In this clip of Industry Focus: Healthcare, Kristine Harjes, Michael Douglass, and Todd Campbell explain how the arrangement will likely benefit both parties, go through the three basic tenets of any M&A deal and how they apply to this contract, and clear up some confusion about Celgene's buying Juno's shares for what seemed to some to be an insanely high premium.
A full transcript follows the video.
This podcast was recorded on Jan. 6, 2016.
Kristine Harjes: So, let's change subjects a little bit and talk about a different set of companies. Michael, do you want to choose one?
Michael Douglass: Yeah, sure. Let's do Celgene and Juno. I talked about Celgene a little bit earlier -- sign-posting, I can't resist. But, what Celgene did with Juno is that signed this 10-year developing and marketing agreement. Celgene pays $1B up front, that includes $150M for the drug and equity investment in Juno of $850M, for a little bit more than 9M shares at $93 per share. Clearly, right there, we know our mechanism. This is a licensing plus equity investment deal. And Celgene gets to name a board member to Juno's board of directors. And, Celgene gets the potential to actually increase its stake in Juno over the next several years, assuming certain conditions are met and approval by everybody, etc. So, there's a lot of optionality for Celgene here to grow its presence with Juno's success. So, your mechanism's very clear.
Harjes: Yet complicated.
Douglass: Yet complicated, yeah. Thinking about risk appetite, Juno is largely a fairly early stage company. You've got some assets in phase 2, you've got a lot of assets in phase 1. So, I would consider this to be on the riskier end. It's very much along the lines of Celgene, where, in a lot of ways, they kind of behave almost like a VC, where they'll basically go into these early stage companies, pay a relatively small amount upfront to then have all this optionality if one thing pans out. It's very much a biotech investor's way of investing. And it's panned out very well for Celgene. Not that they do that solely, but that's been one of their big strategic focuses over the last few years.
Harjes: So, in looking at this deal with Juno, how are you thinking about intent? You touched on a little bit we're coming you could have a lot of upside. But what exactly is going on with Juno?
Todd Campbell: I just think that playing a good amount of educated defense, they make a lot of money, obviously, treating blood cancers. And CAR-T, which is what Juno has under development, is a new way of attacking various cancers, and a lot of them are right up in the wheelhouse of what Celgene already markets into. These drugs that Juno's working on will reengineer or supercharge your immune system to be able to better recognize cancer and destroy it.
So, I think part of it is Celgene's looking at it and saying, "This could be a competitive threat down the road. We can get some pretty cheap optionality here, let's go ahead and get exposed to it." So, yeah, it's a riskier deal, but I guess you could look at the intent of it as saying, "Okay, we already market into these very successfully. If it's successful, we could leverage that and be able to really ramp these up quickly, and at the same time, we protect ourselves against a future competitor."
Douglass: Yeah, I would definitely say, when you're thinking about intention, in my head, it's either, you're gaining scale in areas of current expertise, which is, in a lot of ways, safer, because it's an area of expertise. You already know how things work, so you can make a very good educated guesses. If you're moving into a new disease area, or a lot of new disease areas, kind of like Pfizer is doing with Allergan, that does introduce some potential risk, because it's not your core area of expertise.
Now, of course, if you've got a company with drugs already on the market, like Allergan does, then it's like, "Okay, well, we already know what works, we already know what sales it's bringing in, we can model that pretty reasonably." And then, of course, financial engineering is kind of its own special beast with, I'm sure, lots of in-house counsel and tax lawyers being involved. But I would definitely view this as gaining scale, gaining additional firepower in an area of current expertise for Celgene.
Harjes: You know, Michael, you mentioned financial engineering. That reminds me of one of the most interesting parts of this deal. When it first came out, one of our Motley Fool healthcare writers, Brian Orelli, wrote this really awesome article where he dug into the actual financials behind the deal. And the way it was stated and the way everybody interpreted it when it was first announced was, $1B deal, it's $150M upfront + $850M for 9.1M shares, which, as you mentioned earlier, would value at about $93 per share. This was a substantial premium to what Juno was trading for at the time. So, there was this whole big discussion around, why is Celgene paying so much for the shares of Juno?
And I'll quote from Brian's article, because he did a fantastic job of walking through exactly why that's not the way to go about thinking about it: "The reason for the 9-and-some-million shares is to give Celgene an approximately 10% stake. But the $93 price tag is completely meaningless. Imagine in Celgene paid $1 per share for the 9M shares, and paid an upfront payment of," and he gives a very specific number, 990M and some, "while the drug licensing terms remain the same. So, investors could have freaked out and thought that Juno was giving away 10% of the company for nothing, but the results of that transaction would be exactly the same. Where Celgene gets 10% of Juno, Juno gets $1B." So, that $93 price tag, while it was right there in the announcements, was kind of meaningless.
Douglass: Yes. In a lot of ways, it really truly was. And I'm glad you brought up that point.
Harjes: I'd love to encourage our listeners to check out that article. If you want me to send you a link to it, happy to do so, please email us at firstname.lastname@example.org. This was an article written by Brian Orelli.