President Trump’s tax cuts were expected to usher in a round of share buybacks and acquisitions in the biotechnology space. Celgene (CELG) answered the call with its acquisition of Impact Biomedicines for up to $7 billion:
Celgene, the acquisitive drugmaker, has agreed to buy Impact Biomedicines for $1.1bn upfront and a further $1.25bn dependent on successful regulatory approvals of the biotech company’s blood cancer drug. If the new round of tests win the approval of the US Food and Drug Administration and Impact’s sales surpass $5bn annually, the owners of the San Diego-based start-up could be paid an additional $4.5bn, Celgene said on Sunday evening.
The transaction came after the FDA allowed Impact to resume clinical trials for fedratimid, a drug that treats myelofibrosis (“MF”) and polycythemia vera, which are two types of cancers. The FDA had previously blocked clinical trials in 2013 after a few patients developed a dangerous neurological condition called Wernicke’s encephalopathy, which is tied to Vitamin B deficiency.
About Impact Biomedicines
MF is a rare but serious blood cancer characterized by excessive scar tissue in the bone marrow that disrupts the body’s ability to produce normal blood cells. According to MPN Research the abnormal blood cell production could move to other areas of body:
The abnormal stem cells produce mature cells that grow quickly and take over the bone marrow, causing both fibrosis (scar tissue formation) and chronic inflammation. As a result, it becomes more difficult for the bone marrow to create normal blood cells and blood cell production may move to the spleen (causing enlargement) or to other areas of the body.
People with MF can get worse, and it is possible the disease could lead to a more serious form of leukemia. An estimated 16,000 to 18,500 people in the U.S. have MF and people are usually around 65 year old when they realize they have it.
Polycythemia vera is a rare blood cancer disease caused by the overproduction of blood cells in the bone marrow. According to Novartis (NVS), (NVSEF) it affects about three in 100,000 people globally. The disease is characterized by a mutation in the Janus kinase 2 (“JAK 2”) gene, an a dysregulation of blood cells.
Impact was previously owned by Sandoz, a division of Novartis. After the FDA put a hold on the clinical trials in 2013 Sandoz put the drug on the shelf and shut down several clinical trials. Celgene is now betting that previous FDA concerns have been removed and the drug can be marketed successfully. The transaction comes as Celgene’s own operations might be showing cracks. In Q3 the company grew revenue 11% Y/Y, which is very respectable. However, Otezla’s revenue appears to have slowed. The psoriasis drug represents 10% of Celgene’s total revenue. It grew 12% Y/Y, but was off 14% sequentially; the psoriasis market has become hyper-competitive as Johnson & Johnson’s (JNJ) Stelera and Novartis’s Cosentyx continue to take share. Celgene had to offer discounts on Otezla in order to maintain volume.
Management recently hiked the price of Revlimid (64% of revenue) and Pomalyst (13% of revenue) by 20%. My guess it that it wants to offset potential declines elsewhere, and justify the company’s trading multiple of over 17x run-rate EBITDA. The company’s vaunted pipeline also recently took a hit after it discontinued phase III trials and an extension trial for Crohn’s disease. The write-off will cost up to $500 million after-tax, but it might have hurt sentiment for the stock.
That said, I like the concept of the Impact deal. It is not very expensive. At Q3 2017 Celgene had nearly $12 billion in cash and securities. The $1 billion upfront cost for Impact is very manageable. If Impact’s new clinical trials win approval then more payments will be phased in later. The upside from FDA approval could be tremendous. Alexion (ALXN) only has about 11,000 patients for Soliris which treats ultra-rare disorders. Alexion has a market capitalization of over $27 billion; its market capitalization likely reflects the price of saving lives and the frothiness of current financial markets. Celgene needs to change the narrative and continue to replenish its pipeline. Whether Impact is the right target to go after remains to be seen.
The Impact deal could pay off long-term. In the near term I believe the diminution in Otezla and Celgene’s dependence on sizeable price hikes make it a risky investment. I rate CELG a sell.
On Trump And The Global Economy
Trump And The Global Economy Town Hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Wuyi Jacobs (AfroBeats Radio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead.
The event was well-received by the community. We parsed through President Trump’s proposed tax plan and [i] how it was pure economic folly and [ii] high net worth individuals could potentially game the system by shifting income around. Apparently, Kansas Coach Bill Self did this when the state of Kansas cut taxes in the past. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership vis-a-vis Obama? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?