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Recently, analysts at Bank of America have increased their target price for Celgene Corporation (CELG) from $164 to $179. The bank has taken a buy stance on this stock. In this article, I look forward to analyze this raise in target price and the basis for this decision.

Core activities

Celgene is a pharmaceutical company that concentrates its activities on the development of innovative therapies for the treatment of cancer and immune inflammatory related diseases. Additionally, the company is also actively working on entering the psoriatic drug market. The company's future heavily depends on its research and development activities. The resulting drug candidates in its pipeline can provide the catalysts for future growth. Apart from new product approvals, the company can also market its existing products in new markets and/ or find expanded usage of its existing products.

The future blockbuster drug

The company had been focusing its research and development on coming up with a drug to treat psoriatic arthritis for quite some time now. Yesterday, the company's subsidiary, Celgene International Sàrl, announced the results of its phase III study on apremilast at the Association of Rheumatology Health Professionals (ARHP) annual meeting 2013.

The clinical testing has shown significantly positive results with no major safety concerns. It is expected that apremilast can be recommended on a standalone basis as a first line therapy. Thus, the company has filed a drug application for the approval of its drug to the US and Canadian health authorities.

The potential US market

Psoriasis, which affects 7.5 million Americans per annum, is the most prevalent autoimmune disease in the nation for which there is no full and perfect cure yet. As many as 30 percent of the people with psoriasis are normally diagnosed with psoriatic arthritis, a specific form of arthritis that is painful and debilitating and causes joint damage. Thus, a successful approval will provide Celgene an opportunity to penetrate into its target market which upholds a significant potential to drive its revenues and profits higher.

According to a research conducted by National Psoriasis Foundation, the disease strikes between the age 15 and 25. Approximately 14% of the country's population falls under this age bracket as per the data released by US Census Bureau, 2010. This translates into nearly 44 million people as of July, 2012. Even if a small percentage of the people get affected by this disease, it may be large enough to be able to add big numbers to the Celgene's top line.

The next in line: Europe

The company plans to submit the drug approval for psoriatic arthritis in Europe by the end of calendar year 2013. Let's take a look at the prevalence of this disease in this continent and the competitive landscape which will determine Celgene's success in the European market.

In Europe, the prevalence of psoriasis varies from 0.6 to 6.5% of the total population. With a total European populace of 733 million, this translates into a potential market size of 4.4-47.6 million. Since the incidence of this disease is usually more common in the colder north, it generally affects the people of European descent and less in Japan. These figures indicate that the company can access a huge market by introducing its product in this region.

Fundamentals

Source: Morningstar

The rigorous research and development activity of Celgene has helped the company in registering almost double growth in its top line, compared to the peers in the biotechnology industry, with a similar growth in its bottom line as well. The company continues to invest as much as 31% of its revenue in its research and development activity which helps the company in coming up with breakthrough drugs. Thus, the company has been able to post higher revenue and profits year on year. The successful launch of many drugs resulted in the persistence of a higher margin for Celgene compared to the industry's normal level. With Apremilast nearing FDA approval in the US, I expect the company to be able to sustain these high margins in the future as well.

Competitive Landscape

The approval for apremilast will take the company outside its core haematology and oncology focus. Entering into this new market, the company's apremilast is likely to face competition from the existing drugs selling in the markets of US and Europe that attempt to control psoriatic arthritis.

The US FDA and European Union have recently approved ustekinumab for the treatment of active psoriatic arthritis in adults that have not responded adequately to previous non-biological disease-modifying antirheumatic drug therapy. Ustekinumab is already approved in the US and EU for the treatment of moderate to severe psoriatic plaques in adults.

Amgen/Pfizer's Enbrel (etanercept) was the first biologic approved in Europe for the treatment of psoriatic arthritis. The drug was able to generate global sales of $4.23 billion last year for the company on the back of double digit sales increase in the third quarter.

Novartis' psoriasis drug, Secukinumab, has also shown significantly efficient results in its phase III trial which can be a potential threat for Celgene.

Conclusion

Despite the fact that competitive pressures may exist for Celgene's drug, the current market size is quite large and continues to grow with the increase in population. With its more efficacious results, Celgene may turn the game in its favor. Thus, in my opinion, the raise in the target price to $179 is justified and at current stock price of $146, the stock offers decent return to investors.

Source: Celgene Offering Decent Return To Investors