Celgene (NASDAQ:CELG) has agreed to pay $200 million up-front to the junior biopharma Agios (NASDAQ:AGIO), in yet another deal that makes me wonder if the money is being well-spent. It's not even clear that AGIO has been a good investment so far, yet CELG is doubling down on its 2010 deal with AGIO (then a private company).
There is basically no material difference between the 2010 and 2016 press releases, which both for fun and to make the point I show here with identifying words omitted. Which is from which year? What progress, if any, does one show versus the other?
Agios Pharmaceuticals, Inc. and Celgene Corporation today announced an agreement creating a new global strategic collaboration focused on metabolic immuno-oncology, an emerging field of cancer research focused on altering the metabolic state of immune cells to enhance the body's immune response to cancer. The goal of the collaboration is to discover, develop, and commercialize novel therapies based on Agios' innovative cellular metabolism research platform. Agios will receive an upfront cash payment of - million plus the potential for additional payments if certain development and regulatory milestones are achieved...
Agios will receive an upfront cash payment of - for the initial four-year research term. Celgene has the option to extend the research term for up to two years for a pre-specified amount.
Celgene Corporation and Agios Pharmaceuticals Inc... today announced the formation of a global strategic collaboration focused on targeting cancer metabolism. The goal of the collaboration is to discover, develop, and deliver novel disease-altering therapies in oncology based on the transformational science of Agios' innovative cancer metabolism research platform...
Under the terms of the agreement, Agios will receive a - million upfront payment... In return, Celgene receives an initial period of exclusivity during which it has the option to develop any drugs resulting from the Agios cancer metabolism research platform. In addition, Celgene may extend this exclusivity period through additional funding. If successful, Agios would receive substantial regulatory, clinical, and commercial milestones.
Pretty similar, wouldn't you say?
What has CELG gotten from the deal so far?
The 2010 Agios deal - review
AGIO now has three pipeline products that CELG had been involved with, AG-120, AGIO-221, and AG-881.
These are clever and impressive drugs in that they treat cancer, principally acute leukemia, orally. However, they only work when the cancer has a mutant enzyme, IDH (either type 1 or 2).
Part of this current agreement is that CELG is giving up its ex-US marketing rights to AG-120. Apparently, it is moving through the pipeline too slowly and/or the markets it addresses are not large enough. That leaves CELG with Phase 3 AG-221 as the one farthest along. Clinicaltrials.gov shows its approximate primary completion date as April 2019. That would mean a 2020 launch if it's successful, and it's only for relapsed/refractory cases, not front line use.
AG-881 is in Phase 1.
I'm not up on the details of what further equity and/or milestone investment CELG has made with AGIO pursuant to this deal; I believe there has been some.
The problem with these drugs is, as AGIO said on its Tuesday conference call (no transcript at this point) is that its products address small markets because they require the specific mutation(s) to be present.
This raises the question of why CELG talked up the AGIO deal over the years. In the 2 years that I've been following CELG especially closely, AGIO was one of the two partners it talked about the most when it discussed its broad partnering strategy.
Another detail of the deal is troubling.
CELG cedes control
Note what's said and what's not said:
- Agios will receive an upfront cash payment of $200 million for the initial four-year research term...
- Exploratory research, drug discovery, and early development will be led by Agios.
There's no mention that CELG is going to have any say about what AGIO studies.
That point was the topic of a question in the Q&A. AGIO confirmed that while CELG will be on joint committees, this is AGIO's research. Then if CELG likes a project, it can partner with AGIO. The press release outlines some of the terms, which I'll omit for brevity, with a majority ownership share of the first drug it chooses, then an equal split thereafter.
I could, of course, be wrong but in general, the tough big players in pharma such as J&J (NYSE:JNJ), Gilead (NASDAQ:GILD) and Pfizer (NYSE:PFE) do not like to dish out $200 MM in return for the right to pay more money in order to share distribution rights for some random drug that a tiny company might happen to develop.
Is that an overly harsh statement? Here's the additional evidence, also from the press release:
- Generally, collaboration programs may be designated by Celgene when preclinical studies begin, and Celgene will then have an option on each program up through Phase 1 dose escalation for at least a $30 million fee [what does this "at least" imply? How do they decide? ed.].
Economic Terms on Optioned Programs:
- For metabolic immuno-oncology programs, Celgene and Agios will enter into a global co-development and co-commercialization agreement with a worldwide 50/50 cost and profit share. Agios is eligible for up to $169 million in clinical and regulatory milestone payments for each program.
This deal only goes for 4 years, and it's only in a pre-clinical stage as of now. Just to extend the deal to 6 years, CELG has to fork over additional cash (amount unspecified in the press release).
If CELG has a spare $200 MM and loves AGIO so much, why doesn't it fund AGIO with newly-issued AGIO stock at market price? AGIO needs CELG a lot more than CELG needs more pre-clinical candidates. CELG could also require right of first refusal on any of the "MTAP" candidate that are the subject of this latest agreement that reach Phase 1 testing, or something like that.
No matter how reasonable the deal CELG made a number of years ago may have been when it was much smaller, more recently it continues to take actions that raise the question of how weak its internal drug discovery efforts really are.
Last year's deals were chancy
I moved from a very bullish posture on CELG to a more neutral one in the middle of last year when it made what I believed was an overly generous deal with Juno (NASDAQ:JUNO) for access to its CAR-T platform, though of course, it might work out fine for CELG. I also thought that CELG was over-eager with its partnership with AstraZeneca (NYSE:AZN) for access to its checkpoint inhibitor. These topics were discussed in a July 2, 2015, article titled Multiple Observations On Celgene's Latest Licensing Deals, And Its Valuation, which is behind a PRO firewall.
My steady criticism has been that CELG is such an important, dominant company that it should have been making deals on more favorable terms.
I see this AGIO deal as continuing this pattern.
CELG as a little unfocused and too R&D-heavy versus peers
Almost anyone who has read this far is aware that CELG has a large R&D program, and lots of debt. There is no right or wrong with how much to spend on R&D. Steve Jobs used to boast about how little Apple (NASDAQ:AAPL) spent on R&D - but they spent it very efficiently.
Right now, rather than spending hundreds of millions of dollars on pre-clinical compound, I'd rather see CELG:
- beef up its internal product development capability
- acquire more candidates internally for full control
- take a step back from deal-making and let the pipeline stand and deliver, and/or
- do tuck-in acquisitions that are accretive to GAAP EPS.
Several other companies with which I compare CELG appear to me to have more coherent strategies:
Gilead knows that it grew too fast with its front-loaded massive HCV drugs to be able to ramp its R&D anywhere near that fast. Thus, it has implemented an aggressive capital return program and has (rightly in my opinion) been careful about paying overly high prices to do deals. That makes sense to me, as the whole point of investment is to get a return, which CELG refuses to do for shareholders. In contrast to GILD, CELG pays no dividend and its shares outstanding are about the same as they were in 2006. GILD, in contrast, has about 25% fewer shares outstanding than it did in 2006 (Value Line data).
Regeneron (NASDAQ:REGN) has a top-tier discovery engine, and though it's learning a painful lesson on the facts of commercial life with its overpriced Praluent, there are numerous arrows in its pipeline quiver. Whereas, the many deals that CELG is doing at much lower margins than it enjoys today are going to lead to a lower P/E.
Another drug company that has morphed from Big Pharma to more of a biopharma/biotech company, Novo Nordisk (NYSE:NVO), resembles CELG in that it is a globally dominant company in its field (along with Lilly (NYSE:LLY)). NVO pays a dividend, shrinks its shares outstanding every year, has no long-term debt, and has a focused pipeline that's almost all internally-generated, with industry-standard assistance from small controlled-release technology companies.
So on the one hand, I look at other peers to CELG as offering clearer growth and/or value stories; those are my favorite stocks right now.
On the other hand, Revlimid and its sibling Pomalyst/Imnovid are truly wonderful assets, as is Otezla; all were internally developed and are thus wonderful profit engines. But...
From a stock market standpoint, they are fully discovered. There is not a lot any of us can add to the Street's view of their present value.
Where I feel that maybe I can add a little to the Street's view of CELG, therefore, comes from my sense that CELG is running away from its own pipeline in spending so much money on such speculative activities, and that its emphasis on non-GAAP "earnings" is falling out of favor.
On an EPS basis, I have been carrying a GAAP projected 2016 number of about $4.60, which puts CELG around 22X that number. This deal brings that ratio upward. Furthermore, it raises the question of whether I will return to using TTM P/E numbers, which at Tuesday's closing price of $100.68 was 49X. I had been assuming no significant dilutive deals this year in using forward EPS. Now, I have to put that assumption aside.
The pharmaceutical business is funny. Any P/E can be fair, depending on the profitability of what's coming next. For CELG, the peak year for Revlimid sales is inexorably going to intrude into the consciousness of retail investors. When investors have to deal with an immense patent cliff, or at least a sharp patent slope, if not cliff, they can do anything they want to a P/E.
Thus, I'd be happier if CELG sat back and let its pipeline move along a bit and focus on deals that had a high probability of being accretive to earnings per share, and I'm basically neutral on the stock despite the company's many very strong but very well-known strengths.
Disclosure: I am/we are long GILD,PFE,REGN,NVO.
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.