Celgene- Take the Money and Run

 

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Of all the healthcare companies that took a beating in 2009, Celgene (CELG) seems to be the most undervalued one. Looking at the company’s financial performance and upside potential, it is very hard to understand how a growing biotech company with virtually no potential threat to its leading products is traded at such a low price, a real steal. I typically write about development stage companies, where financial metrics are irrelevant and the focal point is on scientific and medical data. In Celgene’s case, all that is needed is to examine the financial performance and the markets in which the company operates.  

Celgene, which has a market cap of $19.4B, concluded 2008 with a 59% growth in revenues to over $2.2B and a profit of $719 million, or an EPS of $1.56. This implies a historical PE of 27, which is reasonable for a drug company facing a moderate growth rate. The growth in Celgene’s business will be maintained, as for 2009, the company expects to have sales of 2.6-2.7 billion and an EPS of 2.05-2.15, representing an average growth of 20% and 35% respectively. Therefore, even using the same PE, Celgene should be traded at $56.7 by year end. But it certainly doesn’t end there, as the company’s two leading drugs still have plenty of room to grow, not to mention potentially new agents that are expected to hit the market in the coming years.

Celgene’s growth is fueled by sales of two drugs, Revlimid and Vidaza, approved for the treatment of multiple myeloma and MDS, respectively. The two drugs are becoming the undisputed leaders in their respective target markets, and more importantly, both have a lot of room to grow through the routine process of usage extensions. These extensions include the transition from late stage relapsed patients into earlier lines of treatment, from U.S sales to global sales and from a single indication to multiple indications.

Some of these label extensions will bear fruit already in 2009, but a lot of the growth will materialize only in 2010 and onwards. For example, the company expects to file for Revlimid’s regulatory approval in Japan only in the middle of 2009, which means that meaningful sales from this market, the second largest oncology market after the U.S, will come only in 2010. 2009 will probably not include optimal sales in other geographies, particularly the U.K where Revlimid just recently got an approval after a long process negotiations with regulators over pricing and reimbursement. In the case of Vidaza, 2009 sales levels will also be suboptimal, as reimbursement in the different EU countries is expected to be obtained through this year, following an E.U approval last December.

The coming years also hold tremendous potential in terms of label expansion within multiple myeloma and to additional indications. Several ongoing studies may serve as a basis for advancing Revlimid from second line into first line treatment, or even as maintenance therapy after stem cell transplant. These potential developments could have a dramatic effect on the number of patients eligible for Revlimid treatment as well as the overall duration of treatment. Results from multiple trials are expected to be published in 2009, leading to a potential approval in 2010-11. In particular, data from the most important trial that evaluates Revlimid as maintenance therapy are expected to be published in December of 2009.

Celgene has an aggressive development road map for both Revlimid and Vidaza in additional indications. Revlimid showed promise in other blood cancers, including Mantle cell lymphoma (MCL) and Chronic Lymphocytic Leukemia (CLL), which represent significant market opportunities that could add substantially to Revlimid sales from 2012 onwards. Revlimid mild safety profile and the fact that no cumulative toxicity has been observed so far, would facilitate its addition to standard regimens. Several recently announced trial that evaluate the addition of Revlimid to CLL and MCL standard regimens are good examples. Vidaza is also being evaluated in tens of clinical trials, primarily for blood malignancies but also for solid tumors, as its mechanism of action is believed to be relevant in a variety of tumors.

Looking beyond Revlimid and Vidaza, growth in the next decade is expected to come from additional development stage agents in Celgene’s pipeline. The most notable of these agents is Pomalidomide, a new and improved drug, with a similar mechanism of action to that of Revlimid, which seems to possess impressive activity in multiple myeloma patients who had progressed on or failed Revlimid. Another important agent that does not get a lot of attention is Amrubicin, a chemotherapy drug for the treatment of a lung cancer subtype called small cell lung cancer (SCLC). Amrubicin is currently in a registration study, after demonstrating impressive activity in both newly diagnosed and relapsed patients. The market opportunity for this drug in SCLC could be as high as $600 million in the U.S and Europe, and at the moment the only real competition could come from Poniard’s (PARD) picoplatin, assuming it gets approved next year.

Finally, 2009 will be an intriguing year for Celgene in terms of business development and acquisitions. Company’s management is frequently talking about bringing new drugs and technologies through licensing agreements and acquisitions of smaller companies, a step that makes a lot of strategic sense under current market conditions.

Celgene already proved itself as a savvy acquirer by buying its partner, Pharmion, for $2.9 billion in order to gain control of Vidaza. The acquisition, which may have seemed a little bit expensive at the time, turned out as a brilliant step, as Vidaza is expected to generate $400 million in sales in 2009 alone. Celgene saw the benefit of combining its sales force with that of Pharmion in order to obtain maximal coverage at a lower cost. The company is also evaluating the combination of Revlimid and Vidaza in a subpopulation of MDS, which may further entrench Celgene’s position in the MDS market.

Ideally, Celgene would like to leverage its global hematology sales force for expanding its hematology franchise, selling additional drugs for blood disorders. There are several companies with promising development stage hematology drugs, including Allos (ALTH), Seattle Genetics (SGEN) and Incyte (INCY). Allos’ lead drug, PDX was shown to be effective in a blood cancer called PTCL, and the company intends to file for approval this year. Seattle Genetics has two potential assets in the field of hematology, linitizuamb for AML and SGN-35 for Hodgkin lymphoma, which I discussed in last month’s article. Lintuzumab could be of high interest to Celgene, given its strong presence in MDS, a related condition to AML. Incyte is developing its Jak inhibitor for the treatment of a group of blood disorders, which represent a multi-billion dollar global opportunity. The drug, INCB18424, demonstrated breathtaking results in myelofibrosis, a condition with no approved drugs in the market. Celgene is currently evaluating its Pomalidomide for myelofibrosis with encouraging data, but nothing I have seen in the clinic so far comes near to Incyte’s drug in terms of clinical benefit and tolerability.  

All four possibilities represent extremely high chances of approval, implying that Celgene will have to pay a lot of money to get its hands on any of these agents. Another hurdle will be the companies’ intention to retain marketing rights for their drugs in the U.S and out-license the international activity. Moreover, while Allos seems ripe for a takeover, Seattle Genetics and Incyte will probably prefer licensing and demand a huge acquisition premium, as both companies (particularly Seattle Genetics) have a promising and broad pipeline of additional compounds.

Regardless of how Celgene chooses to utilize its $2.2B cash position, investors should not be worried about the company’s financial stability, as it is relatively immune to economic downturn as well as to the bio-generic initiative.

Celgene’s drugs are highly effective treatments for lethal conditions, and as such, could be regarded as recession proof. There is obviously the possibility of pressure from governments and health payers, like Celgene experienced in the U.K, but given the unprecedented benefit both Revlimid and Vidaza provide, Celgene will probably still be allowed to charge premium prices for its drugs.

The second issue of bio-generic competition unjustifiably hurt the stock because Celgene has almost nothing to do with biologic agents. The closest it gets to the field is with its stem cell treatment, currently in phase I trial for Crohn’s disease. Both Revlimid and Vidaza are small molecules, and as such, face the usual generic competition. Celgene claims that recent developments should keep Revlimid protected all the way through 2026 in the U.S as well as maintain Vidaza’s orphan exclusivity in Europe through 2018. Celgene’s drugs will certainly be subject to generic competition in the future, but by the time, the company will probably have several other drugs in the market.       

 

Biotech Portfolio Updates

 

The Biotech Portfolio, managed by Ran Nussbaum and myself, took a hit in the past month, together with the entire market and the healthcare segment. Luckily, we still have a large cash position which enables us to take advantage of current prices. In a market where no one cares about fundamentals, the best thing long term investors can do is buying based on fundamentals.

We are initiating our first position in Celgene, as we believe the stock will end the year with at least one meaningful addition to its pipeline and better numbers than it forecasts. Positive clinical data and geographic expansion of Revlimid and Vidaza, combined with at least one commercial stage drug, could easily take Celgene’s EPS close to the $3 level already in 2010. We are also adding another position in Seattle Genetics, which declined more than 25% in less than a month.

                                          Portoflio holdings as of March 2nd, 2009

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4 thoughts on “Celgene- Take the Money and Run

  1. Ha, followed you on this one too, and sold for a profit today. Very nice call. What do you make of AZN/MedImmune’s announcement to give up its licensing rights on MT-103. I am really surprised about this given the fantastic outcome on the phase-1 NHL and phase-2 ALL results. Any idea why they would do this. I remember an earlier post on GSK doing the same with EXEL. I would like to hear your opinion. As always, I appreciate your columns.
    – Manish

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  2. Thanks, Manish.

    I think this is a great development for MITI, which will be able to get substantially better terms for 103 after initial proof of concept. I don’t think Medimmune know something we don’t, it’s probably part of AZN’s policy, similar to the case of INFI’s hsp90 inhibitor and Abraxis’ Abraxane. Can’t understand these decisions but I can’t complain…
    You rightly mentioned XL184, which was dumped by GSK, picked by BMS for over $100M and is now on the fast track to approval for glioblastoma multiforme.
    Same thing with DNA and SGN-40.

    Best,
    Ohad

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  3. Hi Ohad – I have been enjoying and learning from your posts for many months and have taken positions in several stocks including sgen and exel. What do you think of the earnings news about celg this evening? Seems to me like they essentially confirmed guidance, though at the lower end. The stock is down some 11% after hours and looking like an even more screaming buy at 40. Do you agree? Thanks very much for your insight. Eric

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  4. Hi Eric

    The CELG news is disappointing, no doubt,but it doesn’t justify market reaction, especially given the YE09 guidance. I tought CELG is a good buy at 42$ and I still believe it is at a pps of 40$. There should be plenty of growth beyond 2009 in the Revlimid franchise, particularly fueled by approval in Japan and FDA approval for first line and/or maintenance therapy.

    Ohad

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