More Upside on this Biotechnology Giant

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

The Food and Drug Administration added Celgene’s (NASDAQ: CELG) Pomalyst to the list of approved drugs last Friday. The drug has been approved for myeloma patients who stop showing a response to other cancer therapies. Revlimid is still the main revenue driver of the company and faces tough competition from Johnson & Johnson (NYSE: JNJ) and Onyx Pharmaceuticals (NASDAQ: ONXX). It is single handedly responsible for more than two thirds of Celgene’s entire revenue.

Therefore, the health of Revlimid is extremely important to the survival of the company. The drug currently faces tough competition from J&J’s Velcade and Kyprolis of Onyx. Kyroplis has recently received FDA approval and is the most serious threat to Revlimid, but currently it is only approved as a third-line treatment for relapsed patients previously on Velcade and Revlimid. The newly approved Pomalyst has opened up a new target market for Celgene of patients who have stopped responding to either Revlimid or competing treatments.

Velcade generates sales of approximately $700 million annually (2011) and is a joint venture of Takeda and J&J. The drug still lags far behind the mammoth sales of $3.2 billion (2011) being generated by Revlimid. The new approval greatly improves the range of Revlmid family and gives it an advantage over both Takeda and Kyroplis. The entire market is estimated to have a sales potential of approximately $5.4 billion (2016). The new entry by Onyx might get a smaller share of this pie because it is only allowed for patients who have already failed on Velcade and Revlmid. According to estimates by Reuters research, Kyprolis can have a peak sales potential of approximately $570 million, i.e. approximately 11% of the total market.

Celgene

Celgene is a biopharmaceutical company involved in the discovery, development and commercialization of drugs to treat immune inflammatory and cancer-related diseases. The company has already successfully launched Revlimid, which is an immunomodulatory aimed primarily at treating patients with multiple syndromes (MDS) and myeloma. Other drugs in the commercial stage include Abraxane, Vidaza, Istodax, and Thalomid. The company has a number of candidates in various stages of clinical trials, a detailed list of which can be found here.

FDA approval

The company has recently received FDA approval for its candidate Pomalyst (pomalidomide). The drug has been approved for difficult to treat patients, i.e. patients whose disease has worsened after being treated with other cancer drugs. During the trials a total of 191 patients were evaluated, out of which 34% of these patients showed a positive response to the treatment as compared to only 13% responding to treatment of pomalidomide. The newly approved Pomalyst will cost around $10,500 for each cycle of treatment, and total treatment cost is estimated at $52,500.

The primary contradictions of Pomalyst revolve around pregnant women, and therefore it will carry a boxed warning for such patients. Pomalyst belongs to the same family as Celgene’s Revlimid, but is successful with patients who have stopped responding to Revlimid. According to the company CEO, the drug has a peak sale potential of $1 billion.

Valuations

The stock is currently trading at a P/E of 14x, which is below the industry average of 25x and market average of 19x. The stock is also trading at a 9% discount to its mean sell side target price of $109. As the table below shows, if we use a P/E of 20x and average EPS, the following price targets can be calculated. If valued on a P/E of 20x, the stock is trading at a 13% discount to its 2013 valuations and at a 36% discount to its 2014 valuations.

<table> <tbody> <tr> <td> </td> <td> <p><strong>2013</strong></p> </td> <td> <p><strong>2014</strong></p> </td> </tr> <tr> <td> <p><strong>EPS est</strong></p> </td> <td> <p>$5.66</p> </td> <td> <p>$6.82</p> </td> </tr> <tr> <td> <p><strong>Target Price</strong></p> </td> <td> <p>$113</p> </td> <td> <p>$136</p> </td> </tr> <tr> <td> <p><strong>Discount</strong></p> </td> <td> <p>13%</p> </td> <td> <p>36%<span> </span></p> </td> </tr> </tbody> </table>

According to sell side estimates, the newly approved drug has the potential to generate approximately $500 million in sales by the end of 2015. The strong pipeline and current dominance of Revlimid over alternatives by J&J and Onyx makes me bullish on Celgene as a long term investment.


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