Celgene Corp. shareholders, who have seen the value of their investment decline in recent months, will be able to recoup some of that value through tax savings after Bristol-Myers Squibb Co. announced it would purchase the maker of cancer-fighting drugs for $74 billion.
Pharmaceutical giant Bristol-Myers announced on Jan. 3 that it would buy 69 percent of Celgene with a combination of cash, stock, and contingent value rights that make it the biggest pharmaceutical deal to date. Celgene shareholders would own the rest.
The pending deal is structured to benefit Celgene shareholders because the mix of equity assets being used to purchase their shares is fully taxable. That setup means shareholders would be able to deduct the new taxes to offset past market losses, said New York-based tax consultant Robert Willens.
“They went out of their way to make sure the stock component of the merger will be taxable because a lot of people have losses in Celgene stock,” he said.
Celgene didn’t respond to requests for comment. Bristol-Myers declined to comment.
Bristol-Myers shares fell 14 percent following announcement of the deal on Jan. 3, to $45.12 a share. Celgene shares rose about 28 percent to $85.85 on Jan. 4 from $66.82 on Jan. 2.
Good Tax News
While Celgene investors will certainly see a tax advantage from the deal, it’s impossible to estimate the exact tax savings, because the amount depends on when investors bought Celgene shares, Willens said.
When a merger involves the transfer of more than 80 percent of shares, it automatically becomes tax-free, Willens said. The deal was about 50 percent shares, according to a Bristol-Myers news release.
“You can regulate whether a deal is going to be taxable or tax-free simply by the structure—it is entirely elective,” Willens said.
By the end of 2017, Celgene investors saw their shareholdings drop to $58.59, an about 60 percent decrease from the stock’s high in October 2017.
The drop was due to a sequence of events: a high-profile drug development failure, a downward revision on the company’s 2020 guidance, and other stumbles that exacerbated worries over the upcoming “patent cliff” for a cancer-treating drug, said Asthika Goonewardene, senior biotech analyst for Bloomberg Intelligence.
“All this created a dark cloud over its head for 18 months. This merger was engineered in such a way that it gave investors Bristol-Myers shares, plus $50, plus contingent value rights,” he said Jan. 4.
“The merger is very good news for Celgene investors. Even at $85, it gives them an out which avoids the potential downside risk of an earlier than expected patent expiry” of the company’s best-selling drug, Revlimid. “It gives them an out and the deal could still fall through for other complicated reasons,” Goonewardene said.
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(Updates with additional reporting)