After the Federal Trade Commission (FTC) demanded Bristol-Myers Squibb (BMY 0.83%) sell its blockbuster Otezla to secure approval for its $74 billion acquisition of Celgene (CELG), a bidding war resulted in Amgen (AMGN 0.61%) agreeing to pay $13.4 billion in cash for the psoriasis drug. Amgen's purchase price is well above the range most industry watchers were expecting, but the acquisition could still pay off.
In this episode of The Motley Fool's Industry Focus: Healthcare, analyst Shannon Jones and healthcare contributor Todd Campbell explain why buying Otezla could be a win-win for all the companies involved.
Also, Jones and Campbell dig into compelling data on a new cholesterol-busting drug under development at The Medicines Company (MDCO). Tune into find out how this new drug may reduce the risk of heart disease.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on Sept. 4, 2019.
Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Wednesday, September the 4th, and we're talking Healthcare. I'm your host, Shannon Jones, and I'm joined by healthcare guru Todd Campbell. Todd, how's it going?
Todd Campbell: It's going well. I'm happy to be here!
Jones: So glad to have you! Super excited for this week's Healthcare show. We've got two big stories we're diving into today. The first of which is Amgen's, AMGN, multibillion-dollar bet on an aging mega-blockbuster drug. And then, second half of the show, we're going to be talking about a new contender that could be ready to shake up the cholesterol, specifically the PCSK9, market as well.
Todd, how about we kick things off with Amgen?
Campbell: Sometimes, Shannon, I guess it's not about who has the deepest pockets. It's about who wants the drug or the thing you're buying bad enough? I think that's what we saw with Amgen. Amgen is paying $13.4 billion. In cash, no less!
Jones: Off a very healthy balance sheet. They have like $22 billion on the balance sheet. This is all cash.
Campbell: For Otezla.
Jones: Yes, for Otezla. And for our listeners out there, Amgen's ticker is AMGN. Last week, Amgen announced they're making big moves. This is essentially to bolster their top line. Being very opportunistic here, Todd. Pouncing on Celgene's psoriasis drug Otezla. Really, this is Amgen, taking advantage of that Bristol-Myers Squibb-Celgene mega merger here as they try to appease regulators. Todd, give us the backstory on Otezla and why this opportunity did open up for Amgen in the first place.
Campbell: If you're not familiar, if you haven't been paying attention to healthcare, earlier this year, in January, Bristol-Myers went out and offered $74 billion to buy Celgene, which is a mammoth, fast growing company, with a platform of biotechnology drugs that includes Otezla, which is approved for the treatment of psoriasis, an autoimmune disorder. $74 billion, just so investors have the full information. The way that's breaking out is, if you own Celgene and the deal goes through, you're going to get $50 in cash, and you're going to get a share of Bristol-Myers Squibb. You're also going to get a contingent value right, a CVR, which is worth about $9. We'll get into that later if you want. But that's the background to the deal.
Now, this is a big deal. What it does is combines Bristol-Myers, which has some pretty big sellers in cancer, including Opdivo, a PD-1 inhibitor, with Celgene, which is the market share leader in multiple myeloma. They market drugs like Revlimid and Pomalyst, for example. As a result, the combined company would be the No. 1 player in oncology. That combination would have also created a pretty large player in autoimmune disease by marrying Celgene's Otezla, a psoriasis drug, with Bristol-Myers' Orencia, a rheumatoid arthritis drug. And Bristol-Myers also has a very compelling mid-stage drug in development for psoriasis. That one doesn't have a name yet. It's called BMS-986165.
All these deals have to go through regulatory agencies to make sure that they pass muster and there's not too much concentration of market share. When the FTC evaluated the deal, they determined that the Otezla addition was going to concentrate too much power in autoimmune disease, specifically psoriasis, at Bristol Myers. As a result, the FTC said, "If you want this deal to go through, you're going to have to sell Otezla."
Jones: For context here, for Amgen, this is the largest deal in almost two decades for them. If you look back, Amgen actually purchased a company called Immunex back in 2001. That was a deal for $16 billion. Immunex was actually the company behind Amgen's megablockbuster, Enbrel, which so far has earned more than $60 billion in sales since it launched. Probably more than that now. Also, from a timing perspective, looking at this deal, on the Enbrel front, Amgen actually won a recent court decision that keeps basically lower-cost competitors from entering the market, basically giving Enbrel another eight years of exclusivity. It is the fourth-biggest-selling drug of all time to date. For them, it makes sense. Amgen, they did see revenues fall about 3% to $5.9 billion in the second quarter. So you've got a win on one hand. Revenues have started to slip. This gives an immediate boost to that top line for them.
Campbell: Right. There was some concern about Enbrel. They didn't know how that was going to come out. There's also going to be an appeal that theoretically could threaten that patent win for Enbrel for Amgen. What this does is allow them to leverage all of those resources that it currently commits to Enbrel, also to Otezla. What's interesting about this deal -- I mentioned at the top of the show, sometimes it's not about who has the deepest pockets. A lot of people were thinking maybe Gilead Sciences would go out and do it. They've got tremendous amounts of cash. I think they have a little bit more than Amgen in cash and securities on the books. It might make sense for them. Analysts had projected anywhere between $5 billion and $10 billion as the price that Otezla could fetch in a bidding war. They undersold it, obviously. $13.4 billion is what Amgen's willing to pay for it. I think the reason Amgen was willing to pay that much money is because, yeah, they already have this worldwide embedded salesforce that they can immediately begin leveraging to push the ball for Otezla. We're already starting to see some people thinking about that and readjusting what their peak sales forecasts were for Otezla. Prior to the deal getting announced, people were forecasting peak sales of about $2.5 billion a year for Otezla, which would make this deal break even on a net basis around 2024 or so. Now, you're starting to see them think, maybe Otezla's peak is actually closer to $3 billion because of all the resources that Amgen could commit to it.
The low end of the expectation, $5 billion, is interesting. When we're talking about healthcare and drugs, we have to think about the patent situation. There are patents that are expiring on Otezla as early as 2023. Some people have wondered whether or not the patents that expire in 2028 -- I think the other one's in 2032 or something like that -- would hold up under scrutiny. Some people were thinking, maybe it won't fetch as much because of the patent risk to it. Obviously, Amgen, on the heels of this patent victory, thinks, "No, we'll be able to protect it, and this is going to pay off for us." Time will tell.
Jones: Let's talk about a little bit on the Bristol end, and what they're getting out of this deal. They're pocketing $13.4 billion in cash. Already have some plans for that cash, Todd. One of which is to improve the best balance sheet. They're planning to pay down debt. The merger between Bristol and Celgene does increase Bristol's debt-to-EBITDA ratio from one to nearly three times EBITDA by 2020. This is compared to an average, for most big pharma companies, of about 2.4 times EBITDA. So, they're using the cash proceeds to reduce its debt, which should bring it to less than 1.5 times EBITDA by 2023. They also have plans to accelerate their current buyback plan, increasing it to $7 billion up from $5 billion. We've talked about, of course, the Bristol-Celgene deal quite extensively in the past. But not only are they able to use this cash to pay down debt, they're getting also a huge boost to their pipeline as well. They've got in total more than two dozen clinical programs, and six in Phase III, but they've got a handful of blockbusters too, Todd.
Campbell: Yeah, Celgene has a bunch of pipeline drugs that are knocking on the regulatory door. Each one of them has billion-dollar blockbuster potential. There's five of them, actually. bb2121, Luspatercept, Fedratinib, which just won approval, JCAR017, which we've talked about on the show, and Ozanimod, which we've talked about on the show in multiple sclerosis. If those win approval, obviously, that certainly helps. This deal for Bristol-Myers makes sense.
Investors should also recognize that Celgene was handsomely profitable for this. This is an accretive deal right out of the gate. It's going to help Bristol-Myers' earnings. This company's going to generate a tremendous amount of cash flow. Like you said, that cash flow is going to be used, plus this $13.4 billion, to reduce the debt, get the leverage down, and buy back more shares. I wouldn't be surprised if there's tailwinds to the dividends as well.
Jones: Very good point. A lot to watch here both from Bristol and for Celgene and also for Amgen.
Todd, let's switch gears. Let's talk about the other story making the headlines. This is about a company called The Medicines Company, ticker MDCO, which recently announced at a Paris medical conference that its cholesterol-lowering medicine Inclisiran passed a Phase III study with flying colors both on the efficacy and the safety end. Todd, in reviewing the study results, it's hard not to see this drug not being a formidable foe in this space, especially going up against the likes of Amgen's Repatha and Regeneron and Sanofi's Praluent. It posted really impressive Phase III results. It also comes with a convenience advantage. This is also a huge win for another company we've talked about on the show, Alnylam Pharmaceuticals, ALNY. Ultimately, this drug could be the drug to watch in this space.
Todd, tell us a little bit about the study results and ultimately how this drug works.
Campbell: First, let's give a shout out to the marketing gurus who are behind naming this company. [laughs] No doubt about what they do, right? Medicine Company, I love it. MDCO. So we're talking about cardiovascular disease. We're talking about stroke. We're talking about heart attack. We're talking about over 600,000 Americans alone dying every year because of heart disease and the massive need despite existing treatments for new treatment options. In 2015, Praluent and Repatha both won FDA approval. They were pretty transformational and highly anticipated because they were the first drugs of a class called PCSK9 inhibitors that go about reducing cholesterol to try and reduce the risk of heart attack and stroke in an entirely new way. Unlike statins that try to reduce the production of cholesterol in the liver, what PCSK9 inhibitors did is they helped prevent the breakdown of receptors in the liver that collect bad cholesterol. So more receptors deliver, more bad cholesterol getting cleared from the body, lower cholesterol levels. In trials, those PCSK9 inhibitors were very effective. When added to statins, they reduced cholesterol by an additional 50% or so. So they were heralded and much anticipated when they were launched.
However, they launched with relatively expensive price tags. Originally, they were priced around $14,000 a year. You talked about a dosing advantage. We'll get to that in a second. But the way that the PCSK9 inhibitors that are on the market now, Praluent and Repatha, they're given every two weeks or at a higher dose maybe once monthly. Some people don't like injections. If you're already on statins and you don't like injections, and you're trying to lower your cholesterol, and you've got this really expensive option, maybe it's not going to become the blockbuster that you thought. That's what has panned out.
Now, PCSK9 inhibitors have shown the ability to improve mortality in large studies. That's happened more recently. That's reenergizing this target, the PCSK9 target. As a result, you're talking about hundreds of millions of dollars in sales that Repatha and Praluent are currently bringing in, but shy of the blockbuster expectations.
What The Medicines Company is doing is using technology by Alnylam to basically stop or silence the gene from producing the protein that actually breaks down those receptors in the liver. It's a little bit earlier in the cycle than the existing PCSK9 inhibitors. Because of that and the way it's delivered, they think they can get away with only twice-annual dosing, and deliver roughly the same efficacy as far as reducing cholesterol.
Jones: So, a huge win in terms of this Phase III study. They do have two other Phase III studies ongoing. But for this drug, this is the first cholesterol-lowering therapy in the RNAi therapeutics space, and really the first to go after a much broader class of diseases. Of course, Alnylam has made its name by going after these rare diseases. But what you're seeing, and what has played out this year with some of the data that's come out, is a validation of their RNAi platform. It's boosting the confidence for a lot of investors, as Alnylam plans to go after even larger therapeutic classes. You're talking about hypertension, something we've talked about on the show quite a bit; fatty liver disease, which is NASH. It also gives Alnylam some near-term revenues -- when the drug is approved, of course -- in the ballpark of about 20% in royalties. So not only is this a win for The Medicines Company, it's a win for Alnylam, and really RNAi itself. This study, the ORION-11 study, is now the third positive Phase III study for an RNAi therapeutic and the second in 2019 alone.
This company may be relatively under the radar. Not a lot of people have talked about it. Not a lot of buzz as of now. But I think that's going to change and continue to give more validation to this tech platform as well.
Campbell: This is going to be a really interesting space to watch over the course of the next year and a half, two years. The Medicines Company is expecting to file for FDA approval of this medicine at the end of the year. That would clear the way for an approval in roughly 10 months after it's accepted by the FDA. Let's say late 2020. That's going to put it on the market just a little bit behind, potentially, Esperion's add-on therapy. Esperion is another company, symbol ESPR. They created a drug, bempedoic acid, that when added to statins can lower bad cholesterol levels, and that's an oral pill. It's going to be cheaper to manufacture and theoretically cheaper to the healthcare system. We'll have to see how doctors, patients, everybody else, settles on this. Will they look at, we know that many people -- millions. Statins are the most widely prescribed drug in the world. So, we know that millions of people are on statins. We know that up to 45% of statin patients actually stop or don't take their statins as prescribed, oftentimes because of the side effects. We know that we need new treatment options. So, we need to decide, if we can get an additional 30% or 40% of lowering from this pill made by Esperion, is that enough for most patients? And then, will we leave this theoretically more expensive option from The Medicines Company for the ones who are really failing or completely statin intolerant? This is going to be a very interesting marketplace to watch.
Then, you're also going to have to be thinking about, how is this going to shake out with Repatha and Praluent? Amgen and Regeneron have been cutting the price on those drugs like crazy to get them down to a few thousand dollars. I don't know how The Medicines Company plans on positioning this. They're not saying it. But there's a lot of moving pieces here that investors are going to have to bear in mind before going out and pressing the buy button or the sell button on any of these companies.
Jones: Exactly, yes. I think the pricing conversation is the key area to watch here. I mentioned they've got two Phase III studies ongoing, ORION-10 and ORION-9. Those are expected to read out later this year. With those studies, and going back and looking through the call and the notes, it sounds like pricing conversations with insurers will happen as those studies start to wrap up. Assuming the efficacy and safety profile remain favorable, it could very much position The Medicines Company's drug well above, you mentioned that $14,000 price tag for competitors. That has been one of the main overhangs with the PCSK9s, in addition to the fact that you're having to do these frequent injections.
Also working in its favor, though, if it can get approved with the twice-a-year dosing regimen, this also puts that dosing schedule in line with the recommended doctor's visits for people who are at a high risk for cardiovascular events. So in theory, if they are going to the doctor for regular checkups, they're also able to get this injection once every six months. From an insurer's standpoint, it would seem to me like this would be a favorable outcome for all. You're able to drive those health outcomes because you know people are coming and getting those injections in line with those doctors' appointments.
Still, a lot to watch here. I think pricing will be key. The compliance issue is less of an issue, I think, with The Medicine Company's drug. We'll have to see. I think, for the nearly 74 million Americans that have high cholesterol, and fewer than half that are receiving treatment for it, the opportunity is massive. I think, though, Todd, at the end of the day, what we'll want to see from this company -- granted, it met its primary and secondary endpoints in this most recent study -- to your point earlier, we want to know that this drug has the ability to show a reduction in those cardiovascular events, or the heart attacks and strokes. That'll be a much longer-term study. But that's ultimately what I think gets the patients, physicians, and the payers all on the same page and willing to go to bat for this drug.
Campbell: Yeah, that's a great point. Again, if you're on a PCSK9 inhibitor like Praluent or Repatha, those long-term cardiovascular outcome studies have already been done. If you're a doctor, are you going to say, this is fewer treatments per year, and I assume that the mechanism of action is going to be similar, and we're going to have a similar readout eventually in cardiovascular outcomes, but I don't know that because the trials haven't been done? In the secondary measures, there were some signals that suggest that it could be as effective. Again, it's going to be very, very interesting to see how doctors and patients view that dosing advantage related to the efficacy.
Jones: Exactly. So long term, ORION-4 trial is currently enrolling patients. That won't read out until 2024 on the cardiovascular events end. Again, we did see some promising early signs, but we'll have to wait for that. In the meantime, though, all eyes will certainly be watching the next ORION readout, which could happen at the American Heart Association Conference happening in November. No doubt all eyes want to see at least comparable safety and efficacy. Safety was a big question mark looking at RNAi therapeutics in general.
A lot to watch. We will certainly keep all of our listeners up to date. As for Todd and I, that'll do it for this week's Industry Focus: Healthcare show. We want to thank you for tuning in!
As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is being mixed by Austin Morgan. For Todd Campbell, I'm Shannon Jones. Thanks for listening, and Fool on!