It's been a slow quarter for news out of Celgene (NASDAQ:CELG), which reported Q1 results today. The company has a new CEO, Mr. Alles, a well-regarded executive. I expect him to go easy on the late-stage acquisitions. CELG has numerous irons in the fire, which I will try to put in context a little later.
As explained in my recent article Competitive And Legal Threats To Celgene, I suspect that CELG got so very acquisitive last year because it is aware of those threats; that's my current guess - there's no way to know for sure. Principal among these threats is the patent threat to its flagship product Revlimid, most prominently in the US and secondarily in the EU. I'll have more to say about this key topic later. Also importantly, its blockbuster Abraxane has been the subject of a patent challenge.
So in order to keep the investor community optimistic, CELG has a dual challenge. The easier one is to grow sales and earnings rapidly, something it's been great at. The more difficult one is to move forward on its large, diverse pipeline.
First up, some data and comments on Q1 results and guidance for 2016.
CELG reports another quarter of growth
The company reported EPS of $0.99 per share in Q1:
Based on U.S. GAAP (Generally Accepted Accounting Principles), Celgene reported first quarter of 2016 net income of $801 million or $0.99 per diluted share. For the first quarter of 2015, net income was $719 million or $0.86 per diluted share.
This was achieved via 21% yoy sales growth, with limited harm from forex after hedging.
Revlimid thoroughly dominates at CELG:
Net Product Sales Performance
- REVLIMID® sales for the first quarter increased 17 percent to $1,574 million. Growth was driven by increased market share in newly diagnosed multiple myeloma and increases in duration. U.S. sales of $997 million and international sales of $577 million increased 23 percent and 8 percent, respectively.
- POMALYST®/IMNOVID® sales were $274 million, a 38 percent increase year-over-year. U.S. sales of $171 million and international sales of $103 million increased 33 percent and 47 percent, respectively. POMALYST®/IMNOVID® sales were driven by increases in market share and duration trends.
- ABRAXANE® sales for the first quarter were $225 million, a 1 percent increase year-over-year. U.S. sales of $144 million and international sales of $81 million decreased 10 percent and increased 26 percent, respectively. The decrease in sales in the U.S. reflects quarterly customer buying patterns and increased competition in breast cancer and lung cancer from new market entrants.
- OTEZLA® sales in the first quarter were $196 million, a 224 percent increase year-over-year. Growth was driven by market share gains in the U.S. and Europe. U.S. sales were $175 million and international sales were $21 million.
- In the first quarter, all other product sales, which include THALOMID®, ISTODAX®, VIDAZA® and an authorized generic version of VIDAZA® drug product in the U.S., were $226 million compared to $230 million in the first quarter of 2015.
Again, this dominance is something I'll discuss below.
Guidance was updated, and was not thrilling:
2016 Guidance Updated
Net Product Sales: Total $10.5B-$11.0B $10.75B-$11.0B REVLIMID® $6.6B-$6.7B Approximately $6.7B POMALYST®/IMNOVID®
Greater than $1.0B
Greater than $1.0B ABRAXANE® Greater than $1.0B $950M-$1.0B OTEZLA® Greater than $1.0B Greater than $1.0B Adjusted operating margin Approximately 53.5% Approximately 53.5% GAAP operating margin Approximately 42% Approximately 42% Adjusted diluted EPS $5.50 to $5.70 $5.60 to $5.70 GAAP diluted EPS $4.26 to $4.64 $4.26 to $4.56 Weighted average diluted shares 825M 811M
Note that even non-GAAP guidance was barely increased, and GAAP guidance, which is all I really pay attention to with CELG, was flat to marginally down. So that's uninspiring. It's especially uninspiring given that the company has increased its guidance for shares being bought back. So, GAAP EPS guidance is definitely a bit lower now than it was three months ago. One reason for this is that once again, Abraxane sales are coming in light to the company's expectations.
Given CELG's status as one of the great oncology companies - a truly transformative one - I find it a little disconcerting that it repeatedly has 'missed' on its own Abraxane expectations. The way I learned the pharma business was to always keep an EPS ace in the hole; and, if you're not sure of what's coming, keep your corporate mouth shut.
The company also issued updated guidance for next year and its targets for sales in 2020. However, if it does not know Abraxane sales one-two quarters ahead, why is it issuing sales projections 4-5 years from now?
Milestones for 2016 updated
Slide 36 of the PowerPoint presentation accompanying the conference call is very important for investors looking to get a handle on some of the many moving parts in this company.
What investors may want to focus on is that there is limited Phase 3 data coming this year. The REMARC study on Revlimid in a form of lymphoma was the subject of a question. This is an attempt to expand usage of Revlimid to a common form of lymphoma. The design of the trial is that progression-free survival is the primary endpoint. Overall survival is a secondary endpoint. CELG (Jackie Fouse) expressed confidence that this design could allow FDA approval so long as the survival trend is in the right direction, even if it fails to meet statistical significance; the power of the study is not strong enough for CELG to expect to achieve that. The question remains about how successful Revlimid will be in this setting if it lacks a proven survival benefit.
Also noteworthy is that another section of that slide shows one planned regulatory submission each for Revlimid, Pomalyst and Otezla, and only one minor expected regulatory decision (for Revlimid in a rare cancer in the EU).
Also of note are the plans for multiple pivotal clinical trials to be or to have been initiated this year, and quantitative progress on the pipeline.
Next, I want to say a few words about the Street's view of Revlimid.
Analysts begin to focus on the Revlimid patent cliff
As I mentioned in the recent article linked to above, Revlimid has a patent cliff which may be closer than planned. For the first time I can remember, more than one analyst specifically questioned the company about its plans to replace Revlimid revenues.
CELG is well aware of these concerns. Slide 20 of the PowerPoint lists "Celgene Drugs in Development." However, it does not say that they are specifically for myeloma.
When asked about this topic in detail, Ms. Fouse was a little vague. There was talk about segmenting myeloma variants, and some general mention about using the knowledge of immuno-oncology CELG had gained from Revlimid and the other IMiDs to develop new drugs for myeloma. It sounded to me as though it is going to take a long time to "get there." All the while, competition is intense. And a generic version of Revlimid with proven survival benefit with other drugs is going to be attractive to doctors and payors.
I do not recall hearing any questions about the patent challenge to Abraxane, but even if sales growth is tough with that product, if it goes generic in the US this decade, that will be a moderate but non-trivial negative to investors.
There's a lot of fodder for a future article in the slides, but it's better to leave it for a future article. Two points did catch my eye. One is how much runway Revlimid has for future growth. Another, which is early, comes from Slide 31 about Otezla. Has its market share already tended to peak both in psoriasis and psoriatic arthritis?
Concluding thoughts - CELG remains a relatively aggressive play
Based on the idea of "trading the traders," or trading the analysts in this case, I did not love the tone of the questioning about the Revlimid patent cliff. The Street is now thinking deeply about this, and there's no valuation upside when it does that.
If we make the assumption of rapid growth in EPS through 2020, we can get to $10 per share EPS in that year. Assuming that, imagine that you are looking at CELG in February 2021. If CELG fails in its appeals on the EU patents, then Revlimid goes generic in 2022. I'm not sure what month that is, but if it's early in the year, that guarantees more or less that 2021 will be the peak year for Revlimid sales. Then, it all depends on how the Mylan (NASDAQ:MYL) attempt to get a generic Revlimid (lenalidomide) to market in the US goes, as I discussed in my prior CELG article. Even if there is no generic in the US, there is the staggered but eventually rapid patent cliff per the settlement between CELG and Natco-Allergan (NYSE:AGN).
Under those circumstances, what P/E would CELG merit with its single dominant product headed toward zero in sales from over $10 B?
Why not 10X? If so, then might not the stock be at $100 in Feb. 2021? Even 12X leaves the stock overpriced at its current $107.
If that's reasonable to at least consider, what's a fair price for CELG right now? I doubt that there will be a dividend payout any time soon; management appears to favor buybacks.
Of course, to ask those questions is not to be able to answer them. I do not really know what CELG will be earning in 2020, how strong its other operations will be, how the Revlimid patent cliff will look in detail, or how promising its pipeline will then look.
The unfortunate aspect of asking these difficult questions about a very popular stock is that in the most important sense, CELG is "my type of company." It has succeeded via innovation and with tough, smart patent work. It is driven to succeed by heavy investment in R&D. Society is better off when it succeeds, as it often does. So I'm definitely a fan of CELG and rooting for it. I just cannot predict how many dollars of profits its current, broad crop of pipeline drugs is going to produce. All I know is that by 2020-21, Revlimid is essentially certain to remain quite dominant within this company, and so again I think of GILD and AAPL and their recent P/Es.
So, for now, Revlimid and Abraxane patent reasons keep me on the CELG sidelines, preferring some other names in the biotech field at current valuations with at least a 3-5 year time frame for essentially all of them.
Disclosure: I am/we are long GILD,AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not investment advice. I am not an investment adviser.