Celgene Corp (CELG) has agreed to purchase Abraxis BioScience Inc (ABII) for at least $2.9 billion in cash and stock. Celgene aims to bolster its cancer portfolio through this acquisition, which is expected to close by year-end. The merger has been approved by the boards of both companies.
The deal, which is expected to modestly hurt Celgene’s adjusted earnings in 2011 and be accretive thereafter, entitles the stockholders of Abraxis to an upfront payment of $58 in addition to 0.2617 shares of Celgene for each Abraxis share owned by them. Furthermore, the transaction values each Abraxis share at $71.93. This represents a premium of approximately 17% over its closing price of $61.31 on June 29, 2010. The deal is expected to augment Cegene’s 2015 revenue by approximately $1 billion.
The merger will add cancer injection Abraxane to Celgene’s portfolio. Abraxane is already available in the US and European markets as a second-line therapy for metastatic breast cancer. The drug is being developed for other indications such as skin, lung and pancreatic cancer. The value of the deal will increase significantly if Abraxane receives approval for the additional indications.
Celgene will have to make a payment of $250 million in the event of Abraxane receiving approval from the US Food and Drug Administration (FDA) for treating non-small cell lung cancer. Furthermore, the company is obliged to pay $300 million under the deal if the drug is approved by the FDA for treating pancreatic cancer. If the pancreatic cancer approval comes, Celgene stands to pay a further $100 million in the event of Abraxane getting marketing approval as a treatment for pancreatic cancer by April 1, 2013. The transaction is inclusive of approval conditions and potential royalty payments.
2010 Earning Outlook Backed
Celgene backed its earlier projection of 2010 earnings per share (excluding special items). The company expects to earn in the range of $2.60 – $2.65 per share in 2010.
Our Take
With the impending acquisition of Abraxis BioScience coupled with the purchase of Gloucester Pharmaceuticals earlier this year, Celgene has further boosted its cancer portfolio, which will drive growth in the coming quarters. The company’s key growth engine is Revlimid, currently approved for Myelodysplastic Syndromes and second-line Multiple Myeloma and Celgene is expanding its label into other indications.
Although Celgene, with Vidaza and Revlimid, will dominate the Myelodysplastic Syndromes market, it will face tough competition in the Multiple Myeloma market. The negative growth of its other product Thalomid, approved as a treatment for Multiple Myeloma, is likely to continue due to better alternatives in the market for multiple myeloma.
Our Recommendation
Declining sales of Thalomid is the primary reason for the Zacks #4 Rank (Sell) on CELG shares. This implies near-term pressure on the stock.
However, we are Neutral on Celgene in the long-term, since the outlook is more stable and growth is expected to be driven by Revlimid, Vidaza and the acquired cancer drugs. Our long-term Neutral stance on the company indicates that the stock is expected to perform in line with the overall US equity market for the next 6-12 months. Consequently, we advise investors to retain the stock over the time-period.
Read the full analyst report on “CELG”
Read the full analyst report on “ABII”
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