Revlimid Ramp-Up, New Drug Launches Make Celgene a Buy

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Celgene (NASDAQ: CELG) is a global biopharmaceutical company focused on treating cancer and immune-inflammatory related diseases. The Summit, New Jersey-based company was founded in 1986 and has grown to employ more than 4,500 people worldwide.

Let’s evaluate Celgene’s business as it stands today before considering upcoming catalysts for the company in the next six to twelve months. With a market capitalization of approximately $33 billion, Celgene derives its current revenue from drugs such as Revlimid, Vidaza, and Abraxane. Most of Celgene’s products are designed to treat patients with limited treatment options, and the company enjoys a rich gross margin of 95% on its sales.

Total Revlimid revenue for the third quarter of 2012 grew to $970 million, a year-over-year increase of 18% from Q3 2011.  Sales mix consisted of 56% domestic here in the U.S. and 44% in international markets. Revlimid is the market-leading treatment for multiple myeloma (from Greek myelo-, bone marrow), and received initial FDA approval on June 29, 2006. Revlimid's main competitor comes in the form of Onyx Pharmaceutical's (NASDAQ: ONXX) Kyprolis, which received accelerated FDA approval on July 20, 2012.

Celgene is seeking to expand the label for further usage indications of Revlimid, which accounts for more than two-thirds of the company’s overall sales revenue.  While upon initial deliberation investors may view the dependence on Revlimid sales as a risk, Celgene is intent on creating a platform within a product for Revlimid. Numerous Phase III studies are underway, including trials for chronic lymphocytic leukemia, and non deletion 5q myelodysplastic syndromes (MDS). Geographic expansion of Revlimid should boost sales, with approvals expected in China and Brazil during 2013. Finally, there is ample evidence treatment duration has increased on average per patient, a testament to the drug’s efficacy and safety.

Celgene’s second biggest source of revenue ($220 million in Q3 sales) comes in the form of Vidaza, the first FDA approved drug for the treatment of myelodysplastic syndromes. Vidaza is currently the standard of care and market leader for MDS, also known as preleukemia. While revenue from Vidaza should continue to grow in the future, I expect the rest of Celgene’s pipeline, including the new drugs discussed below, to outperform Vidaza sales.

The third main source of revenue for Celgene is Abraxane, with $106 million in Q3 sales. Abraxane had pre-existing FDA approval for treatment of breast and lung cancer during the quarter. On Oct. 12, the Food and Drug Administration announced an expansion of the treatment label for Abraxane, with approval as the first-in-line-treatment for patients with non-small lung cancer. Huge potential for Abraxane also exists in advanced pancreatic cancer.

On Nov. 9, Celgene announced that PC patients who received Abraxane in addition to standard chemotherapy had a statistically significant improvement in survival than those patients who received chemotherapy alone. Analysts estimate Celgene could earn a lot more revenue from Abraxane solely indicated for pancreatic cancer. The relative success for Celgene's Abraxane in pancreatic cancer is yet another setback for Clovis Oncology (NASDAQ: CLVS), which recently announced disappointing results for its own drug intended to treat the same disease.

For myeloma patients who do not respond to Revlimid as a first-line or second-line form of treatment, Celgene has an answer in the form of a third-line treatment. Celgene shareholders received positive news on Oct. 23, 2012 when management announced that the drug Pomalidomide “demonstrated significant progression-free survival and overall survival advantages in Phase III study of heavily pre-treated myeloma patients.”  Pomalidomide is not currently approved for the treatment of any indication, however Celgene has submitted for approval with the European authorities (decision expected in second half of 2013), and the FDA has already received a new drug application for Pomalidomide with an advisory committee meeting being held on Feb. 10, 2013.

Although I have provided a substantial amount of material on Celgene already, my analysis would be incomplete without discussing a final consideration of the product pipeline in the form of apremilast. Apremilast is an oral compound that was being studied in multiple Phase III trials for the treatment of psoriatic arthritis. On Sept. 6, 2012, Celgene announced that its three Phase III trials for apremilast (referred to as PALACE-1, 2, & 3) achieved "statistical significance and clinically meaningful improvements for the primary endpoint, as well as other measures of signs and symptoms and physical function.” Celgene is planning to submit a New Drug Application to the FDA in the first quarter of 2013.

In conclusion, it is a satisfying time to be a Celgene shareholder:

  • Revlimid ramp-up should include geographic launches in China and Brazil, increased duration of treatment among patients, and possible expansion of FDA label indications.
  • Abraxane is now approved for non-small lung cancer, in addition to traditional breast and lung cancer.
  • Pomalidomide launch in the first half of 2013 is a high probability, based on compelling Phase III data and PDUFA date set for Feb. 10, 2013.
  • Apremilast submission for New Drug Application is expected in 1Q of 2013 based on PALACE-1, 2, & 3 studies for psoriatic arthritis. 

As of Sept. 30, Celgene had 2.4 billion dollars remaining under its stock repurchase program. Management should be able to repurchase an additional 31 million shares of Celgene stock, based on the current market price. The 2012 American Society of Hematology Meeting being held in Atlanta from Dec. 7 – 11 serves as yet another catalyst, with more than thirty confirmed abstracts on Revlimid and twenty abstracts on Pomalidomide.

Large-cap biotech companies have historically traded at 13 times to 20 times earnings-per-share. Currently, Celegene is priced in the middle of the range with a 16x multiple, based on management’s 2012 guidance of $4.85-$4.90 per share. If one applies the same methodology to 2014 consensus estimates of $7.00 a share, we arrive at a share price of $112, representing approximately 40% upside over a two-year time period.


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