Epigenetics (Part II): The Biopharmaceutical at the Epicenter

BA is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Part I (Epigenetics: A 21st Century Science with Huge Investment & Medical Implications) explains epigenetics in simplified terms and lists some of the major players.

This article’s focus is Celgene (NASDAQ: CELG), as it owns two of the four FDA-approved epigenetic drugs. Before we hone in on the epigenetic drugs, let’s look at the bigger picture.

Celgene is a biopharmaceutical company primarily engaged in the discovery, development and commercialization of therapies to treat cancer and immune-inflammatory related diseases. It’s a $34.5 billion market cap company that’s well-established (founded in 1986, publicly traded since 1987).

Its drugs include: Revlimid, Thalomid, Vidaza, Abraxane, and Isodax. Abraxane is used to treat breast and lung cancers, while the others treat various blood cancers. Revlimid is its blockbuster drug, accounting for 68% of revenue in its most recent quarter

Additionally, it has an FDA-registered service called LifebankUSA. Parents can bank their babies' umbilical cord blood, as well as stem cells from the umbilical cord and the placenta.

Celgene also has various partnerships with other drug companies.

Celgene has a robust pipeline, including a strong late-stage pipeline, as it's conducting over 25 Phase III trials. Foolish writer Keith Speights wrote a great summary of Celgene's 2012 highlights and what's coming in 2013.

Approved Epigenetic Drugs: Two out of Four is...Darn Good

While Meatloaf considered two out of three ain't bad, I'd say Celgene's two out of four is darn good.              

<table> <thead> <tr> <td>   <p><strong>Company</strong></p>   </td> <td>   <p><strong>Target</strong></p>   </td> <td>   <p><strong>Agent</strong></p>   </td> <td>   <p><strong>Indications</strong></p>   </td> <td>   <p><strong>Approval Date</strong></p>   </td> </tr> </thead> <tbody> <tr> <td> <p><strong>Merk </strong><span class="ticker" data-id="204567">(NYSE: <a href="http://caps.fool.com/Ticker/MRK.aspx">MRK</a>)</span></p> </td> <td> <p>HDAC</p> </td> <td> <p>Zolinza (vorinostat)</p> </td> <td> <p>Cutaneous T-cell lymphoma (CTCL)</p> </td> <td> <p>FDA approved Oct. 2006</p> </td> </tr> <tr> <td> <p>Celgene</p> </td> <td> <p>HDAC</p> </td> <td> <p>Istodax (romidepsin)</p> </td> <td> <p>CTCL</p> <p> </p> <p>Peripheral T-cell lymphoma (PTCL)</p> </td> <td> <p>FDA approved Nov. 2009</p> <p>FDA approved June 2011</p> </td> </tr> <tr> <td> <p>Celgene</p> </td> <td> <p>DNMT</p> </td> <td> <p>Vidaza (5-azacitidine)</p> </td> <td> <p>Myelodysplastic syndromes (MDS)</p> <p>Higher-risk MDS</p> </td> <td> <p>FDA approved May 2004</p> <p>FDA approved (expanded)  Aug. 2008</p> </td> </tr> <tr> <td> <p>Eisai; sublicensed to <strong>Johnson & Johnson</strong> <span class="ticker" data-id="204142">(NYSE: <a href="http://caps.fool.com/Ticker/JNJ.aspx">JNJ</a>)</span></p> </td> <td> <p>DNMT</p> </td> <td> <p>Dacogen (decitabine)</p> </td> <td> <p>MDS</p> <p> </p> <p>MDS</p> </td> <td> <p>FDA approved May 2006</p> <p>FDA approved (expanded) Mar. 2010</p> </td> </tr> </tbody> </table>

Source: Nature Biotechnology (original FDA approval data) and Drug.com (used to update)

Note: Table includes FDA (US) approvals only. EU approvals may differ. For instance, Dacogen failed to gain FDA approval for the treatment of acute myeloid leukemia (AML) in early 2012, but was approved by the European Commission in September to treat AML.

While the two Celgene epigenetic drugs are not blockbusters, the fact that Celgene acquired both through acquisitions shows good foresight. Vidaza, the very first approved epigenetic drug, is no slouch -- it's number 2 by revenue in Celgene's drug lineup. Vidaza sales increased 15% last quarter, and accounted for about 16% of total revenue. Isodax is currently contributing little to Celgene's top line. However, in a promising independent Mayo Clinic lab study, Isodax used together with Eisai's/JNJ's Dacogen killed multiple cell lines of kidney and breast cancer.

Of course, there is always the risk that epigenetic drugs in the pipeline might not live up to the promise some believe they have. Additionally, epigenetics as a drug discovery tool might fall short of expectations.  

Is Celgene Among the Quantitatively "Fittest"?

Qualitative info -- epigenetics -- led me to Celgene. Now it's time to run Celgene through some basic quantitative analysis. I primarily selected other larger biotechs to provide context. JNJ is the odd company out, as it's not a larger biotech like the others, but a huge diversified health care company. I included it because it is involved in epigenetic drugs, and is considered by Yahoo! Finance to be a direct competitor.   

Stock Price

First, let's check how Celgene's stock has performed over a 5-year period...

<img src="http://media.ycharts.com/charts/1a981493a6881ed0ee1b3d2227d7f707.png" />

CELG data by YCharts

Up 75% -- nice, especially in a period with a flat market. Price history is backwards looking, but longer-term price history is still meaningful. It typically reflects strong moats and management prowess, among other things.

Celgene's robust drug pipeline bodes well for continued price strength, assuming no negative surprises involving late-stage drugs failing to gain approval.  

Revenue Growth

Celgene is the fittest on this measure among this group...

<img src="http://media.ycharts.com/charts/51fc75ae8917f43cbb5eace42609df51.png" />

CELG Revenue TTM data by YCharts

Looks OK (relatively so) over the 1-year period, too...

<img src="http://media.ycharts.com/charts/ea9514e1df94e7cb5d6d192d13303d00.png" />

CELG Revenue TTM data by YCharts

Earnings

5-year looks great...

<img src="http://media.ycharts.com/charts/4f920fa73167fd54bc78e280d0a7ac60.png" />

CELG Net Income TTM data by YCharts

1-year looks OK...

<img src="http://media.ycharts.com/charts/8f8ddd2453edf08855302dfd1fa44c49.png" />

CELG Net Income TTM data by YCharts

Profit Margin

Profit margins reflect competitive advantages. Celgene's number looks great, as do the other larger biotechs (JNJ is a more diversified health care company, so margins wouldn't be expected to be as large.)

<img src="http://media.ycharts.com/charts/8db5230310edd76fec4546d84c33cf45.png" />

CELG Profit Margin Quarterly data by YCharts

Return on Equity

Celgene is doing well for its shareholders...

<img src="http://media.ycharts.com/charts/7a20e8271be28c005d980f2d9d8bcf52.png" />

CELG Return on Equity data by YCharts

Free Cash Flow

Celgene's cranking out cash (FCF has recently been greater than reported earnings). This is a great sign, as Foolish investors know "earnings" are not as "real" as cash.

<img src="http://media.ycharts.com/charts/155e2a4ad01720a13254c0f5b0e7d2d8.png" />

CELG Free Cash Flow TTM data by YCharts

Valuation

OK, the numbers look good, but how's the stock priced? Looks like a bargain from a PEG (.44) standpoint...

<img src="http://media.ycharts.com/charts/681a267a017e2df6290387d385a8304a.png" />

CELG PEG Ratio data by YCharts

Bottom Line

Celgene has significant involvement in the still relatively new, but fast-growing, field of epigenetics. The company sports a robust pipeline and solid numbers.

Biotech investors who want to do Darwin one better – and thrive, not just survive – might want to further investigate Celgene, or at least stay abreast of the progress of epigenetics in drug development.

 

 


BAMcKenna has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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