In case you missed it, it turns out the rumor was true. Biotech giant Celgene (NASDAQ: CELG) recently announced that it had agreed to acquired Juno Therapeutics (NASDAQ: JUNO) for $9 billion. This represents the company’s largest acquisition in its history.
Should shareholders cheer this news, or is it possible that management just made an unforced error? Here are three reasons investors should believe in this deal.
1. Right products
Juno Therapeutics is a clinical-stage biotech that is focused on immunotherapy. Specifically, the company is working on an exciting new type of treatment called chimeric antigen receptor T-cell therapy, or CAR-T. This therapy extracts a patient’s T-cells and then reprograms them to be able to identify cancer. Once complete, they are infused back into the patient’s body, and they go to work on the patient’s disease.
While Juno boasts a number of products in its pipeline, its crown jewel is called liso-cel, which is also called JCAR017. This CAR-T therapy holds promise to be a best-in-class treatment.
That potential “best-in-class” label is of prime importance here because, if approved, JCAR017 won’t be the first CAR-T drug to hit the market. That honor actually belongs to Novartis‘ (NYSE: NVS) drug Kymriah. Gilead Sciences‘ (NASDAQ: GILD) also successfully crossed the finish line with a CAR-T drug called Yescarta thanks to its recent buyout of Kite Pharmaceuticals.
Thus, the competition in this space is expected to be stiff.
Why does Celgene believe JCAR017 will be able to stand out? The answer lies in the drug’s data when compared to Kymriah and Yescarta:
This chart shows that JCAR017 successfully outperformed both Yescarta and Kymriah in the two metrics that matter most to healthcare providers and patients: efficacy and safety. This suggests that JCAR017 could be the top CAR-T therapy if it wins approval. Adding the rest of Juno’s pipeline to the mix is only icing on the cake.
2. Right price
Writing a check for $9 billion is a heck of a gamble, but there’s an argument to be made that the company is getting Juno for a decent price.
One recent point of comparison here is Gilead’s recent buyout of Kite Pharma. Gilead shelled out $11.9 billion to bring Kite into the fold, which is more than Celgene is ponying up for Juno. However, Kite had already filed Yescarta for approval when the acquisition was announced. This makes the $9 billion price tag look reasonable since JCAR017’s submission is still about a year away.
Another way to think about the buyout price is to look at JCAR017’s peak sales potential. Celgene’s management believes the drug could eventually pull in approximately $3 billion in annual sales, which means Celgene is paying three times that figure. That’s a reasonable multiple based on JCAR017’s potential alone, let alone what the rest of Juno’s pipeline might eventually be worth.
Overall, the evidence suggests that the $9 billion buyout price looks quite reasonable.
3. Right time
Why did Celgene decide to announce this deal in January of 2018? A few reasons come to mind.
First, JCAR015 has not yet been submitted to the FDA; that’s expected to take place later this year. You could argue that reaching a milestone like that would have pumped the price tag even higher. Given that Yescarta and Kymriah both sailed through the FDA approval process with ease, this looks to be a slam-dunk. Buying the company ahead of that value-creating event makes sense to me.
Another factor to consider is the recent changes to the U.S. tax code. The new rules will allow Celgene to fund this deal in part with some of its international cash, which wouldn’t have been as attractive of an option under the old rules.
When combined, these factors make the timing of this deal look quite smart.
Celgene is a buy
Overall, while this deal is certainly a gamble, this shareholder thinks there is ample reason to believe this acquisition will work out favorably for investors. With shares currently trading hands at a cheap valuation — Celgene’s stock can be purchased right now for around 12 times 2018 estimated earnings — this Fool continues to believe Celegene is a rare bargain in today’s pricey market.
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Brian Feroldi owns shares of Celgene. The Motley Fool owns shares of and recommends Celgene and Gilead Sciences. The Motley Fool recommends Juno Therapeutics. The Motley Fool has a disclosure policy.
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