The entire world of investing is admittedly an enormous case study in abnormal psychology, but biotech seems to have a bit more than its share. For instance, there are not too many other sectors where a large portion of investors actively ignore companies with established records of success in favoring of betting on awful little companies with collectively minimal chances of success.
So although I realize it would probably be better for my pageview numbers to review another sub-$5 oncology biotech wannabe, I am instead going to look at Celgene (CELG). Celgene shares are not what I would call cheap, but the odds of Celgene (still) being a successful company in 2020 is quite a bit better than for the majority of biotech stocks.
Revlimid - Already A Blockbuster, But About To Become Even More So
Here's part of what makes Celgene an interesting company to me - Revlimid is already a blockbuster (over $3 billion in sales), but the incremental sales opportunity simply from getting first-line labeling in Europe could be worth another $500 million to $1 billion (or more) in incremental sales.
Keep in mind, too, that the drug was recently approved in Japan, an approval decision is pending in China, and Celgene is funding additional studies that could meaningfully expand the label (including lymphoma and leukemia). These later studies in particular could be highly value additive, as the company won't have to increase spending all that much to leverage the additional revenue potential.
Like any drug, there are still risks with Celgene's Revlimid franchise. Although Revlimid is definitely the share leader for multiple myeloma, Velcade (co-marketed by Takeda and Johnson & Johnson (JNJ)) is a worthwhile competitor. What's more, there are drugs like Onyx's (ONXX) carflizomib that could hit the market and sap some of Revlimid's momentum. Generic competition is also a risk - Natco and Watson (WPI) are challenging some of Celgene's patents - though I don't think there is an especially large chance that the patent challenge will succeed.
Abraxane Still Up In The Air
Celgene paid nearly $3 billion to acquire Abraxis in 2010, in a deal that was controversial at the time. While Celgene shares have continued to climb since then, the deal still hasn't really proven itself. Abraxane sales have been just "okay" in breast cancer and attempts to extend the label to lung cancer have likewise not gone to plan.
There's still some hope that a trial of Abraxane in pancreatic cancer will support label extension to this very under-treated disease (which has, I believe, only one labeled monotherapy option). Phase 2 results were indeed encouraging, but grizzled investors have seen this before - drugs like Avastin, Erbitux, and Xeloda all looked pretty good in Phase 2 studies, only to see efficacy drop off significantly in Phase 3 studies. In addition to the pancreatic cancer indication (which is low-probability/high-potential), there's the possibility of getting a label extension in melanoma. Investors should consider, though, that the introductions of Yervoy and Zelboraf could lift the standards of what Abraxane has to deliver in terms of efficacy to be commercially significant here.
A Solid Pipeline
While all many oncology biotech investors want to talk about is pipelines, Celgene's pipeline is sometimes overshadowed by the significance of its marketed drugs. That's a mistake, though, as there could yet be some future blockbusters lurking here.
Apremilast is Celgene's entry into the oral RA market. Data should be coming relatively soon from the company's pivotal studies in psoriatic arthritis and psoriasis, while studies in ankylosing spondylitis and rheumatoid arthritis are further back. Though this drug has shown some bothersome GI tolerability issues, if the efficacy results seen in earlier studies holds up, it should be a worthwhile competitor to Enbrel (marketed by Pfizer (PFE) and Amgen (AMGN)) and Abbott's (ABT) Humira.
That said, "worthwhile" is not the same as blockbuster, and apremilast is probably not a major blockbuster in the making. What's more, with Pfizer's own oral alternative coming along (tofacitinib), there will likely be a lot of head-to-head marketing competition.
Celgene's pomalidomide looks more promising. With potential in myelofibrosis and second-line multiple myeloma, it could be a billion-dollar drug that will fit in nicely with Revlimid. It will be interesting (to me, at least) to see how this drug ultimately stacks up against Incyte's (INCY) Jakafi and whether or not two successful myelofibrosis drugs affect the potential market for YMI's (YMI) CYT387 if that drug's anemia benefit holds up in pivotal studies.
Behind these drugs, Celgene is also developing a kinase inhibitor for idiopathic pulmonary fibrosis, stem cell-based therapy for autoimmune disease like Crohn's, MS, and RA, and a host of additional potential oncology drugs.
Is Celgene Too Eager To Pull Out Its Wallet?
Like any other biotech or drug company, Celgene faces the risks that its pipeline candidates won't work, that reimbursement will worsen, and/or that competitors will develop more effective drugs (or market existing drugs more effectively).
Beyond that, though, is the risk that the company will continue to spend aggressively on acquisitions. Thus far, the Abraxis deal is looking pretty iffy; unless Celgene gets follow-on usage in melanoma or pancreatic cancer, investors are looking at a single-digit IRR. Likewise, the deals for Pharmion and Gloucester don't look like huge value-adds for Celgene shareholders at this point (though it's still early).
More recently, the company decided to acquire Avila Therapeutics. In exchange for $350 million in cash and nearly $600 million in potential milestones, Celgene gets Avila's protein silencing technology and its early-stage AVL-292 drug.
Given that the recent partnership between JNJ and Pharmacyclics (PCYC) could see JNJ pay nearly $1 billion in milestones for PCI-32765, a Bruton's tyrosine kinase inhibitor like AVL-292, the price tag doesn't seem so outrageous, but it's a risk all the same. Likewise, who knows if companies like Seattle Genetics (SGEN), Ziopharm (ZIOP), Exelixis (EXEL), or Onyx could attract a similar bid at some point.
The Bottom Line
Even if Celgene management is a little too much in love with M&A, the shares are nevertheless worth some consideration - both from the ongoing growth potential of Revlimid and Vidaza (acquired in the Pharmion deal), as well as the potential of the pipeline.
Celgene is likely to post low-teens revenue growth out through at least the next five years, with some upside if label extension studies add to potential of Revlimid or Abraxane. Just as important, Celgene does a phenomenal job of translating revenue into free cash flow and does so at a rate that only a rare few other drug companies (Amgen and Gilead among them) approach.
All in all, then, Celgene shares look to be worth something in the mid-$90s on the basis of the company's probable free cash flow trajectory over the next decade. While that admittedly pales in comparison to the multi-bagger dreams that many biotech investors carry with them, the reality is that Celgene's downside is far less frightening and there's actually a better than average chance that Celgene will find the success that so often eludes small-cap biotechs.