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Biotechnology trusts bounce on $74bn Celgene takeover

4 January 2019

The merger & acquisition drive that has helped underpin impressive returns from listed biotechnology funds revives after Bristol-Myers Squibb mounts a record bid for cancer specialist Celgene.

Shares in the five biotechnology trusts holding Celgene (CELG.O) have risen on the news of its proposed $74 billion takeover by fellow US drugs giant Bristol-Myers Squibb (BMY.N), marking one of the largest deals in the pharmaceuticals sector.  

Bristol-Myers announced its plans to snap up Celgene yesterday, signalling the pair's attempt to corner the market in cancer treatments.

The deal continues the merger and acquisition (M&A) boom that has helped generate impressive returns for biotech trust holders in the past 10 years.

Celgene is held as a top 10 stock by five of the seven biotechnology investment companies – Bellevue Asset Management’s BB Biotech (BION) and BB Healthcare (BBH), OrbiMed’s Biotech Growth (BIOG) and Worldwide Healthcare (WWH) trusts, as well as SV Health Managers’ International Biotechnology Trust (IBT).

Biotech Growth, its largest backer, with 8.6% of its portfolio, its third biggest position, saw its shares rise 3% to 680p yesterday.

BB Healthcare, which holds both Celgene (5.9%) and Bristol-Myers (3.9%), gained 2.3% to 120.75p

International Biotechnology, which holds its biggest position in Celgene at 5.5% of assets, added 2.8% to 586p.

Worldwide Healthcare, which has 4% exposure to Celgene, rose at the news but later retreated and stands at £24.10, up 5p today.  

Zurich-listed BB Biotech, which has a 6.8% weighting to Celgene, rose 3.9% and added a further 2% gain to CHF 61.95 today.

Shares in the target and the bidder diverged, as is often the case. Celgene shot up 31.5% at one point while Bristol-Myers plunged 14.6% as shareholders balked at the price and the execution risk entailed in the acquisition.

Both companies had a tough 2018 with Celgene plummeting 39%, while Bristol-Myers shares fell around 15%.

One of Celgene’s largest setbacks was the failure of its Crohn’s drug, after scrapping it at the third phase of trials in 2017. Last year, the US Food and Drug Administration refused to approve its multiple sclerosis drug Ozanimod. There is also concern that it will face competition for its flagship blood cancer treatment, Revlimid, as its exclusivity on the drug starts being phased out in 2022.

Bristol-Myers also suffered as its main cancer treatment, Opdivo, lost ground to Merck & Co’s (MRK) rival drug Keytruda last year.  

US president Donald Trump’s pledge to lower prices paid by the country’s Medicare programme for prescription drugs has also shaken investor sentiment towards the pharmaceuticals sector as a whole.

However, the merging of the two companies is expected to create a cost saving of $2.5 billion and bring in more than $15 billion in revenue with a combined pipeline of six near-term product launches.

BMS chief executive Giovanni Caforio revealed his company had opened talks with Celgene in September. He believes their combination will make a top oncology franchise, thanks to Bristol-Myers’ specialism in tumour treatments and Celgene’s expertise in blood cancer.

‘Together, our pipeline holds significant promise for patients, allowing us to accelerate new options through a broader range of cutting-edge technologies and discovery platforms,’ he said.

Under the deal Celgene investors will receive 1 BMS share and $50 in cash for each of their Celgene shares.

Takeda’s (4502.T) £46 billion ($59 billion) acquisition of Irish pharma company Shire was the biggest M&A deal of 2018, which was approved by shareholders in December. It took the Japanese drug maker into one of the top 10 biggest pharmaceutical companies globally.

Biotech and life sciences investment companies have been among the strongest long-term performers in the closed-end fund sector. Over 10 years, the pace of M&A and scientific development has seen the sub-sector deliver an average shareholder return of 627%, according to Numis Securities, data, which includes the 725% return from BB Biotech. 

Returns have moderated in the past five years but nonetheless the six listed biotech funds with a record over that period have generated an average of 147% for shareholders.

With the exception of Syncona (SYNC), which emerged at the end of 2016 and does not hold Celgene, BB Biotech is the most highly rated with its shares standing on a 14% premium over net asset value (NAV). BB Healthcare and International Biotechnology trade on modest premiums over over 2% while Biotech Growth and Worldwide Healthcare stand on discounts below NAV of 5% and 0.2% respectively.

Investment company news brought to you by Citywire Financial Publishers Limited.

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