A sweetheart deal for Celgene in Receptos acquisition?

While analysts mostly are upbeat, some concerns remain with regard to the $7.2-billion M&A agreement

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SUMMIT, N.J. & SAN DIEGO—Considering the deal was struck July 14, it’s not exactly “news” now that Celgene Corp. and Receptos Inc. announced a definitive agreement under which Celgene has agreed to acquire Receptos for  $232 per share in cash, or a total of approximately $7.2 billion. No, sometimes the real news is in the market reactions, cautions and predictions to a pending merger and acquisition (M&A) deal.
The acquisition “significantly enhances” Celgene’s inflammation and immunology (I&I) work, the acquiring company notes, and further diversifies the company’s revenue beginning in 2019 and beyond, building upon Celgene’s growing expertise in inflammatory bowel disease (IBD).
The transaction adds Ozanimod, a novel, potential best-in-class, oral, once-daily, selective sphingosine 1-phosphate 1 and 5 receptor modulator (S1P) to Celgene’s “deep and diverse pipeline of potential disease-altering medicines and investigational compounds.” Based on clinical studies, Ozanimod demonstrated several areas of potential advantage over existing oral therapies for the treatment of ulcerative colitis and relapsing multiple sclerosis, including its cardiac, hepatotoxicity and lymphocyte recovery profile. Also, Ozanimod is positioned to potentially become the first S1P receptor modulator to be approved for IBD.
And it is in that therapeutic focus where we see some of the first hesitations among analysts and other market-watchers with regard to this M&A.
As Brian Nichols noted online at Seeking Alpha, the M&A is being celebrated by most people on Wall Street but, “While Celgene’s likely outcome with Receptos is positive, investors must realize that Celgene is historically an oncology specialist. This means that marketing Receptos’ products may not prove so easy.” That is especially true, Nichols notes, given the networks and progress already created in the multiple sclerosis space by Biogen Idec and Novartis.
Also on the cautionary side has been Matthew Harrison of Morgan Stanley, who wrote in a note to investors that while Celgene would acquire compelling Phase 2 data in two indications that have promising potential in the marketplace, the acquisition might be “a distraction from the elephant in the room.”
As he explained:”When a management team is this aggressive at compiling assets (Juno, PD-L1, Ozanimod) that have launch dates (2019/2020E) which coincide with the bear case from patent risk on their key asset (i.e, Revlimid), we worry about the perceived risk to the franchise. In absence of that risk, we believe this is a strategic deal that makes sense.”
The potential for increased risks regarding Revlimid (a blood-cancer treatment from which Celgene derived nearly a third of its $7.67 billion in global sales last year—the patents of which are now being challenged by generic drug makers) and GED-0301 has Harrison and his firm “much more neutral on this deal than we might otherwise be.”
So, the upsides that have most folks buzzing?
Analysts at Wedbush Securities have estimated that Ozanimod could grow to more than $1.2 billion in revenue by 2020.
Cory Kasimov of JPMorgan wrote in an investor’s note that Celgene is adding to its pipeline significantly with Ozanimod, which could “materially move the needle” in 2020 and beyond, and noted that the timing seems ideal with regard to when Revlimid goes off patent. Kasimov also noted that Ozanimod has a “long runway” into 2032 in terms of intellectual property.
Geoff Meacham of Barclays wrote in his own note that the acquisition makes sense first because it diversifies away from Revlimid but also because it addresses large commercial opportunities that can leverage Celgene’s I&I infrastructure and it provides “meaningful value inflection milestones” in 2017 and 2018.
The price tag “looks fair,” Meacham wrote, given predicted peak sales potential for Ozanimod of $4 billion to $6 billion and its stage of development.
“All this said, we don't think the deal provides an urgency to buy Celgene shares today given that key value-driving catalysts (Ozanimod in MS and UC, GED-0301 in CD, Revlimid in NHL, etc.,) are still more than 18 months away and there is likely only modest P&L upside in the near term,” Meacham wrote. “Net-net, we are encouraged by the transaction rationale/continued pipeline expansion and we expect Celgene shares to reset higher.”
M. Ian Somaiya of Nomura Securities noted, “We believe Celgene got a good deal given our projections for peak Ozanimod sales of $6.2 billion [in multiple sclerosis and ulcerative colitis alone], putting the $7.2 billion purchase price well below the 3-4x peak sales multiple we have seen in recent pharma/biotech deals.” He added that a Crohn’s indication could add more than $2 billion to Nomura’s model.
As for Zacks Investment Research, it concluded of the M&A deal and Celgene’s trajectory right now that “We expect Celgene to easily achieve its guidance driven by its strong product portfolio and prudent acquisitions and deals.”
Another issue of note—and possible concern—was brought up by the Motley Fool website by contributor George Budwell, whose article notes: “Celgene might have just made the best M&A deal in the pharmaceutical industry in a long time” and suggests that Receptos might have given the acquirer a “sweetheart deal.”
Remember that there have been months of speculation before July about a Receptos acquisition, with companies like AstraZeneca, Gilead Sciences and Teva having been named as potential suitors, though it has been said in various reports that none of those companies offered enough  cash to sway Receptos. Stories in June predicted that bidding wars for Receptos could drive the per-share price to between $211 and $348.
“The noteworthy part is that Receptos' management was reportedly holding out for an offer somewhere in the area of $350 a share, and several unconfirmed reports surfaced that they even rejected an offer from Gilead and Teva at $280 a share last June,” Budwell wrote.
Yet Celgene sealed a deal for $232 per share. As noted earlier, that might be because Celgene was willing to offer more in actual cash than its rivals, but regardless, the potential price differential has several law firms lining up to investigate the terms of the deal on behalf of shareholders who might feel Receptos was worth much more.
Now, as for the companies in the M&A deal themselves, they have predictably nice things to say.
“The Receptos acquisition provides a transformational opportunity for Celgene to impact multiple therapeutic areas,” said Bob Hugin, chairman and CEO of Celgene. “This acquisition enhances our I&I portfolio and allows us to leverage the investments made in our global organization to accelerate our growth in the medium and long-term.”
“In Celgene, we have found the ideal partner to maximize the potential of Ozanimod and our promising pipeline in order to improve the lives of patients worldwide,” said Faheem Hasnain, president and CEO of Receptos.
“Ozanimod is a potentially transformational oral therapy that has demonstrated robust clinical activity with impressive immune-inflammatory modulating properties in Phase 2 trials,” said Scott Smith, president of I&I for Celgene. “Ozanimod is a highly differentiated next-generation S1P receptor modulator with important efficacy and safety features that create the opportunity for development across a spectrum of immune-inflammatory diseases.”
Celgene’s I&I portfolio is currently anchored by the successful global launch of Otezla (apremilast) in psoriasis and psoriatic arthritis. Celgene’s I&I pipeline will, upon completion of the M&A transaction, consist of three high-potential commercialized or late-stage assets; Otezla, GED-0301 and Ozanimod. All three candidates are in Phase 3 development and encompass four indications: Behçet’s disease, Crohn’s disease, ulcerative colitis and relapsing multiple sclerosis. The pipeline also includes seven molecules in Phase 2 development in a variety of indications, including RPC4046 for eosinophilic esophagitis and a growing number of Phase 1 and preclinical assets.

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