biotechnology

January 26, 2013

Celgene, based in Summit, New Jersey, with a research center in San Diego, California, is a biotechnology and pharmaceutical company best known for its Revlimid therapy for multiple myeloma (MM). At its analyst call to discuss fourth quarter 2012 results, CEO Robert Hugin projected that revenue would hit $6 billion in 2013 and grow to $12 billion by 2017. He believed profits (non-GAAP EPS, earnings per share) would grow even faster, at an average of 25% per year through 2017.

Last night I heard a high-level twit on NPR's Marketplace say that he would not buy stocks at this level because they have gone up so much in the last year, and in over the years since the 2008 collapse. Would he say the same about Celgene in particular?

Celgene's stock price took a hit during and following the 2008 selloff, reaching a low of $38.33 in 2009. Here are end-of year closing prices since then:

2009: $55.68
2010: $59.43
2011: $67.60
2012: $78.47

A naive investor might think that after a run up over four years buying at $78.47 would be a very risky thing to do. But in less than a month Celgene jumped to Friday's closing price of $99.76.

This is not idle speculation. Celgene stock has risen because revenue and profits have risen. It will rise further if revenue and profits continue to rise. So the question an investor should be asking is not what the price history is, but what reasonable projections can be made about profits.

The rise of Celgene to a top-level company has been driven largely by Revlimid sales, which accounted for $1.0 billion in revenue in the fourth quarter, or 70% of overall revenue of $1.42 billion. That might indicate a risky concentration in a single drug. Drugs typically pick up competitors over time, and eventually go generic. Should we discount the value of profits coming from Revlimid?

Revlimid's original approval was not for MM, but for MDS, myelodsplastic syndromes, and it is still used for that indication. Revlimid received FDA approval for MM in 2006, so it is a relatively new drug. Revlimid revenue is projected to continue to mount for three reasons. Revlimid has not yet fully penetrated the global market for its current label, which is for second line therapy, in other words for "patients who have received at least one prior therapy." There are still nations in the process of approving the therapy, of approving reimbursement, or of ramping commercially. A bigger factor is clinical trial data suggesting that Revlimid should have its label expanded to include first line therapy, which would give it a bigger share of the MM market. The length of therapy has been increasing and should bet a good bump from the shift to first line. Longer therapy means more revenue per patient.

Yet most of the projected expansion of Celgene revenue does not come from Revlimid. Revenue in Q4 from Vidaza was $216 million; from Abraxane was $106 million; and from Thalomid was $73 million. Except for Thalomid, all these therapies should see revenue growth. Abraxane, in particular, has clinical data showing it is effective for two hard-to-treat cancers, pancreatic and melanoma, in addition to its current label for breast cancer and its recent FDA approval for non-small cell lung cancer. FDA approvals are likely some time in 2013.

Apremilast for psoriasis and psoriatic arthritis, ankylosing spondylitis, and rheumatoid arthritis will likely be a blockbuster, with good clinical data in psoriatic arthritis likely leading to FDA approval this year. and Istodax has already received FDA approval and will generate revenue in 2013. Pomalidomide is in a Phase III trial for myelofibrosis and reported good results for MM. The FDA should complete its review by February 10, 2013.

Beyond these leaders, Celgene has a potential product pipeline so deep I'll just suggest you click on the link and gape at it.

Of course, the future could hold twists we cannot foresee. Celgene's Hugin is not guaranteeing a certain level of profit for 2017, or any particular stock price.

I find Celgene's 2017 revenue and earnings guidance quite credible. Given that, the price per share in 2017 should be in the $200 to $230 dollar range, given a typical stock market with typical price-to-earnings ratios. Also assuming that in 2017 it looks like there is more growth ahead.

Celgene is in the Nasdaq 100 and S&P 500, so several index funds include it. It is in most biotechnology funds as well, for instance the Nasdaq Biotechnology Index (IBB).

Remember, no matter how good you think a single company's future look, diversified portfolios can provide much more safety while retaining a high degree of potential growth. Keep diversified!

Disclaimer: I have owned Celgene stock since 2007. I will not trade in CELG for at least 3 days from this article's publication date.

William P. Meyers

See also: www.celgene.com

My Celgene main analyst conferences page.
My Celgene Q4 2012 conference notes

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