Here's why Bristol-Myers Squibb's record-breaking $74 billion biotech deal is facing investor backlash

Regis Duvignau / Reuters

Biopharmaceutical company Bristol-Myers Squibb announced on Thursday that it is buying the troubled biotech Celgene for $74 billion.

• Bristol-Myers Squibb said on Thursday that it would acquire the biotech Celgene in a $74 billion deal.
• The two companies each face their own strategic problems, and Wall Street analysts questioned whether a combination would produce solutions.
• An individual familiar with the deal told Business Insider that it was intended to lower each company's risk.

Bristol-Myers Squibb's $74 billion acquisition of biotech Celgene is the biggest deal not just of 2019, but also in the pharmaceutical sector, ever. But investors are asking whether the unexpected combination will help the two companies confront the big challenges they're facing.

The companies repeatedly described the deal as a unique, complementary opportunity in a Thursday morning conference call. They said it makes the combined company a leader in treating cancer and heart disease.

The two companies have similar strategies. Bristol-Myers Squibb and Celgene have each sought to carve out disease areas that they can dominate with treatment options, and make a profit from. But each is also facing questions about whether they can pull it off, especially because some of their key treatments are facing new competition.

Bristol-Myers' shares tumbled more than 13 percent after the deal was announced, and analysts peppered the company's executives with tough questions on a conference call.

"We are surprised that this deal occurred," Cantor Fitzgerald analyst Alethia Young said. "We are also interested that Celgene wasn't acquired for more."

The deal valued Celgene at $102.43 a share, while Cantor Fitzgerald's base expectation for target price was $100, Young noted. Celgene shares, which had dropped over the last three months, surged 26% in Thursday morning trading to about $83.91.

Investors surveyed by Mizuho analyst Salim Syed were also skeptical about the deal. Of around 100 individuals who responded, more than 50% said they were not happy with the news.

Including debt, the deal rates as the largest ever in pharma, topping even Pfizer's 1999 acquisition of Warner-Lambert and last year's Takeda-Shire deal, according to Bloomberg News.

Facing competition for some of its most reliably profitable products, Celgene has struggled to develop new drugs to take their place. Meanwhile, Bristol-Myers Squibb has faced challenges in its effort to become a leader in lung cancer drugs.

Reducing each company's reliance on a limited number of drugs was the intent of the acquisition, a person who worked on the deal told Business Insider.

The two companies began their discussions in September, though they had had other conversations prior, and there was a clear fit, the individual said.

"Each of the two companies had a little too concentrated risk, and this lowers that. Too much riding on too concentrated a set of things. Now that's broader," the person said.

Analysts pressed leadership for the two companies about those risks during the Thursday call.

They asked about the deal's timing, given that Bristol-Myers Squibb has a number of upcoming releases of new trial results for its key cancer drug Opdivo that could affect the drug's prospects. They also pressed management about its expectations for cancer drug Revlimid, a blockbuster product for Celgene that is set to face competition.

In response, Bristol-Myers Squibb CEO Giovanni Caforio emphasized the leading presence that the combined company will have in oncology, with products that treat both solid tumors and cancers in the blood.

He also stressed the new drugs that the deal will add to Bristol-Myers Squibb's pipeline.

"We now have six near-term launch opportunities, and I stress the term 'near-term' - a number of those are imminent files that are going to be submitted to regulatory authorities," Caforio said. "I think about Revlimid as a really important product, a foundation on which we can maintain leadership in hematology, but this deal is not about Revlimid."

Related: Bristol-Myers Squibb and Celgene said their huge merger has about $2.5 billion in synergies. That should make employees nervous.

The combined company could also try out Celgene's cutting-edge cell therapies in combination with cancer drugs called checkpoint inhibitors, and test combinations of different drugs in autoimmune diseases like inflammatory bowel disease (IBD), ulcerative colitis and Crohn's disease, management also said on the call.

More broadly, having a "critical mass" across different types of disease will be important no matter what happens with US health policy, Caforio said, improving the company's position in negotiations with health insurers and employers.