On 1/7/13, Celgene (CELG), as the first presenter at the annual JPMorgan Healthcare Conference, reaffirmed its 2015 target of $8-9 adjusted earnings per share on $8-9 billion in net product sales. Concurrently, and unexpectedly, it introduced 2017 targets of $13-14 adjusted EPS on $12 bn net sales. (Press release here.) It was a bold, perhaps even unusual, move, particularly for a management team that has consistently guided the coming year's performance conservatively (which they again did, concurrently).
Celgene's share price gets off to a fast start in 2013
Analysts scrambled to adjust their models based on the company's explanation and on the rapidly evolving data surrounding its late stage pipeline. Celgene's share price, having underperformed for several years, caught fire and accelerated a gain that had begun Jan. 2. It leveled off by mid-January in the 97-101 range.
In Celgene's Q4 and 2012 full year earnings call (on 1/24/13), the company elaborated on the basis for their 2017 guidance. Notably, EPS targets assumed infrastructure investment in their "I&I" (think Apremilast) franchise, continued operating margin improvement, stable tax rate, and flat share count. (Company's IR webpage, containing link to presentation slide deck, here.)
So far in 2013, shares have risen from 12/31's close of $78.47 to $98.77 as of 2/15's close, for a gain of nearly 26% YTD. Investors might now ask whether the announced targets are achievable and the extent to which the current share price bakes in those targets, discounted from 2017.
What past performance may mean
These targets should be examined first in light of immediate past performance. From 2009-2012, non-GAAP EPS increased from $2.08 to $4.91 (y/o/y 35%, 35%, and 29.5%, respectively), on revenue that increased from $2.68 bn (2009) to $5.5 bn (2012), due mostly to expanding Revlimid use (in combination with dexamethasone) in second line multiple myeloma (MM). (Revlimid is also approved as a standard treatment for patients with transfusion dependent anemia due to low or intermediate risk deletion 5q myelodysplastic syndromes (MDS). In 2012, product sales were approximately 56% US and 44% international. Revlimid's sales accounted for about 68% of overall 2012 revenues.
These numbers by no means predict similar performance in the future; they do, however, evidence the company's ability to execute in developing a blockbuster drug, obtaining approvals globally, and successfully marketing it globally.
2017 revenue/EPS goals - fantasy or achievable?
To achieve their 2017 goal of $12 bn net sales and $13-14 adjusted EPS would require a 2013-2017 revenue compound annual growth rate (CAGR) of about 17% and EPS cagr of about 23%, respectively, over the next five years vs. 2012. The pathway to such growth appears, from company presentations and press releases (list with links here), largely in place and rapidly coming to fruition, but apparently the scale of that growth is only beginning to be appreciated by investors.
Five drugs and a blizzard of potential catalysts
Five drugs will drive the vast majority of the growth. Let's look briefly at each, starting with flagship Revlimid.
Revlimid. Indication expansion for Revlimid (lenalidomide; 2012 sales $3.767 bn; 2013 guidance $4.1-4.2 bn) into newly diagnosed multiple myeloma (NDMM), including maintenance therapy, is probably the biggest potential catalyst for 2013. Watch for MM-020 data in a few weeks, followed by MM-015 data by qtr end; they will be crucial. If either is supportive, expect European Medicines Agency (EMA) resubmission and U.S. Food and Drug Administration supplemental New Drug Application by YE 2013.
Revlimid indication expansion has been widely followed by analysts and discussed by several. Consistent with Celgene's recent, publicly stated optimism following last year's EMA submission withdrawal snafu, one long-time Celgene analyst said he believes the MM-020 study (Revlimid-Dexamethasone combination therapy vs combination Melphalan, Prednisone and Thalidomide (MPT) in transplant ineligible or over 65, first line MM patients) will likely show the requisite progression free survival (PFS) meeting the study's primary endpoint and possibly even show an overall survival (OS) benefit. He also concludes approval in this indication (which he views as likely) could add a whopping $3.31-$7.71 to EPS by 2016 depending on duration of therapy and market share.
Also, Celgene now expects U.S. approval for Revlimid in its first lymphoma indication (Mantle Cell Lymphoma (MCL)) by June 2013. Additional Revlimid indications, forms of Non-Hodgkin's Lymphoma (NHL) and Chronic Lymphocytic Leukemia (CLL), are enrolling Phase III trials now, having had encouraging Phase II results. Notably, according to the National Cancer Institute the prevalence of the U.S. NHL population is about 6 times that of the MM population, though it is too early to know which NHL patients, if any, would benefit from Revlimid. Depending on further trial results, NHL, therefore, or some of its sub-types, could become a potentially significant, additional indication.
It's far too early to project peak Revlimid sales or when that will occur; not all indications are yet known, nor are penetration rates or duration predictable. What is known is that there is substantial room for significant geographic and indication expansion, which should drive considerable sales and EPS growth.
One more fact: Celgene decided several years ago not to partner Revlimid. Instead, they reasoned that the company's long term interests were best served by going it alone. In doing so, they generated skepticism, only later to prove the skeptics wrong. Shareholders are just now starting to reap the rewards from that decision. As Revlimid revenues continue to grow rapidly, 100% of the profits will stay with Celgene.
Pomalyst. Approved earlier this month in U.S. for relapsed/refractory multiple myeloma, Pomalyst (pomalidomide) is the most powerful myeloma drug ever approved, having been shown to have good efficacy in patients who fail Revlimid, Velcade and stem cell transplant. Launch is underway.
Pomalyst is now being tested for myelofibrosis, with Phase III results due in H1. EU decision in refractory MM is expected in H2 2013.
Pomalyst pricing exceeded some analysts' expectations, and the drug is expected by some to achieve blockbuster status by (or before) 2017.
Abraxane. Abraxane (paclitaxel protein-bound particles for injectable suspension (albumin bound); 2012 sales $427 million) is approved for second line metastatic breast cancer and recently was approved for first line non-small cell lung cancer (NSCLC).
Recently published ph III data showed a significant survival advantage when used in combination therapy for advanced pancreatic cancer, so Abraxane is likely to gain approval in that indication (sNDA H1 2013) as a new, standard treatment option.
Also, a Phase III, randomized open label trial for stage 4 melanoma was reported in late 2012 to have shown Abraxane to have met the study's primary endpoint, PFS, and to have demonstrated a trend to overall survival. Celgene is studying further investigational and regulatory strategy for that additional potential indication. Celgene is currently forecasting $1.5-2.0 bn in sales by 2017.
Apremilast. Apremilast was reported in 3 recent Phase III trials (PALACE-1, 2 and 3) to have demonstrated robust and consistent, statistically significant clinical benefit across all 3 studies, achieving its primary endpoints in treating psoriatic arthritis. A New Drug Application (NDA) in that indication is to be filed by Q1 end.
Notably, when Apremilast was given as monotherapy in dmard naive patients, efficacy approached that of biologics (e.g., Enbrel). In the Palace-4 Phase III trial now underway, all patients are receiving Apremilast monotherapy. If that trial demonstrates efficacy similar to the monotherapy results just mentioned, such a result could considerably enhance Apremilast's appeal as a new therapy in psoriatic arthritis.
Watch also for ESTEEM I and II (psoriasis Phase III) detailed data at 3/2/13 AAD meeting, another very closely watched potential catalyst. sNDA is expected to be filed for psoriasis in H2. EMA joint filing is also planned in H2.
The drug should be launched by end of 2013 or early 2014 in psoriatic arthritis, and 2014 for psoriasis, in the U.S. Other indications (ankylosing spondylitis, Behcet's, both having shown encouraging Phase II data) and possibly rheumatoid arthritis will follow if registrational data (Phase III now enrolling for ankylosing spondylitis) are supportive.
As an oral agent without infection risk, Apremilast could compete well against current TNF blocker (injectable) therapies (e.g., Enbrel) that have significant risks (including serious infection, heart failure, Hepatitis B activation, new psoriasis, autoimmune reactions, and some forms of cancer) in the extraordinarily large, and growing, autoimmune/inflammatory disease market. Celgene expects multiple billions in Apremilast sales, eventually.
Vidaza. Vidaza (azacitidine; 2012 sales $823 million), for use in high risk MDS, has seen continued increase in sales, especially ex U.S., with no generic entrant visible in U.S. and continued ex-U.S. protection. Celgene's guidance conservatively has assumed a generic U.S. entrant beginning 6 months forward (currently, H2 2013). Notably, Vidaza is difficult to manufacture, so that given its continued exclusivity ex-U.S., generic manufacturers might deem it not worthwhile to pursue in just the U.S. Even were there a U.S. generic entry, Vidaza may well reach $1 bn in annual peak ex-U.S. sales if current trends continue.
Celgene is testing Vidaza in combination with Revlimid in a Phase III trial for acute myelogenous leukemia (AML), with overall survival as the primary endpoint. Results are expected by 2013 YE. Success would be upside to expectations, and it could compensate for any generic U.S. entry.
Celgene is in two trials with an oral form of azacitidine in lower risk MDS and AML. Should results (a few years away) warrant, the oral form could eventually replace Vidaza (an injectable), with a new patent life and period of exclusivity.
Other contributing factors
Geographic expansion. Continued geographic expansion for these products, especially in under-appreciated China (where Revlimid was just approved and Celgene's Abraxane sales force is already substantially in place), should contribute significantly to revenue and EPS growth, although it remains unclear when Revlimid will launch in China. Markets that could contribute soon, according to the company, include Russia, Turkey, South Korea, Mexico and Brazil.
Product gross margin, operating margin, effective tax rate. Important profitability contributors include an enviable product gross margin (2012 94.6%, a 110 bp improvement vs 2011), an impressive operating margin (2012 48.1%, which was a noteworthy 300 bp improvement vs 2011), and a low, effective tax rate (2012 16.4%, a 200 bp decrease vs 2011), guided by well-respected CFO Jackie Fouse, PhD. (hired Sept. 2010; substantial international experience). Operating margin is projected to improve another 100 bp in 2013, and further through 2017.
Increasing net cash generation, share repurchases. Also contributing to EPS growth is that Celgene has in the last few years become more active in using its fast-growing net cash generation (2012 $2.03 bn) to fund share repurchases (2012 28.6 mm shares at $2.1 bn), with $1.8 bn remaining on its most recent authorization as of 12/31/12. 2012 YE cash/marketable securities was $3.9 bn, with about $3.1 bn in debt.
As noted above, Celgene explicitly said that its targets assume a stable share count. Thus, should they continue repurchasing shares in an amount exceeding option dilution, which seems likely in light of their most recent reports and growing net cash flow (2013 likely exceeding $2.5 bn), such buybacks would represent upside to EPS guidance.
What about IP?
No discussion of a biopharmaceutical company would be complete without mention of the condition of its patent estate, especially for a company whose revenues are as concentrated in one product as is the case here.
Five of Celgene's Revlimid patents have been challenged collectively by Natco Pharma, Arrow International and Watson Laboratories [WTI] in two ANDA certifications. Celgene has repeatedly expressed strong confidence in its patent estate surrounding Revlimid into 2027, reporting having invested significant time and expense with highly regarded counsel. It has filed the responsive infringement suits against Natco, the second of which reportedly resulted in a stay through Dec. 2014.
In an Oct. 1, 2012 FT article (here), several patent attorneys were quoted in detail regarding the claims, saying generally that Natco, et al will have a difficult case. The issue could concern some investors, especially as the litigation gets underway in 2015, but most analysts who have written about the subject have echoed Celgene's confidence.
What does the future hold, then?
Will Celgene meet its 2017 sales/EPS growth targets? It comes down to science and execution. Having convinced themselves that they will, they have set out to convince Wall Street and thrown down a gauntlet of sorts. They did so, I believe, only because they know they have the science, and they have proven to themselves their ability to execute.
As recent events have shown, understandably cautious analysts underestimated some aspects of Celgene's science, which in part supports Celgene's earlier-stated 2015 targets. In the laboratory, in the clinic, and with regulators, their execution has been excellent. (Last year's EMA withdrawal snafu was more related to managing expectations.) Their product candidates appear strong, versatile, and are so far supported by excellent data, sufficient for the company to foresee three, possibly four, additional blockbuster drugs by 2017.
They have an extraordinary product gross margin, very strong operating margin (still improving), relatively low tax rate, all of which contribute to outstanding operating leverage. Moreover, annually they are generating larger amounts of net cash with which to further leverage earnings growth.
Separately, but importantly, diversification of their revenue stream geographically and by product is now more visible, de-risking the stock somewhat.
Going forward, the company needs only to replicate its 2009-2012 regulatory and commercial execution, and to continue to negotiate successfully through the continuing cost containment efforts of governments and insurers. I believe they will.
Does that cake still need icing?
Valuation, despite the recent run by both the sector and Celgene, has arguably not kept pace with Celgene's rapidly changing outlook, at least relative to its peers. At a share price of about $99, Celgene shares trade at a 2013 price-earnings ratio of 17.5 (using 2013e EPS $5.66) and a five year forward PE to growth ratio (PEG) of 0.76 (using their target-derived 23% EPS CAGR). Its peers (AMGN, BIIB and GILD) currently trade at PEGs of over 1.00, comfortably so in the case of BIIB.
As investors digest the data for Abraxane (in pancreatic cancer), for Apremilast (in psoriatic arthritis and psoriasis), and, assuming the data are supportive, for Revlimid in NDMM, among others, the commercial implications of same, and once investors believe the regulatory and commercialization hurdles will be successfully executed, they should begin to realize that Celgene's current valuation deserves at least parity with, if not a premium to, those of its peers.
As noted above, many of these events are to occur either in the near term or later in 2013, so "seeing will be believing, without further delay." For these reasons, a number of analysts have named Celgene their number one rated stock among large cap biotechs (pretty healthy competition, it's worth noting) for 2013. It's mine, too. Chocolate fudge, please.
Disclaimer: Readers are cautioned that the above statements represent the opinions of the author, who is not a registered investment advisor, and they are not intended, and should not be construed, as a recommendation to buy or sell any security or otherwise as investment advice. Investors should do their own due diligence to ascertain whether any company mentioned would be a suitable investment in light of their personal circumstances, risk tolerance, and time horizon.