares are down 12 percent year to date. Its two biggest moneymakers, Revlimid and Pomalyst, will lose patent protection in the mid-2020s. As something of a thought exercise, Brian Abrahams, an analyst with RBC Capital Markets proposed a scenario where Celgene goes private in 2019 via leveraged buyout.
Abrahams wrote in a note to clients, “Celgene is in a unique situation where strong near-term cash flows and pipeline have become overshadowed by the looming out-year loss of most current revenues from Revlimid’s cliff, causing a valuation disconnect. Based on our analysis, we believe one interesting value-creation opportunity could be going private, which would provide upside for current shareholders, insulation versus medium-term volatility as they transition to a post-Revlimid business model, and appreciation for a buyer; while perhaps unlikely, it implies a valuation floor.”
He cites three possible advantages in this scenario. First, it would allow the company to do a better job in capturing the medium-term value from future Revlimid sales before the patent expiration. Two, it would avoid valuation volatility and they can settle various lawsuits over Revlimid—mostly over Dr. Reddy's Laboratories, Inc.’ efforts to launch a generic version— and get their pipeline on the market, in particular re-filing for ozanimod. Third, it would reduce, at least a little bit, G&A expenses.
On February 27, the U.S. Food and Drug Administration (FDA) issued a Refusal to File letter for the company’s New Drug Application (NDA) for ozanimod as a treatment for multiple sclerosis (MS). The FDA indicated that both the clinical and nonclinical aspects of the application were inadequate. The company plans talks with the agency and eventual resubmission.
It also had a big late-stage failure of its GED-0301 for Crohn’s disease. These two events together, along with the patent suits, are what have analysts and investors shaking their heads and preparing worst-case scenarios—head for the shelters, a storm’s coming. The company is still optimistic about ozanimod and believes that once approved it could generate peak annual sales of about $2 billion.
So going private isn’t the most likely scenario. More likely are additional acquisitions. The company’s chief financial officer, Peter Kellogg, recently speaking at the Barclays Global Healthcare Conference, said Celgene would “let science dictate” what it might buy or license, although it would “love to get [its] hands” on a late-stage program, even though they’re usually competitive and expensive. But another area of interest for Celgene is neurology, where Kellogg said, “it would be logical for us to broaden our portfolio.”
Abrahams wrote in his note that a leveraged buyout is somewhat unrealistic. “Leveraged buyouts greater than $10 billion are rare, and the largest ever was about $50 billion (so in some ways this may be more of a thought exercise than anything likely imminent); obtaining sufficient equity to fund part of a deal of this size would necessitate a creative structure involving a consortium of private equity firms and strategic investors (e.g., big pharma joint venture).”
And it’s also possible that such a last-ditch scenario to recover from some setbacks and or future patent cliffs won’t be necessary at all. Keith Speights, writing for The Motley Fool, says, “Despite Celgene’s series of miscues and setbacks, I think the company remains in good shape overall. Like Celgene’s management, I remain confident that ozanimod will be a big winner—eventually. My view is that the biotech will probably protect Revlimid from generic competition by settling with Dr. Reddy’s in an agreement similar to the one reached with Natco. And I’m looking forward to more acquisitions.”