Saturday, November 24, 2007

Celgene (CELG) and Pharmion (PHRM)

I own Celgene (CELG) stock, so naturally I am wanting to know whether the Pharmion (PHRM) acquisition will be a good thing. The rational question to ask is: would I buy Pharmion at its price prior to the Celgene offer, and would I buy it at the agreed price of $2.9 billion ($72 per share) if I were running Celgene. Truth be told, I have never paid any attention to Pharmion in the past.

In October Pharmion, which has just under 37 million shares outstanding, was running mostly between $45 and $50 per share, so its market capitalization was roughly between $1.7 billion and $1.9 billion. But as late as in July it could be bought for under $25 per share, or the whole lot for well under a billion dollars. Congratulations to those brave souls who bought at under $25.

The numbers only tell part of the story of a company like Pharmion, but they are worth looking at. Q3 2007 revenues were $67.3 million. Annualized that is $269 million. Revenues have been growing, but not at the kind of rate that awes: revenues for all of 2005 were $221 million.

As to net income or earnings, there are none. But losses are substantial, amounting to only $21.4 million in Q3 2007 (after an only $9 million loss in Q2). That is a number that makes it look like break even could be a long way away. But it includes "a charge of $8 million for a milestone payment triggered by the acceptance of our marketing authorization application (MAA) for Satraplatin for the treatment of second-line hormone-refractory prostate cancer by the European Medicines Agency (EMEA)."

Where do the revenues come from, and how much might they grow in the next couple of years? Vidaza for myelodysplastic syndromes (MDS) is marketed in the U.S. and had $43.2 million in Q3 2007 sales. Sales of Thalidomide were $20.2 million.

End of Q3 Pharmion had $258 million in cash in its coffers, so it could have gone on alone, without a partner, until expanded sales took it to profitability.

Pharmion more buys rights to drugs and markets them (if they are approved by the FDA or EMEA or other nations) than develops them from scratch. It has the right to sell Celgene's Thalomid (Thalidomide) for multiple myeloma in Europe. It is seeking approval of Vidaza in Europe, where it is already sold on a compassionate use basis. The latest clinical results for Vidaza are very encouraging; it is hoped that physicians will be impressed and use it more than competitors.

Pharmion has a pipeline of promising drugs as well, notably including Amrubicin for small cell lung cancer in a Phase 3 study, MGCD0103 early studies in solid tumors and CLL for and it has commenced a program targeting sirtuin inhibitors.

How do you value all that? Truthfully, you can go in many directions. Pipelines should always be heavily discounted because most drugs fail to reach market for one reason or another; even drugs with promising Phase III results may not be approved by the FDA. For instance in an 8-K filed 10/31/2007, Pharmion said Satraplatin failed to achieve its goals in a Phase III trial when combined with Prednisone for treatment of patients with hormone-refractory prostate cancer. But that does not mean Satraplatin will not prove effective for other types of cancer.

Approval of Vidaza in Europe are highly probably; that is worth quite a bit, since revenues from Europe should help cover overhead and push Pharmion to profitability. Apparently approval for Thalomid for multiple myeloma in Europe is also very likely.

Still, as a Celgene stockholder I wish the price were more conservative. Celgene feels it is buying an international sales operation, but I suspect they could have put one together for far less than the price of Pharmion.

In the last couple of years two of my companies have made major acquisitions that were supposed to be long term strategic, and might still out to be, but killed the stock price in the short run. One was AMD, which bought ATI (which I also owned). The other was Marvell, which bought Intel's cell phone microprocessor division. I'm not going to sell my Celgene stock just because of those bad experiences (and I kept the MRVL and AMD stock, too), but I am not inspired with confidence.

I felt I had a grip on Celgene's history and prospects when I bought it. Now I feel it is a far riskier proposition. I am not at my limit for Celgene in my portfolio model, so I might have bought more on the dips. Now I'll leave it alone, at least until the acquisition is complete and we start seeing more meaningful Vidaza revenue.

More data:

My Celgene page (with links to Celgene Analyst Conference summaries)

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