We wrote in our last Letter that Celgene (NASDAQ:CELG) had recently announced it was being acquired by Bristol-Meyers Squibb in a $74 billion stock and cash acquisition. Over the course of the quarter, activist investors spoke out against the deal, large Bristol shareholders came out in support of it, and, finally, Institutional Shareholder Services (ISS) issued its opinion in favor of the deal going through. This latter development all but solidifies the deal will be approved by shareholders, likely by the time you read this Letter.
We believe this deal to be especially beneficial to Bristol, and we are holding our position in Celgene at this time. At the time of the announcement in early January, we estimated that Celgene’s pipeline was being valued at essentially nothing. This acquisition strongly supports our thesis that there is significant value to the pipeline that is yet to be realized. Celgene investors’ main concern has been losing the Revlimid revenue stream (which has made up nearly 70% of total Company sales at times) and, subsequently not having new drug revenue streams to replace this blockbuster drug. As a result, shares sold off, despite the promising pipeline of late-stage drugs. As part of the deal courtship process, Bristol Management performed extensive due diligence on the Revlimid IP estate. They attest their modeled revenue assumptions are more conservative than both Street estimates – as well as Celgene management’s own estimates. In addition, during the quarter, Celgene had two positive patent decisions regarding Revlimid that ultimately reduced the risk of early entry of generics to Revlimid, at least prior to its patent expiration in 2023.
We continue to maintain our position in Celgene as we took advantage of the deal spread narrowing leading up to ISS issuing its opinion. We also believe the set up for the combined Company has attractive aspects. Bristol management has outlined EPS accretion of +40% in the first full year with continued accretion through 2025. The combined Company also expects to realize cost synergies of $2.5 billion and free cash flow generation of more than $45 billion in the first three years following the deal close. If Bristol shares do not realize this value, we believe it is a perfect Wedgewood-type setup to obtain additional shares directly in Bristol at a reasonable value with potential for strong growth that is not yet being realized in the current share price. We will continue to watch both positions closely and will update our clients as developments, or our opinions, change.
From David Rolfe (Trades, Portfolio)'s first-quarter 2019 Wedgewood Partners client letter.
