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Celgene (NASDAQ:CELG), incorporated in 1986, has just surpassed $60 billion in terms of capitalization which is a great achievement for a pharmaceutical concern in the current hypercompetitive environment.

Celgene's success stems from its drug discovery and acquisition focus that targets high value areas such as intracellular signaling pathways in cancer, immune cells and autoimmune diseases.


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Celgene's current commercial stage products include Revlimid, Vidaza, Abraxane, Pomalyst, Thalomid and Istodax. Combined they are expected to generate $6.2 billion in 2013. Add in royalties from Focalin and Ritalin licensed to Novartis (NYSE:NVS) and the sale of services through its Cellular Therapeutics subsidiary and Celgene would be looking at generating close to a total of $6.3 billion.

At current share price levels, Celgene is now valued at close to 10 times 2013 revenue; higher than any other pharmaceutical company its size. Since more than 83% of Celgene's shares are held by institutional investors, seasoned experts in valuation and guardians of other people's money, we thought it prudent to re-examine growth prospects of its commercially approved product portfolio to see if current valuation levels are justifiable.


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Revlimid (lenalidomide)

Revlimid, an oral immunomodulatory drug approved for treatment of patients with multiple myeloma who have received at least one prior therapy, generated sales of $3,767 million in 2012, an increase of $559 million, or 17%, compared to 2011.

Revlimid, which is also approved for the treatment of transfusion-dependent anemia due to low- or intermediate-1-risk myelodysplastic syndromes associated with a deletion 5q cytogenetic abnormality, continues to be evaluated in numerous clinical trials for the treatment of a broad range of hematological malignancies.

Based on Celegene estimates of $4.3 billion in global sales for Revlimid in 2013, an increase of 14% over 2012, the product is expected to continue to account for over 68% of total company revenue.

Revlimid is a already a blockbuster that competes in an increasingly crowded hematological oncology market that is forecast to experience slowed growth over the coming years. In our opinion, further growth beyond 2013 will be tempered and will likely slow down Celgene's overall medium-term revenue growth prospects.

Vidaza (azacitidine)

Vidaza, an injectable pyrimidine nucleoside analog for the treatment of patients with myelodysplastic syndromes, achieved net sales of $823 million in 2012, an increase of $118 million, or 17%, compared to 2011.

Vidaza, which will retain orphan drug exclusivity in Europe through the end of 2018 and in Japan until January 2021, has lost US regulatory exclusivity in May 2011. If a generic version of Vidaza is successfully launched, Celgene may quickly lose a significant portion of its sales for this product.

Abraxane (paclitaxel)

Abraxane, injectable paclitaxel albumin-bound particles, is a chemotherapy treatment option for metastatic breast cancer and non-small cell lung cancer. Celgene acquired the product, together with Abraxane Bioscience Inc., in October 2010 for $2.9 billion.

Abraxane net sales reached $427 million in 2012, an increase of $41 million, or 11%, compared to 2011. In September 2013, the FDA expanded the approved uses of Abraxane to treat patients with late-stage pancreatic cancer.

Pancreatic cancer is the fourth leading cause of cancer death in the U.S. with an estimated 45,000 patients diagnosed every year. Surgery is currently the only option to permanently remove or cure pancreatic cancer, but it usually is too late for surgery by the time the cancer is diagnosed so Abraxane fortunes are on the rise and the product might reach a blockbuster status.

However, paclitaxel, the active ingredient, is an old molecule discovered in 1967 and is practically a commodity generic. The main competitive advantage of Abraxane is its targeted delivery system, so pricing maneuverability and medium range growth prospects may be limited due to competition from the many generic paclitaxel formulations that are flooding the market.

Pomalyst (pomalidomide)

Pomalyst, a small molecule orally administered immune system modulator, was approved by the FDA in February 2013 for patients with multiple myeloma who have received at least two prior therapies.

Pomalyst second quarter sales, the first full quarter of sales in the US, reached $66 million and the product was approved in Europe in August 2013. Such impressive performance points to a potential blockbuster status especially that the product is also being evaluated in a phase III clinical trials for the treatment of myelofibrosis and for expanded usage in multiple myeloma. Already analysts are forecasting sales of slightly over $1 billion by 2017.

Thalomid (thalidomide)

Thalomid, marketed for patients with newly diagnosed multiple myeloma, achieved net sales of $302 million in 2012, a decline of 11% compared to 2011.

Thalomid, an old molecule that should not have been re-approved for human consumption in the first place, is expected to continue a declining trend till it gets replaced with newer molecules with cleaner side effect profiles.

Istodax (romidepsin)

Istodax, approved for the treatment of cutaneous T-cell lymphoma in patients who have received at least one prior systemic therapy and for the treatment of peripheral T-cell lymphoma in patients who have received at least one prior therapy, realized sales of $50 million in 2012, an increase of $19 million, or 62%, compared to 2011.

Istodax, acquired in January 2010 together with Gloucester Pharmaceuticals for a total of $640 million, has also received orphan drug designation for the treatment of non-Hodgkin's T-cell lymphomas, however, overall it is a niche product and is not expected to reach a blockbuster status.

Apremilast

Apremilast, Celgene's lead product candidate in the inflammation & immunology space, is currently being evaluated in a broad phase III program for psoriatic arthritis, psoriasis, and ankylosing spondylitis. The product, which is currently under active regulatory review, is on track for a possible U.S. launch in 2014. However, Celgene's guidance which implies sales of up to $2 billion in 2017 contrasts with analysts' estimates of less than $1 billion.

Valuation

P/E 41
Price to Revenue 10
Price to Cash Flow 32
Price to Book 11

Celgene is a very successful company with impressive track record and a great potential moving forward. Most analysts' recommendations are for a strong buy, with few analysts recommending a buy rating and even fewer recommending a hold.

However, in our opinion, current valuation level seems rather exuberant and seems to fit a speculative play rather than a maturing pharma concern.

We do understand that this view is rather contrarian, however it seems that the stellar rise in share price could have been fueled by the company re-purchasing its own stock and the fact that most of the shares are tightly held within a small group of institutional investors.


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Celgene, which has never declared or paid any cash dividends on its common stock and saw its share price double over the past year, has repurchased approximately $1.8 billion worth of its common stock since the beginning of the year.

Company Ticker P/E P/S
Amgen AMGN 18.7 4.8
Johnson & Johnson JNJ 19.4 3.7
Celgene CELG 41 10.9

Amgen (NASDAQ:AMGN) and Johnson & Johnson (NYSE:JNJ), which compete with Revlimid, Thalomid and Pomalyst in the multiple myeloma space and are impressive companies in their own right, have comparatively very low price-to-earnings and price-to-sales ratios.

Celgene has increased adjusted diluted EPS guidance, for 2013, to a range of $5.80 to $5.90 from the previous range of $5.55 to $5.65, an increase of approximately 19% over 2012 adjusted diluted EPS.

Celgene has also increased total net product sales guidance to $6,200 million from $6,000 million, an increase of approximately 15% compared to 2012. However, even at those new upwardly revised estimates a valuation of close to 10 times sales seems rather rich.

Celgene, which had $4 billion in cash and marketable securities at the end of the second quarter of 2013, has authorized the repurchase of up to an additional $3 billion of its common stock.

If I was a fund manager holding Celgene, but looking to maximize value for my investors, I would take some of that cash and invest in a more rationally priced stock or simply keep it for a rainy day. I could even re-invested back in Celgene once its value settles back to a more sustainable level.

Source: Celgene: Strategic Valuation For Fund Managers And Institutional Investors