Acquisition Targets: Could Bluebird Be In Season?

Last Updated on March 7, 2019 by Sultan Beardsley

• Acquisitions in pharmaceutical industry staying at an elevated pace
• Strong balance sheet even before having any drugs approved for sale
• Promising lentiviral genetic treatment platform
• Significant partnership with Celgene (now Bristol-Myers Squibb)

Bluebird Bio has been in the news recently after releasing its 2018 annual report, and for good reason. Though its operating results are still lacking due to not having drugs for sale yet, its financial position is better than ever and all its major drug programs are still progressing towards approval.

As Bristol-Myers Squibb just proved with its blockbuster takeover of Celgene, the M&A market in pharmaceuticals is still strong. A firm like Bluebird with a promising drug pipeline and plenty of funding to get it through testing and development makes for an appealing target.

Their LentiGlobin platform hopes to use lentiviral vectors to implant new genetic material in patients’ Haematopoietic stem cells. Lentiviruses are types of viruses that can deliver large amounts of genetic material into a donor cell. For genetic diseases like Sickle Cell Disease and β-thalassemia, which cause problems with blood cell formation and require a lifetime of ongoing blood transfusions, this treatment could create new cells able to create proper hemoglobin and potentially cure the condition after one time.

Bluebird’s other main business investment has been in the development of its bb2121 and bb21217 product candidates in partnership with Celgene for the treatment of multiple myeloma. Multiple myeloma is a serious type of cancer that forms in plasma cells in the blood, where the cancerous cells accumulate in bone marrow.

The two companies split development costs and eventual US revenues as part of the partnership, with Celgene getting the distribution rights outside the US. There is some concern that the partnership may be affected (or potentially even cancelled) by Bristol-Myers Squibb, who just announced their acquisition of Celgene for $74 billion in cash and equity. Celgene had the right, per the agreement, to terminate the relationship if they chose and BMY would retain this ability.

There are several reasons to presume that they would continue in the development of the bb2121 and bb21217 product candidates. Over 60% of Celgene’s revenues currently come from its cancer drug Revlimid, which will begin to face generic competition in 2023. Though it also has other drugs in production and in development that could provide future revenue growth, it seems unlikely that BMY’s first actions would be to pare down Celgene’s drug pipeline.

One of Bluebird’s biggest strengths, especially compared to similar companies, is the quality of their balance sheet. Any company not currently earning revenue from product sales is obviously concerned about managing their liquidity. With no drugs approved for sale yet, Bluebird’s only revenue is what has been recognized as “Collaborative Revenue” from some of their partnership agreements.

They have been aggressive about maintaining a strong capital position without taking on corporate debt. The company had several rounds of equity capital raising throughout 2017 and 2018. The company’s stock has dropped somewhat on weak news over the past 12 months, but they took advantage of elevated price levels for their new equity issuance. Total income from these financing activities was $1.1 billion in 2017 and over $730 million in 2018.

The company currently has $400 million in cash and $1.5 billion in marketable securities on the balance sheet that can be used to continue funding operations. Based on the 2018 operating loss of $550 million, the company could continue operating and developing their pipeline until 2022 without needing to raise additional capital or reach profitable drug sales. With multiple drug lines expected to be approved for production in 2019 and 2020, the company should have no problem funding itself until it can start generating cash flow from operations.

Since their capital funding has all come through equity issuance, they also have the advantage of having almost no debt. The company has zero long term debt and a current ratio above 10. Having no debt coverage issues means their cash flow can be directed entirely to research and development instead of debt interest payments. As an acquisition target, having large cash holdings and no debt is an obvious positive. The healthy liquidity and expectation to begin earning on drug sales by the end of 2019 could put Bluebird in the sights of larger firms sitting on cash. The promise of their lentiviral platform to treat a variety of genetic disorders is also a potential for significant growth that companies could look to add to their own genetic treatment portfolio.