As part of Celgene's (CELG) deal with Juno Therapeutics (JUNO), Celgene agreed to "purchase 9,137,672 shares of Juno's common stock at $93.00 per share," according to the press release.
If Celgene thinks Juno is worth $93 per share, why is Juno trading at a substantial discount to that price?
As I wrote previously on a Motley Fool message board, the short answer is: "Celgene doesn't think Juno is worth $93 now. The number is completely arbitrary and shouldn't have even been included in the press release."
A longer explanation
Celgene isn't just buying those 9 million or so shares; it's also gaining access to Juno's pipeline. Celgene has the right to opt in to sell Juno's products outside North America while giving Juno a royalty, and the larger biotech also has the option of taking a 50% stake in two of Juno's products, splitting costs and profits equally.
In exchange for the shares and the rights to Juno's pipeline, Celgene is giving Juno $1 billion and rights for Juno to take a 30% stake in some of Celgene's related compounds.
The press release breaks the $1 billion out as $93 for 9,137,672 shares, which is about $850 million, and "an upfront payment of approximately $150 million."
The reason for the 9,137,672 shares is to give Celgene an approximately 10% stake, but the $93 price tag is completely meaningless.
Imagine if Celgene paid $1 per share for the 9,137,672 shares and paid an upfront payment of $990,862,328 while the drug licensing terms remain the same. Investors might have freaked out about what looks like having Juno give away 10% of the company, but the results of that transaction would be exactly the same: Celgene still owns 10% of Juno, and Juno still has $1 billion.
Alternatively, Celgene could have paid $109.44 for those 9,137,672 shares and not given any other upfront payment. Same result: Celgene still owns 10% of Juno and Juno still has $1 billion.
So where did that $93 per share come from?
As far as I can tell, the value cited in the press release seems to have just been a number large enough to get journalists to focus on it. We all did:
"The company said the deal values Juno's shares at $93, or roughly double the $46 they closed at Monday afternoon. That would mean Juno was worth over $8 billion." -- Fortune
"The stock portion totals around $850 million, and the per-share price is nearly double the $46.61 closing price of Juno stock on Friday." -- The Associated Press
"Its giant purchase of Juno stock at $93 a share -- more than twice Monday's closing price -- raised some eyebrows on the Street." -- Investor's Business Daily
"Celgene is buying 9.1 million shares of Juno at $93 per share -- a 102% premium to Juno's closing price of $46.30." -- The Street
Even I bit initially before realizing the stated share price was meaningless: "Celgene is handing over $150 million upfront and will make an equity investment of about $850 million at $93 per share, about double where the stock closed on Monday."
How much does Celgene really think Juno is worth?
The only way to know how much Celgene thinks Juno is worth is by knowing how much the rest of the deal is worth to Celgene, subtract that out of the $1 billion, and divide by 9,137,672 to get the price per share.
The reverse calculation is easier to make if we assume the current price of Juno -- almost 17% above where it was before the deal was announced -- is the correct price. At the closing price on Thursday, Juno had a market cap of about $5.4 billion on a pro forma basis, adding in Celgene's yet-to-be issued shares, so Celgene's 10% stake is worth roughly $540 million.
If we subtract that out of the $1 billion, Celgene is handing over roughly $460 million and the option to a 30% right to some of its drugs in exchange for the rights it's getting on Juno's pipeline.
Is it worth that much? It's hard to say without knowing how many drugs Celgene will ultimately get from Juno's pipeline and how much the 30% stake in Celgene's unnamed drugs is worth to Juno. But it doesn't feel all that overpriced, although Celgene is certainly taking on more risk than is typical in a licensing deal.
If Juno's CAR-T technology works, $460 million will look like a steal. Eli Lilly recently signed a discovery-stage deal for BioNTech's immuno-oncology platform that could give the biotech over $300 million for each drug Eli Lilly licenses as well as tiered royalty payments up to double digits. The difference is Eli Lilly is paying only $30 million upfront and investing $30 million in BioNTech. The rest of the payments are tied to development, regulatory, and commercial milestones. If the partnership doesn't pan out, Eli Lilly isn't out all that much.
Ironically, if Juno's therapies end up getting on the market, Juno's market cap should eventually exceed $10 billion, making Celgene's initial stake worth $1 billion, and Celgene will have essentially gotten the rights to Juno's drugs for free.
That's "free" in the same way that capital gains are free; Celgene is still risking its capital just like any other investor.