Celgene

Celgene was a major American biotechnology company that became a giant in the treatment of cancer and inflammatory diseases. Before being acquired, it was a darling of Wall Street, famous for its incredible growth, high profit margins, and a portfolio of life-changing medicines. Its business model centered on developing and commercializing novel therapies, with its superstar drug, Revlimid, used to treat multiple myeloma, accounting for a huge portion of its revenue. This heavy reliance on a single product was both its greatest strength and a source of significant risk for investors. In 2019, in one of the largest pharmaceutical deals ever, Celgene was acquired by Bristol Myers Squibb (BMS) for $74 billion. The story of Celgene offers a powerful case study for investors on the dynamics of the pharmaceutical industry, including the power of patents, the terrifying reality of the patent cliff, and the complexities of merger and acquisition (M&A) deals.

At its peak, Celgene was the quintessential biotech success story. The company didn’t just sell drugs; it built dominant franchises around them. By focusing on niche but critical areas like oncology and immunology, it could command high prices for its products, leading to eye-watering profitability. For shareholders, this translated into a soaring stock price for many years.

You can't talk about Celgene without talking about Revlimid. This drug was a true blockbuster drug, a term for a medicine that generates more than $1 billion in annual sales. For Celgene, Revlimid was the goose that laid golden eggs, consistently delivering over 60% of the company's total revenue. From a value investor's perspective, this created a classic dilemma.

• On the one hand: The drug's dominance, protected by a fortress of intellectual property, gave Celgene a powerful economic moat. Its profitability and predictable cash flows were immense.
• On the other hand: This created a massive concentration risk. Any threat to Revlimid—be it a successful legal challenge from a generic competitor or an approaching patent expiration—was a threat to the entire company's future.

As the 2020s loomed, so did the expiration of key patents for Revlimid. The market grew increasingly nervous about Celgene's future. Recognizing the need to diversify and the value still locked within Celgene's research pipeline, Bristol Myers Squibb swooped in. The acquisition in 2019 was a landmark event. It wasn't just a simple cash-and-stock deal. A key feature was the inclusion of a Contingent Value Right (CVR), a special type of security given to Celgene shareholders. This CVR acted like a lottery ticket: it would pay out a specific cash amount only if three of Celgene's late-stage drugs in development received approval from the Food and Drug Administration (FDA) by certain deadlines. This clever tool helped bridge the gap between what BMS was willing to pay and what Celgene's board thought the company’s future drug pipeline was worth.

Looking back, Celgene provides several timeless lessons for investors, particularly those interested in the high-stakes world of pharmaceuticals and biotechnology.

Celgene’s primary economic moat was its patent portfolio. Patents grant a temporary monopoly, allowing a company to sell a drug without competition and charge high prices. However, these moats are, by definition, temporary. When a patent expires, generic drug makers can enter the market, causing prices and sales to plummet dramatically. This event is known as the “patent cliff.” For Celgene, the market's fear of the Revlimid patent cliff was a major factor in its stock performance and eventual sale. An investor must always ask: How durable is this company's competitive advantage?

For any biotech company, what's in the lab is just as important as what's on the pharmacy shelf. A company’s drug pipeline—its collection of drugs in various stages of research, development, and clinical trials—represents its future. A value investor analyzing Celgene couldn't just look at Revlimid's current sales. They had to become part-scientist, trying to assess the probability of success for drugs like Liso-cel, Ozanimod, and bb2121—the very drugs tied to the CVR. This meant digging into clinical trial data and understanding the competitive landscape for each potential product.

The Celgene CVR (ticker: BMYRT) became a publicly traded instrument of its own, and its price fluctuated wildly with news about the clinical trials.

• Two of the three drugs met their deadlines, but the third, Liso-cel, missed its deadline by a few months due to FDA inspection delays.
• As a result, the CVR expired worthless, and holders received nothing.

This was a brutal but valuable lesson: when evaluating complex deal structures, investors must understand that “contingent” means there's a very real chance of getting zero. It highlights the need to read the fine print and assess the probabilities of success with a healthy dose of skepticism.

The Celgene saga is more than a history lesson; it's a practical guide to investing in a complex industry.

• Beware of Concentration. A company dependent on a single product, no matter how successful, carries inherent risk. Diversification of revenue streams is a hallmark of a more resilient business.
• All Moats Can Dry Up. In industries like pharma, economic moats built on patents have a clear expiration date. Always investigate the patent lifecycle of a company's key products.
• Look Beyond the Headline Price. In M&A deals, the structure matters. Exotic securities like CVRs can offer upside, but they come with unique and often binary risks.
• Value the Future, Not Just the Past. To value a biotech company, you must analyze its pipeline. This requires more than reading a balance sheet; it requires an understanding of the science and the industry.