Tuesday, January 14, 2014

Celgene in 2017: $375 per share or more

Recently Goldman Sachs panned Celgene (CELG), downgrading the company to a "Sell." A few days later Nomura started Celgene as a "Buy". Celgene is one of my key long-term investments and has provided a lot of alpha for my portfolio. Lately it (or at least the stock price) has been outrunning my cautiously optimistic projections.  Should I sell, take profits, and reinvest when or if the price normalizes? Or is there a factual basis to revise my past calculations upward?

I last wrote about Celgene on July 30, 2013 in "Celgene Up Over 100% In A Year: Still A Buy?" I concluded then that even at over $140 per share a prudent investor would buy Celgene, based on my estimated minimum $200 per share price in 2017. But Celgene closed on Friday, January 10, 2013 at $169.81. Its 52 week high was $173.80. Even if it were to reach $200 in 2013, that would only require a $10 advance per year, or about 6%. That is not what I consider good alpha, though it still beats bonds.

As always, the truth resides in the fundamentals. At pharmaceutical companies fundamentals have their foundation in future sales of currently approved therapies and in pipelines. There were quite a few developments at Celgene in the second half of 2013 that effect these foundations. The pace of sales of its key current drug, Revlimid for multiple myeloma (MM), increased, while new data indicating a label expansion to newly diagnosed  MM is possible was positive. Abraxane was approved for pancreatic cancer, in addition to its earlier approval for breast cancer. Pomalyst/Imnovid was approved for MM and sales have ramped quicker than expected.

Apremilast turned in good data for psoriasis and related diseases in 2013. Its market name will be Otezla, and FDA approval is expected this year (of course there is no guarantee of that). Celgene expects Otezla sales to reach $1.5 billion, or perhaps as high as $2 billion, in 2017.

On January 13 Celgene released preliminary Q4 and full 2014 results, as well as 2014, 2015 and 2017 estimates. Short term investors will want to focus on the Q4 results and 2014 estimates. Short-term, I'll just note that Celgene has a high P/E (price to earnings) ratio; maintaining it requires investor confidence in a high rate of profit growth.

As a long-term investor my interest is in where Celgene stock could reasonably be at the end of 2017. The easy answer comes from not doubting any of the parts, but accepting Celgene's 2017 estimate. Celgene projects revenues of $11.5 to $12.5 billion in 2017, up from $6.5 billion in 2013. Given operating margin estimates, the resulting non-GAAP EPS is expected to be in the vicinity of $15.00, compared to near $6.00 in 2013.

One way to project forward is to take the gain in EPS and multiply that by the current stock price. $15.00 / $6.00 = 2.50. Using a stock price rounded to $170, that would give us $425 per share. The percentage rate of increase, non-compounding, to reach that would be 37.5%. If this were guaranteed, no investor would want to miss out on that kind of growth rate.

Being more conservative, I would guess that today's high P/E will have normalized somewhat by 2017. Maybe the pipeline and projected earning s increases will have decelerated by then. I'll use a PE of 25, which still assumes Celgene is growing at a fair clip in 2017. 25 x $15.00 = $375 per share. That gives a non-compounding growth in the stock price of 30% per year. Still something not to be passed up.

In looking out four years to 2017 we need to recognize that a lot of things could go wrong. Private insurers or government health plans (particularly outside the U.S.) could demand lower prices for therapies. A new competing therapy could come to market and take market share. An unexpected adverse reaction to a therapy could be discovered. Or operating costs might exceed estimates, lowering profits.

Being aware of all that, I also note that the picture could be even rosier than outlined by Celgene management. As far as I can tell, the 2017 figures do not include any revenues from the pipeline except for Otezla. It is worth taking a brief look at the pipeline (excluding expanding current therapies to new targets):
For lymphomas, there is the Btk inhibitor CC-292 in Phase I; it is also in Phase I trials for Chronic Lymphocytic Leukemia. Sotatercept is in Phase 2 trials for a variety of anemias. CC-122, CC-115, CC-122 and CC-486 are in Phase I trials for solid tumors. In the anti-inflammatory segment we have CC-11050 in Phase II for cutaneous lupus erythematosus and CC-220 for undisclosed targets in Phase I. For Crohn's disease Celgene has PDA-001 in Phase I. Last on my list, a cellular therapy for organ transplants, UCB + HPDSC is in Phase I.

So, at least balancing the possibility that Celgene will not hit its 2017 estimates, there is the possibility that one or more of these earlier-stage therapies will gain FDA approval and begin generating significant revenue, or at least foreseeable revenue, before the end of 2017.  Celgene also can buy or generate (internally or with partners) new potential therapies, or advance preclinical candidates to human trials, but I don't see those as generating income by 2017.

In conclusion, while there are risks involved, I see no reason I should not hold my Celgene stock until 2017, when my expected value would be $375 per share. I also see no impediment to long term investors buying at current prices. Of course, if Goldman's negative view of biotechnology, or of the market in general prevails, there could be better price entry points than the $160 to $170 price range we have mostly been in lately.

I would like to buy more Celgene, especially since I sold some shares in October (at $156.74) in order to keep CELG within my portfolio limits for holding any single stock. I bought my CELG mostly in 2007 and 2008. I have to weigh that possible action against the benefits of diversifying into other biotech stocks and other classes of stocks. I hope sharing my thoughts will help other long-term investors with their thinking about Celgene. As to short-termers, what they do seldom affects the long run. But I thank them for providing liquidity and an air of excitement to investing in stocks.

No comments:

Post a Comment