Celgene Corp.: Time to Buy This Cancer Drug Play?

Apr. 5.11 | About: Celgene Corporation (CELG)
The Japanese nuclear disaster reminds us of our frailty in the wake of man versus nature. Similar to Chernobyl, Japan's population will face higher cancer incidence rates, likely in the form of thyroid, sooner, and myeloma, later, as they’re the more commonly occurring cancers post exposure. As investors, we can be thankful biotechnology companies, including Celgene Corp. (NASDAQ:CELG), are developing products to fight cancer. But is now the right time to buy?
Celgene has some great attributes. First, it’s a cheap stock, trading at 14x 2012 estimates, which is below the 5 year PE low of 17x. Second, it has a powerful cancer fighting drug, Revlimid, which is used to treat multiple myeloma.
But, there are reasons Celgene is trading cheap. First, it's an acquirer which means investors have dilution and balance sheet risk. Second, the company has had to offset sales declines in its Thalomid franchise, where revenue fell 15% lower year-over-year last year. Third, the company will face generic risk here in the U.S. later this year for its Vidaza drug, used to treat myelodyasplastic syndrome (aka. MDS), a bone marrow disorder predominately affecting populations over 60.
The biggest overhang, however, is trial data regarding secondary cancer in patients receiving maintenance doses of its top selling Revlimid. In December, increased risk of secondary cancers when Revlimid was used in patients who had also been treated with the chemotherapy drug melphalan was reported. This prompted an official investigation by the European Medicines Agency, and potentially increased FDA scrutiny.
How important is Revlimid to Celgene? Very. Revlimid generated $2.5 billion of Celgene’s $3.6 billion in sales in 2010. And, Revlimid is growing fast, with revenue rising 45% last year. So, if Revlimid’s reputation gets tarnished, or worse, if Revlimid’s use is restricted, the impact would be great.
This means the two upcoming conferences, the International Myeloma Workshop (IMW) on May 3 through May 6 and the ASCO 2011 meeting on June 3 through June 7, will be very important to Celgene and investors.
Specifically, investors will be watching for updated information regarding Revlimid’s secondary cancer risk, potentially positive progression rates and hopefully (for long investors and cancer patients) improved insight into survival rates. If we assume, given secondary cancers are already a risk in multiple myeloma patients, eyes will end up focused on progression and survivorship, and Celgene’s stock provides upside opportunity ahead of the meetings.
Clearly, there is a risk here. But given Revlimid has revolutionized multiple myeloma treatment, there is also substantial upside. Celgene is trading 25% off its 2008 high, despite expectations of 21% EPS growth in 2011, 20% EPS growth in 2012 and forecasts of a near doubling in revenue in 2015. But, Revlimid isn’t the only drug Celgene has in its product line. Offsetting domestic generic risk to Vidaza is rising global adoption of the drug. Last year, international Vidaza sales were up 50%. And, despite falling Thalomide sales, the drug still generated $387 million in sales in 2010.
Outside of Revlimid’s potential expansion into treating other cancers, such as prostate cancer, the company also has Abraxane, which it got in last year’s Abraxis acquisition. Abraxane treats metastatic and recurrent breast cancer and may also have a future treating lung, malignant melanoma and pancreatic cancer. Overall, CELG estimates Abraxane sales could hit $1 billion by 2015. And the company got the drug Istodax when it bought Gloucester Pharmaceutical in 2010. Istodax treats cutaneous T-cell lymphoma. Further down the pipeline, products treating sickle cell anemia, psoriasis, inflammation and small cell lung cancer are being developed.
Celgene will conceivably acquire another biotech company, given it's sitting on $2.6 billion in cash and equivalents. For now, however, the company is buying back shares. In February, CELG added another $500 million to January’s $1 billion buy back program.
Overall, Celgene offers investors enough reward to justify buying shares ahead of the conferences and enough risk to suggest using a stop loss. If the stop loss is triggered, keep an eye on the conferences before revisiting the trade. After all, clarity is often rewarded and cancer treatment, unfortunately, is a growth industry.
Disclosure: I am long CELG, AMGN, BMY, PFE.