Dive into Celgene (CELG) Growth Story

Disclosure: I am long on CELG, with PT $120 in a year, and $180 in 3 years.

Brief Background

From 2010, stock price returns +276%, higher than Nasdaq +242%, or Dow Jones +154%. Most of the revenue has come from its blockbuster drug Revlimid (for multiple myeloma, approved at the end of 2005).  The company has three other drugs running at annual revenue rates of over $1B: Abraxane, Pomalyst, and Otezla. Total revenue in 2017 was $13B.

Fact Check

• Current Price： $105
• 52-Week Range: $94.55 - 147.17.
• PT ranges from $97 to $166, average $126.
• Ratings: 18 Strong Buy, 1 Overweight, 12 Hold, 1 Sell
• Total liquid: $12B at the end of 2017, compared to $8B at the end of 2016.
• Shares Buyback: In 2017, CELG purchased $3.9B of shares, $0.8B remaining under existing program by the end of 2017.
• 2018 Guidance: Total Revenue: $14.4B - $14.8B (12% growth); non-GAAP EPS: $8.70 - 8.90 (18% growth).
• 2020 Target: Revenue $19-20B, non-GAAP EPS > $12.5

DATA of Recent Quarters (4 yrs)

Revenue grows at ~20%/yr

EPS grows at ~27%/yr 

P/E at historical low level

Recent Weakness

Two causes triggered recent selloff from $147 to below $100: a failed Phase 3 drug, and revised down 2020 target.

Failed drug

On 10/19/2017, Celgene announced its GED-0301 (mongersen) therapy program for Crohn's disease had been discontinued. Mongersen may present 5-10% future revenue in analysts' models.

Lower 2020 target in 2017Q3 ER

• Original target: Revenue $21B and non-GAAP EPS $13
• New target: Revenue $19-20B, non-GAAP EPS > $12.5

Other Concerns

Revlimid Patent Cliff

Analysts had expected the entry of generics of Revlimid in 2020, which is delayed as RDY missed an important deadline. On the news of 11/21/2017, "Dr. Reddy's Laboratories failed to file for inter partes review of patents covering top seller Revlimid."

In 2015, Celgene settled litigation with Natco Pharma Ltd. of India. Celgene has agreed to provide Natco with a license to Celgene's patents required to manufacture and sell an unlimited quantity of generic lenalidomide in the United States beginning on January 31, 2026. In addition, Natco will receive a volume-limited license to sell generic lenalidomide in the United States commencing in March 2022. The volume limit will grow gradually from ~5% to 1/3 over the course.

Note: keep in mind that generics can take over certain market shares, but not ALL. Revlimid will still be profitable although its revenue will start to decline once generics hit market (2020 or beyond).

Currently, Revlimid is still growing fast (+21% YoY), as shown below.

Other argue 1: revenue growth is from drug price hike

False: overall price increases contributed 5.5% to revenue growth for 4Q and 3.3% for the full year. Volume contributed to 13.6% growth for the year.

Other Argue 2: weak pipeline after Mongersen failure

False again: Instead, CELG has a real fat pipeline. Following chart shows its broad collaborations with other biotech companies. Celgene had 282 presentations (60 oral) at 59th ASH (American Society of Hematology Annual Meeting)!  We will have lots of Phase 2 and Phase 3 data this year.  Link for its full pipeline info. And let's talk about recent acquisitions.

Recent M&A

Impact BioMedicines (1/8/2018)

Impact Bio currently has two blood cancer drug candidates in its pipeline in phase-3 and phase-2. Celgene's paying $1.1B upfront, and then $1.25B for regulatory approval. Then Impact's shareholders get more payments if sales pass $1B. If annual net sales total $5B  – these payments will total $4.5B.

Juno Therapeutics (1/22/2018)

Celgene paid $9B for Juno's cellular immunotherapy pipeline. Juno is a pioneer in the development of CAR-T and TCR therapeutics with a broad, novel portfolio evaluating multiple targets and cancer indications. JCAR017 represents a potentially best-in-class CD19-directed CAR T currently in a pivotal program for relapsed and/or refractory diffuse large B-cell lymphoma (DLBCL). Regulatory approval for JCAR017 in the U.S. is expected in 2019 with potential global peak sales of approximately $3B. Other candidates include JCAR014/016/018/020/023/024, BCMA, LeY for broad indications. LINK

2018 Catalysts

I think Celgene may have done with acquisitions this year. However, there are plenty of possible catalysts as following.

• Ozanimod data in MS (multiple sclerosis) will be approved by FDA this year. It has been designated as an Orphan drug for the treatment of pediatric patients with Crohn's disease. Among the benefits of Orphan Drug status in the U.S. is a seven-year period of market exclusivity for the indication, if approved.
• Otezla for Behcet's disease may be submitted to FDA in 2018. 
• The Phase 3 trial in ulcerative colitis will continue enrollment. 
• The Phase 3 trial in Crohn's disease should start in 2018.
• Luspatercept, licensed from Acceleron, for anemia associated with MDS (myelodysplastic syndromes) should report Phase 3 data in mid-2018.
• Juno pipeline (including JCAR017) will generate more data in 2018.

2018 Outlook

It will take couple of years for new acquisitions to generate revenue. For 2018, Celgene will focus to grow current drugs, mainly Revlimid and Otezla. Following is the summary of Otezla sales. International launch and indication expansion will fuel the growth.

This is a summary of the 2018 plan.

Conclusions

1. CELG is currently traded at the lowest P/E level (<15).
2. The company is growing steadily at 20% YoY. EPS is growing 26% YoY. Growth in 2018 is projected to be 12% and 18%, although they will probably beat these numbers.
3. Financial status is healthy with solid balance sheet.
4. Recent pipeline failure and revised-down 2020 target were over-read, and the stock is oversold.
5. Recent acquisitions strengthen its rich pipeline for long-term growth.
6. Manager team has great vision and proven capabilities to lead the company to a new Era.