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.

Celgene (CELG) 2017 Guidance: Two Times 2013 Revenue

Celgene, based in Summit, New Jersey, 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!

See also:
www.celgene.com
My Celgene main analyst conferences page.
My Celgene Q4 2012 conference notes

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.

3 NASDAQ 100 Biotechs: Gilead, Celgene, Biogen Idec

When I wrote about Gilead Sciences (GILD), on July 26, 2011, I said "A convergence of factors is driving Gilead profits higher. This trend should accelerate in 2012 and continue through at least 2015." [See Gilead Sciences Readies Pipeline]. Gilead stock that day closed at $42.16. This morning GILD opened at $56.42. While I am a long-term investor, it is encouraging to see these short-term results.

The forward-looking story is now largely about curing Hepatitis C and refreshing Gilead's market-dominating anti-HIV franchise, but first the backward-looking numbers.

In Q2 revenue was $2.41 billion, up 6% sequentially from $2.28 billion and up 13% from $2.14 billion in the year-earlier quarter. GAAP net income was $711.6 million, up 61% sequentially from $442.0 million, but down 5% from $746.2 million in the year-earlier quarter. GAAP earnings per share (EPS) were $0.91, up 60% sequentially from $0.57, but down 2% from $0.93 year-earlier. Eliminating one-time and non-cash items, Non-GAAP EPS was $0.99, up 9% sequentially from $0.91, but down 1% from $1.00 year-earlier.

The y/y EPS showing may make you wonder why the stock is up so much. Bringing the new HIV drugs to the FDA and the hepatitis drugs through clinical trials is adding to expenses. The price of the stock had been beaten down because of fears of expiring patents. The increased revenue promises a healthy dose of future profits since it now appears the HIV franchise will remain strong and hep c revenues may kick in as early as 2014. Recent Phase II hep c trials have been encouraging. The goal is to have a multi-agent, highly effective once-a-day tablet that will completely cure hepatitis C over a reasonably short period of time.

Gilead's P/E Ratio? Just over 17. It's a bargain.

Celgene (CELG) also is generating healthy profits while getting ready to introduce blockbuster therapies over the next few years.

Celgene Q2 revenue was $1.37 billion, up 8% sequentially from $1.27 million and up 16% from $1.18 billion year-earlier. GAAP net income was $367.4 million, down 8% sequentially from $401.5 million but up 32% from $279.2 million year-earlier. GAAP EPS (earnings per share) were $0.82, down 9% sequentially from $0.90, but up 39% from $0.59 year-earlier.

With a 39% y/y growth in GAAP EPS, you might think Celgene would be flying with a higher P/E ratio. Is is just GAAP accounting? No, non-GAAP EPS in Q2 was $1.22, up 13% sequentially from $1.08 and up 37% from $0.89 year-earlier.

Celgene closed a bit down today at $71.85, but a year ago it was selling for under $55. Its P/E Ratio is near 21.

The two new Celgene drugs that could produce revenue in 2013 are Pomalidomide for relapsed and refractory multiple myeloma and Apremilast for psoriatic arthritis and psoriasis. Safety and efficacy look good for both drugs, but there is always a chance that the FDA will disapprove or cause delays by asking for more clinical data.

Biogen Idec has already proven itself to be one of the big winners of late.

Biogen (BIIB) closed today at $144.54. In 2010 you could have bought it in the fifties most of the year. It has a higher P/E Ratio than Celgene or Gilead at just over 26.

So is BIIB more of a product for profit taking? [Disclaimer: I did already take some profits on this one, but it's gone up since then.]

Q2 revenue was $1.421 billion, up 10% sequentially from $1.292 billion and up 17.5% from $1.209 billion in the year-earlier quarter. GAAP net income was $386.8 million, up 28% sequentially from $302.7 million and up 34% from $288.0 million year-earlier. GAAP EPS (earnings per share) were $1.61, up 29% sequentially from $1.25 and up 36% from $1.18 year-earlier.

That alone would seem to justify the P/E, but like Celgene and Gilead, Biogen has a pipeline that could mint money for investors. The first one coming up for an FDA decision is BG-12 (dimethyl fumarate), an oral therapy for multiple sclerosis. The data looks good and a positive FDA decision would mean a commercial launch this year.

While each of these stocks has its risks, as a group they have a large number of profitable drugs and a large number of therapies in their pipelines. Holding all three minimizes risk. They are all in the NASDAQ 100.

Keep Diversified!

Disclaimer: I am a long-term investor in Gilead Sciences, Celgene, and Biogen Idec. I will not trade in the stock for a week from today.

See also:

my Gilead Sciences Q2 2012 analyst call summary

Celgene Q2 2012 analyst call summary

Biogen Idec Q2 2012 analyst call summary

Celgene Q3 shows model strength

Celgene provides a double dose of growth potential: further growth of its currently approved therapies and a rich pipeline with some therapies closing in on FDA approval and commercialization. Since I last wrote about Celgene on August 2, its stock price has risen from $57.29 to today's close of $64.29. Celgene's 52 week high is $68.25 reached on October 24th.

Consider Celgene's Q3 earnings reported last week. Revenue was $1.22 billion, up 3% sequentially from $1.18 billion and up 41% from $886 million in the year-earlier quarter. GAAP net income was $373.0 million, up 34% sequentially from $279.2 million and up 33% from $281.2 million year-earlier. GAAP EPS were $0.81, 37% sequentially from $0.59 and up 35% from $0.60 year-earlier. Non-GAAP EPS was EPS $1.02.

Most of this rapid growth was based on a single therapy, Revlimid for multiple myeloma (MM) and myelodysplastic syndromes (MDS). Revlimid revenues grew 28% from a year earlier. Expansion is largely international now, with Russia, China and Brazil still ahead. In addition various clinical trials have indicated Revlimid will be beneficial in other types of cancer. Revlimid is in Phase III trials for CLL (chronic lymphocytic leukemia), NHL (non-Hodgkin lymphoma) and prostate cancer.

Thalomid is ancient and had revenues $83 million, down 12% y/y.

VIDAZA for multiple myeloma revenues were $191 million, up 35% y/y. This is despite losing exclusivity in the United States.

The bit new revenue generator is ABRAXANE for breast cancer. Abraxane is also in clinical trials for treating lung, pancreatic, bladder, skin, and ovarian cancers. ABRAXANE revenues were $114 million, up 20% sequentially, that is quarter over quarter; Celgene did not market it a year ago. A Phase III trial comparing it to decarbazine for metastatic melanoma is expecting to read out data in mid 2012. Phase III Pancreatic cancer trial should complete enrollment in Q1 2012. International revenue continues to ramp. For instance, in the quarter Celgene received reimbursement permission for Abraxane in in Greece and the Czech Republic.

Earlier in the pipeline Celgene displays depth-of-field. Of course most pre-clinical drugs don't make it through all the clinical phases and FDA approval; there are likely to be some losers. Celgene's pipeline is so broad and important you could write a book about it.

In Oncology/Hematology we have pomalidomide in Phase III trials for myelofibrosis and nearing the end of Phase II for multiple myeloma. There is Amrubicin, in Phase III for small cell lung cancer. In Phase II we also have ACE-011 for CIA and ABI-008 for prostate cancer. In Phase I we have Tork Inhibitor and ABI-009, both for solid tumors. There are two additional pre-clinical ABI variants for solid tumors.

Apremilast completed enrollment of patients in Phase III trials for psoriasis and psoriatic arthritis, with three more Phase III trials to complete enrollment by year-end. Phase II trial data for ankylosing spondylitis will be presented in November. In inflammation and immunology we also have JNK CC-930, CC-11050 and PDA-001 in Phase II.

Pomalidomide Phase II data for relapsed and refractory myeloma will be presented at ASH in December. The company is conducting a broad clinical program to support global registrations for pomalidomide.

Beyond that Celgene lists over a dozen agents in discovery and pre-clinical phases.
Of course, what will affect Celgene's stock price soonest are the late stage candidates. The first big movers is likely to be expanding the label for Revlimid to first-line (initial) treatment of multiple myeloma. The second would be Abraxane for non-small cell lung cancer, with FDA submission in second half of 2011 and a decision likely in the first half of 2012.

In general it is a very good time to invest in biotechnology, even given the known risks. Celgene is a cash cow that also has unrealized value in its pipeline. Small, risky biotechs aren't commanding the high premiums they used to, which is good because many of their drug candidates don't work out. With the larger biotechs like Celgene if a drug candidate fails it is disappointing and the stock can lose some momentum, but cash flow can be used to buy and develop more candidates. Celgene's cash and equivalents balance ended at $2.58 billion. Cash flow from operations was $602 million. $885 million was spent on share repurchases in the quarter.

Hopefully some time soon Celgene will start paying out a dividend, which is the true gold standard for today's investors.

Keep diversified!

Disclaimer: I am long Celgene. I have no plans to buy or sell Celgene in the next two weeks.