The Case For Celgene

| About: Celgene Corporation (CELG)
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Summary

CELG has provided a beat-and-raise quarter in Q3.

After surging a few years ago, its share price has lagged a record-setting stock market.

This article analyzes its profit drivers and concludes that the stock may be modestly undervalued based on most of its known profit drivers and pipeline.

However, additional pipeline projects, especially CELMoDs as well as CC-486, could provide significant upside that might be durable.

Thus, I find CELG attractive, with a price target around $135 and a possible $165 target next year.

Background

Before explaining and updating my version of the Celgene (NASDAQ:CELG) story, first, I'll briefly explain and link to the 2 1/2-year story of my bullish-bearish-bullish evolution of views on this stock. This will help lay the groundwork to why I am again accentuating the positives, understanding there are negatives; the article goes into both sides of the CELG argument.

I initiated coverage of CELG in June 2014 with an article titled Why This Physician Is Bullish On Celgene; some of the bullet points introducing the article observed that:

  • The company has a bulging pipeline on which it is overtly bullish, and management has earned respect.
  • Based on prospective earnings by 2017, the stock is undervalued.

CELG was at $80.54 when that article was submitted.

I announced that I had sold CELG in an article 13 months later, on July 21, 2015. The article was titled An Assessment Of Celgene's Deal For Receptos. In addition to analyzing that deal, I took the opportunity to suggest that we could be looking both at a top for biotechs, especially small caps (NYSEARCA:XBI), and an important intermediate top for CELG. These are some of the relevant quotes. First, re: small caps, one of the bullet points read:

  • In another aspect of the deal, the slim premium that Celgene is paying for RCPT may be a cautionary sign for takeover targets in junior biotechs.

Note, many of the small caps were trading as if they were takeover targets at that point.

More important to this current article are my views of CELG shares at the time, views which hold up well 1 1/2 years later and which still encapsulate some of the material negatives I think about now that I'm again long CELG in a material way:

Why did CELG soar on the news? Was the move appropriate?

CELG has put on more than $7.2 B in stock market value since it announced this deal. In that sense, the deal has "paid for itself." At its current price near $135, CELG is trading around 50X GAAP projected EPS for 2015. Since CELG's GAAP EPS are very similar to its free cash flow, that would imply about a 2% earnings yield - with a weakened balance sheet. That's rich. It does not imply "bubble," but it's not an attractive metric.

Including Celgene's purchase of Quanticel in April for $100 million up-front (giving Celgene a total of $145 million invested in Quanticel to date) plus the deals I wrote about a few weeks ago, Celgene has now made at least four deals just in the past four months for close to $9 B cash out the door. This is about 4X its expected profits for 2015. It's aggressive.

Interim summary

CELG has increased its risk profile with its series of deals the last few months. This has again made it a very high P/E stock; CELG now is valued around 9.5X expected 2016 sales per share. Of course, we're in a go-go stock market environment, with "growth" is the flavor of the day. Yet, today, the future cash flows from CELG are now more difficult to forecast than before.

Valuation and balance sheet concerns gain relevance when considering downside possibilities from the Revlimid patent suit(s) involving Allergan (NYSE:AGN) in partnership with Natco (BSE: 524816).

Thus, I've sold my remaining CELG shares into the latest rally.

So, I was in around $80, out around $135. That's nearly a 70% return in 13 months.

Then I got back in with the stock down to around $104, another 15 months later, about a 16% decline. The reason from the change from bearish at $135 (with an intermediate shift to neutral as the stock declined while operations did well) to bullish was encapsulated in the title of an article written just after Q3 results were announced: Celgene's Stock Price Ready To Join The Sales Trend And Rock And Roll.

In addition to the beat-and-raise quarter from a sales growth standpoint, the best part of the story was, in my view, the observation by an analyst and the grudging confirmation of reacceleration of growth for CELG's flagship drug. From the Q3 conference call, first, the question:

Eric Schmidt, Ph.D. - Cowen & Co. LLC

Good morning. I was a little surprised by Peter's open-ended guidance for REVLIMID sales in 2017. I didn't think that was very much like him, at least his historical conservatism. So is this drug now on a different growth trajectory? For the last three or four years we've seen very, very steady high teens year-on-year growth, and obviously in this quarter ex-the Russian shipments it was 25%. Are we seeing an [upward] inflection?

The main response was by Michael Pehl, who tried to beat around the bush, seeming to me to wish to keep expectations low so they could be beaten in the future. He began with the following explanation for why Revlimid was seeing sales acceleration and had additional tailwinds; with my clarifications in brackets:

Michael Pehl - Celgene Corp.

I'm just repeating the growth drivers that I was trying to summarize in my prepared remarks. So the MM [multiple myeloma] launch in U.S. and Europe, the ongoing MM launch upon MM-020 [a clinical trial] and the label that we have is one. The triplet combination - and many of them have been approved and reimbursed in U.S. and in Europe are another one. Now we have the next accelerator, and we were just saying that we were receiving Priority Review designation NDMM [newly-diagnosed myeloma] treatment maintenance with a PDUFA date in February in the U.S. is our transplant-eligible label that we're going to get. We're going to show Myeloma XI data in induction and maintenance from the biggest myeloma study ever. And I hope you're all going to be there when those data are going to be presented.

Finally, he had to confess that Dr. Schmidt was on to something big:

So there are really multiple amazing drivers for REVLIMID. And I think yes, there is some inflection at this moment of time, yes.

In thinking about CELG's sales momentum, I'm reminded of companies such as Microsoft (NASDAQ:MSFT) and Oracle (NYSE:ORCL) in the 1990s, which regularly beat and raised, and of course Cisco (NASDAQ:CSCO). Or, more recently, Apple (NASDAQ:AAPL) following the Great Recession. Stocks that seemed highly valued just kept on moving up, as analysts steadily raised their forward estimates; then raised them some more.

Part of the thesis of this article is that because CELG has suddenly pointed to acceleration of already-rapid sales growth, that is bullish for the stock, as analysts are naturally cautious: They would rather see a beat-and-raise quarter, allowing their price targets to be met comfortably. It's the way the stock market game is often/usually played.

Introduction to this article

CELG is presenting Monday and will provide updated 2016 results and probably an updated view on at least the first quarter of 2017. If you are reading this before then, you have the views of an article that I've been working on for two weeks. If you are reading it after, please adjust accordingly. My expectation is that CELG will be conservative in its guidance going forward, leaving room for the company to beat expectations as the year progresses.

The first sections of the article are little more than cut-and-pastes from the Q3 earnings report, with some commentary. Feel free to skip them if you are familiar with the changed projections and other results presented. After those sections, the article then covers a lot of ground. It forecasts 2017 sales by product line, takes a stab at estimating present values of existing products and much of the pipeline, and then discusses some of the pros and cons of the stock.

There is far too much going on with CELG as a company, and as a stock, for this to be comprehensive. Where I am guessing at future earnings or values, of course these are forward-looking statements that represent opinion. They may be materially wrong. Do not rely upon them. I do try to report facts accurately, but before getting into the article, here's a form of repetition of some of the bullet points. My bull case for CELG right now turns on the following:

  • industry-leading chart among large cap biotechs (NASDAQ:IBB), and still within its 2-year trading range
  • beat-and-raise periods tend to persist, often leading to outperformance of the equity
  • growing visibility for potential blockbusters in the internally-developed pipeline
  • increased change that CELG will become a true platform technology company with advantages that could last for the next 20 years.

The parameters of the beat-and-raise

Here are what amount to predictions. A core part of my bull thesis for CELG is that it has so much operational strength now that they are probably leaving room for some "beats" this year:

2016 Guidance Updated

Previous 2016 Guidance Updated 2016 Guidance
Net Product Sales
Total Approximately $11.0B Approximately $11.2B
REVLIMID® Approximately $6.8B Approximately $7.0B
GAAP diluted EPS $3.82 to $4.05 $3.12 to $3.29
Adjusted diluted EPS $5.70 to $5.75 $5.88 to $5.92
GAAP operating margin Approximately 37% Approximately 31%
Adjusted operating margin Approximately 54.0% Unchanged
Weighted average diluted shares 806M 804M

Net product sales guidance for POMALYST®/IMNOVID®, ABRAXANE® and OTEZLA® remain unchanged.

2017 Targets Updated

  • Total net product sales are expected to be at the high end of the range of $12.7 billion to $13.0 billion
  • REVLIMID® net sales are expected to be more than $8.0 billion versus the previous target of approximately $8.0 billion
  • Adjusted diluted EPS is expected to be at the high end of the range of $6.75 to $7.00.

As I'll get to, it's almost a metaphysical question as to how to think about EPS for this company. But what's not metaphysical is that extremely high quality of its sales base and current growth.

Thinking of Revlimid and its growth, and looking at Dr. Pehl's commentary that the drug has "multiple amazing drivers," I have to think that the above projections are conservative. That's especially true now that Mrs. Clinton is at most the future Mayor of NYC, but not President, and at least for the next two years, the Republicans control both houses of Congress. So I expect more flexibility from CELG on Revlimid pricing, which has been restrained for a few years in the US.

Why EPS is less important for CELG than it might seem

The question of what is an "earning" and what is a "saving" with its form merely transferred from cash or a bond to a riskier asset, such as a development-stage drug, can be seen in part by looking at part of the earnings presentation:

Three-Month and Nine-Month Periods Ended

September 30, September 30,
2016 2015 2016 2015
Net product sales $ 2,968.6 $ 2,312.6 $ 8,207.8 $ 6,621.9
Other revenue 14.2 21.5 40.9 70.8
Total revenue 2,982.8 2,334.1 8,248.7 6,692.7
Cost of goods sold (excluding amortization of
acquired intangible assets) 107.7 109.9 324.5 314.7
Research and development 1,653.5 1,304.5 3,335.4 2,920.5
Selling, general and administrative 698.0 550.3 1,973.1 1,696.3
Amortization of acquired intangible assets 87.1 63.6 353.7 190.9
Acquisition related charges and restructuring, net 25.0 226.2 25.3 215.9
Total costs and expenses 2,571.3 2,254.5 6,012.0 5,338.3

The proportion of R&D to revenues is over 50% in Q3 of each year. This is enormous, typically something one sees from a company just emerging from junior biotech status. But for a company on the verge of doing $13 B in product sales next year, this is not "normal." It's an outlier. Much of the R&D involves acquisitions. One year it's A and B, another year it's X, Y and Z, etc. But it's almost always something material. And the question is, are these really costs the way cost of goods is?

Clearly not. A cost is a cost that's needed to get something done, such as paying employees, but a development-stage asset is a gamble that invites additional costs (also called investments). I'll discuss these investments later.

Investors may also want to look closely at a subsequent table showing reconciliation of GAAP and non-GAAP earnings.

For these reasons, the EPS of CELG is a difficult concept to reconcile with EPS of other large companies. So, what I do is look at price:sales ratios for CELG in comparison with its own history and those of its peers.

As companies get larger, their P:S ratios tend to diminish. Thus, the first question to look at for CELG is what forward sales will be, what growth they might have, and then what is coming up behind them as the drugs producing revenues today mature and go generic.

Next, a review of 2016 sales by product and my guess at 2017 revenues.

Why I'm above consensus for 2017 sales

CELG saw yoy sales growth of 28.4% in Q3, driven by Revlimid, Pomalyst/Imnovid and Otezla. However, about 3 points of that growth came from sales to Russia, which occurred in Q4 last year and will not have recurred in Q4 2016. So, call it 25% yoy growth.

These are 9-month sales by product for the big 3 for 2016:

Nine-Month Periods
Ended September 30, % Change
2016 2015 Reported Operational(1) Currency(2)
REVLIMID®
U.S. $ 3,229.4 $ 2,578.6 25.2 % 25.2 % 0.0 %
International 1,936.1 1,661.8 16.5 % 19.6 % (3.1 )%
Worldwide 5,165.5 4,240.4 21.8 % 23.0 % (1.2 )%
POMALYST®/IMNOVID®
U.S. 558.9 422.1 32.4 % 32.4 % 0.0 %
International 373.9 267.4 39.8 % 38.2 % 1.6 %
Worldwide 932.8 689.5 35.3 % 34.7 % 0.6 %
OTEZLA®(3)
U.S. 636.1 272.5 N/A N/A N/A
International 76.0 16.2 N/A N/A N/A
Worldwide 712.1 288.7 N/A

This is extraordinary growth.

By product:

Revlimid is gaining indications throughout the EU and elsewhere. All over the world, it is being used for longer durations per patient, and increasingly, either in place of bone marrow transplant or after it as maintenance therapy (rather than only after failure of BMT). The advent of improved antibodies for myeloma such as J&J's (NYSE:JNJ) Darzalex is helping prolong lives and therefore time on an IMiD. This is likely a positive for both Revlimid and Pomalyst/Imnovid.

Pomalyst/Imnovid, also an IMiD but more potent and newer than Revlimid, is used in third-line treatment and increasingly in second-line treatment. There's no obvious end in sight to its growth, so I'm reluctant to guess that it will do more than decelerate at a mild-to-moderate pace.

Otezla, approved for psoriasis and psoriatic arthritis (a nasty form of arthritis), is just undergoing ex-US market introduction. CELG reports that 80% of its use has been as a stepped therapy after basic frontline treatments such as methotrexate have proven inadequate but before a biologic such as AbbVie's (NYSE:ABBV) Humira is used. Duration on Otezla once treatment is begun with it has been outstanding, indicating favorable physician and patient experiences with it.

Even though informed opinion doubts that CELG will get an approval for Otezla in a spinal disease called ank-spond, I remain bullish on Otezla just within its current approved indications. Any additional indications such as eczema or inflammatory bowel disease would be icing on what is already a tasty financial cake for CELG.

Consensus projections for revenues for CELG as a whole for this year are around $13.2 B. I'm more like at $13.5 B, with upside to that, based on these tentative projections, in $B:

  • Revlimid - 8.5
  • Pomalyst - 1.65
  • Otezla - 1.6
  • Abraxane - 1.0
  • Vidaza, others - 0.8.

That comes to $13.55 B, which I round down to $13.5 B. However, with readers understanding that we do not even have Q4 2016 results in and therefore these numbers are mere guesses, I think there's upside to that $13.55 B guess.

Now, the more important question is not precisely what happens this particular year. The question I ask now is what the future revenues and profits from the currently marketed drugs will be.

To help readers understand, here are the patent expirations published in the 2015 10-K (p. 10), submitted to the SEC in February 2016. Note there are several material footnotes.

U.S. 1 Europe
REVLIMID ® brand drug 2027 2 2024 3
(U.S. and European use patents)
THALOMID ® brand drug 2023 2019
(U.S. formulation/ European use patents)
VIDAZA ® brand drug 2011 4 2019
(U.S. use patent and EMA regulatory exclusivities only)
ABRAXANE ® brand drug 2026 2022
(U.S. use patent and European use/formulation patents)
ISTODAX ® brand drug 2021 5 6
(U.S. drug substance patents)
POMALYST ® /IMNOVID ® brand drug 2024 7 2023 8
(U.S. drug substance/use patent)
FOCALIN ® brand drug 2015 N/A
(U.S. use patents)
FOCALIN XR ® brand drug 2015 2018
(U.S. use patent/European formulation patent)
(European Patent Office (EPO) drug product patent)
OTEZLA ® brand drug 2024 9 2028 3
(U.S./European drug substance patent)

I'm going to look for Pomalyst and Otezla to be patent protected in both the US and EU until about 2025.

Next I'm going to lay out some preliminary working assumptions to justify going with the momentum and high P/E of CELG, before translating that to a P:S ratio.

Here's the first part of the analysis.

Note that based on CELG's disclosures in Q3 (see slide 10/63) and my analysis that separates out R&D from routine operating expenses, I'm going to carry the net profit margin from sales as 60%. This includes 3% COGS, 20% SG&A, 20% tax rate (above what CELG actually books) and 2-3% interest costs.

First, I'll take a stab at revenues, then translate that to profits.

Estimating sales of current products from 2017-21

This is pretty simple. It's certainly wrong, but in which way, I cannot be sure. I simply begin with my guess at $13.5 B this year and assume decelerating growth to $16.5 B next year, then add $1.5 B per year for the next three years, ending with $21 B in 2021. This assumes loss of EU exclusivity for Vidaza in 2019 but no loss of Abraxane exclusivity or other important patent losses.

The sum of these sales for the 5 years 2017-21 is $88.5 B, which would translate to $53 B in after-tax profits. And, note this is using a 5% or so higher tax rate than CELG books, so in that sense, it's conservative.

I justify these assumptions because while Abraxane and Vidaza (plus generic Vidaza in the US) are more or less flat in sales, the "Big 3" products are growing rapidly. So I think these numbers could be too high or too low. I also think that as Revlimid and Pomalyst/Imnovid sales grow larger and larger, SG&A may shrink below current levels. Finally, CELG has been restrained in price increases, and if volume tails off, can easily justify price increases on Revlimid in the US.

Next, product-specific and R&D sector-specific guesses beyond 2021, with commentary as appropriate.

Revlimid, 2022-5

As legal matters stand in the EU, Revlimid is scheduled to lose patent protection in 2022. It is appealing its two patent losses. Victory in one but not both would give it either protection until 2023, or else 2024. I've taken those possibilities into account in the estimates. I've also taken the deal it made with AGN and Natco into account, in which a small generic market share is likely to come into the US market in 2022, rising over time. In addition, further muddying the waters, there are legal actions with Mylan (NASDAQ:MYL) and Dr. Reddy's Labs (NYSE:RDY) upcoming related to proposed generic versions of Revlimid.

What I have done is estimated $15 B in Revlimid sales in 2022 and then total sales from 2023-5 of $16 B, dropping to negligible in 2026.

All this gives about $31 B in additional projected Revlimid sales, translating after adjusting for rounding to about $19 B in after-tax profits.

Note that these estimates involve guesses about probabilities of various patent-related legal results as well as market size. I do assume flat yoy Revlimid sales by 2021-2.

This brings the projected profits from $53 B to $72 B.

Pomalyst/Imnovid

I assume that sales peak around $3 B by around 2022 and remain flat through patent expiration in 2025, with negligible global sales beyond 2025. I think there's upside and downside risks to this sales figure. Since 2025 patents likely do not go into December, I've adjusted the 4-year sales projections and come up with a projected profit around $7 B for the 2022-5 period for this drug.

This brings the projected profits to $79 B.

Otezla

I assume 6 full years of sales at $3 B per year from 2022-7, part of the year for sales in 2028, then little afterwards. This would give about $20 B in revenue and thus about $12 B in profits, bringing the total to $91 B.

This might be conservative, given the possibility of limited competition throughout most of this period and the chance of approval for at least one other important indication. Otezla is still in a hypergrowth stage; estimates will be fine-tuned over time.

The other marketed products

Vidaza (azacitidine) is now sold by CELG in the US as a generic to Sandoz. Its patent expires in the EU in 2019. I give it no value beyond 2021.

Abraxane is subject to patent challenge currently in the US. CELG lists 2026 as the date of patent expiration in the US. That may well be misleading, because Abraxane is an advanced formulation of a drug that's long been generic. The last EU patent expires in 2022, per the above list. Whether this date will hold is unclear to me.

Then there are Thalomid, Istodax and other tiny current revenue sources.

Basically, there may be almost nothing of value here beyond 2021, though Abraxane is a wild card. I'll be conservative and just give all these a nominal $1 B aggregate value. That brings the running total to $92 B.

Next, much of the pipeline is given a value.

Partnered and purchased pipeline

CELG's gigantic pipeline can be classified three ways, though there is some overlap.

One way involves its multiple partnerships. These typically involve CELG taking an equity stake in the company, which is often private at the time of the deal, and then supporting it on an IPO and secondary offering. CELG has a number of 10-15% equity positions in various companies. The deals then vary around the common theme of co-development of products or even product concepts and different marketing arrangements if a drug reaches market.

These are all one-offs. For example, until CELG withdrew rights to one of the Agios (NASDAQ:AGIO) drugs, it had deals with AGIO for development and marketing of three different AGIO candidates, and all deals were different. Other prominent partnerships involve Juno (NASDAQ:JUNO) and Acceleron (NASDAQ:XLRN).

Valuing all these, which for now are cash-burning parts of CELG's business, involves even more guesswork than the above guesses. After looking at the list and thinking about it, I'm just going to toss out a $6 B profit contribution. I note that CELG's profitability from marketing these products is far less than for its IMiDs or Otezla. For example, XLRN is entitled to about a 25% royalty on sales of luspatercept, now in Phase 3 studies for two types of rare anemias.

XLRN also has co-promotion rights in the US, if I remember correctly, and might also be entitled to modest profits on production of luspatercept. Every deal is potentially different (variations on a theme), so it's not important at this top-down level of analysis of this class of drugs to delve into each deal's details. The point is that CELG has given up a lot to do the deals, which has contributed to its success in doing so many.

There may be substantial (possibly very substantial in a renewed biotech bull market if CELG sells some of its equity positions) upside to this $6 B profit guess, but for now, it's a loss-making enterprise.

The second type of deal involves purchased or in-licensed but not partnered products such as ozanimod, which was the main point of what ultimately was a $7.7 B acquisition cost for Receptos in 2015. An example of this type of deal for rights to a drug is also seen from the deal for mongersen, struck in 2014 (also called GED-0301). Here, CELG paid a high six-figure fee to the developer, Nogra, plus milestones, plus royalties on sale. But CELG gained full control, took no equity stake in privately-held Nogra, and is not working with it in other ways.

Some deals such as the JUNO deal and the large deal to co-develop the AstraZeneca (NYSE:AZN) checkpoint inhibitor durvalumab have characteristics both of partnering and more of the in-licensing type, which is why I group them together.

CELG has made many acquisitions of product or companies, such as the Q3 deal for EngMab for about $600 MM, which the company acknowledged at the recent ASH meeting was a bit rich - but said they really, really wanted this one to round out their strategic program. Another strategic purchase was the $100 MM+ deal for diagnostics company Quanticel in 2015.

How to value these many deals?

Probably ozanimod, which is in Phase 3 for multiple sclerosis and ulcerative colitis and Phase 2 for Crohn's, is the most important, and perhaps the mongersen deal, which is focused more on Crohn's than UC is the next most important. There's probably a lot of optimism amongst experts and analysts that these IBD drugs have a lot of potential, but the prospects for ozanimod in MS are murkier.

Because the Receptos deal was done at the top of the market, as were the AZN deal and some others, I'm inclined to value these deals at cost. (Note the subsequent discussion of adjusting for time value of money.) The cost includes acquisition cost, milestones, clinical trial costs, interest, and costs of beginning to set up a sales force even before Phase 3 results are known. So even the total costs of, say, the ozanimod deal are not fully known. CELG could easily be out $9 billion by the time it earns its first net profit from ozanimod, a very hefty sum for a product with nothing but Phase 2 data at the time of the deal.

I'm going to give a $12 B value to all these deals.

Adding this to the $6 B value for the partnered deals, added to the running total of $92 B, brings my guesstimate of the value of CELG's profits to $110 B.

Sharp-eyed readers may have noted that what has been omitted here are CELG's pipeline products being developed internally. I'll get to them in the conclusion.

Next, a word on methodology of all the above.

Valuing CELG and valuing profit streams

This is being submitted with CELG having closed at $119.64 Friday. This gives it a stated market cap of $93 B. However, in order to do the above analysis, it's more accurate to use enterprise value, which I obtain by adding net debt as of the end of Q3. This is somewhat over $7 B negative, thus bringing CELG's enterprise value to $100 B.

Importantly, the above profit estimates do not in the methodology used herein require adjustment for present value. That's because I'm thinking only of volume/mix considerations. CELG has been responsible on pricing, which makes sense given the very high price for its innovative product lines. So I assume that it will be able to adjust pricing upward to meet the required return, aka discount for present value, that investors look at when thinking of future potential corporate profits versus more assured returns from bonds, etc.

So, making countless assumptions, I come up with CELG being modestly undervalued. Enterprise value $100 B, future profits $110 B with a large range of possible results affected by many factors.

Valuing CELG on a P:S basis

This ends up supporting the above guesstimates. CELG has traded for the past 7 years between about 4.5X sales per share for a year on the low end to 12X or so on the high end.

8X sales appears about average, and given accelerating sales growth again for Revlimid and very strong growth for Pomalyst/Imnovid and Otezla, I think 9X is also plausible as the top end of assumptions.

Multiplying 8X by projected 2017 sales of $13.5 B gives a $108 B valuation. These are of diluted shares, not enterprise value. Assuming 800 million diluted shares (might be less given such strong projected sales growth), that would give a $135 share price, which is my basic target for mid-year.

Looking out further, if the Street remains positive on CELG's longer-term growth prospects, then if the company can do $16.5 B in sales in 2018, multiplying that by 8X and using the same share count (likely will be lower) gives a $165 target price for some time next year.

No guarantees! Mr. Market is fickle, and many snares exist to bring valuations down toward the industry mean, which is several turns lower than CELG currently enjoys.

Now it's time to sum up.

Summary and concluding thoughts

CELG and biotechs have been a little bit neglected as attention has returned to cyclicals. This sector has been helped both by the apparent end to the industrial recession the US may have entered when oil prices crashed in 2014, and by sentiment following the election. This sector rotation always returns to favor the best companies in a sector, and CELG appears to me to be the default choice among large cap biotechs right now. So I'm not too worried about whether biotech is in favor anymore in buying the stock. The sector peaked in mid-2015; that's far enough in the past to look at each stock on its merits.

Now, all the above was done for two reasons. One big reason is that CELG is such a complicated company, it's difficult to get one's arms around. Perhaps the above analysis could provide a framework for some readers who will rework my analysis to their (your) way of thinking. CELG's pipeline is especially difficult to analyze comprehensively. After years of looking at it and writing about it, the way it has been presented in this article is a way that I find manageable.

I see no need to think too deeply about smaller deals, rather, I just assume that some will work out and some won't. A bell curve, as you will. I don't have to decide exactly what ozanimod or mongersen will sell; I'll just assume that they will at least earn their projected return. If so, my assumption that they are worth the money spent on them is cautious but not an unduly stringent assumption.

More broadly, these are high profile drugs. The best academic and industry minds have thought about them and compared what's known about them to what's known about their currently marketed and pipeline competition. There's not a lot of alpha that I can generate from thinking too deeply about such well-studied drugs. The same would go for such deals as the JUNO deal.

All the above is in some sense a lead-in to what excites me the most about the potential for CELG to truly beat expectations. That involves its in-house program, with my primary interest being in its CELMoDs and CC-486 ("oral azacitidine"). The company has recently been a good deal more forthcoming about the prospects for CELMoDs. Also, in the presentation and Q&A at the ASH meeting, CELG mentioned that it had been surprised that CC-486 was showing signs that it was not just an oral equivalent of Vidaza, but could be a differentiated, superior drug. If so, CC-486 has important potential.

Broadly speaking, these drugs, especially CELMoDs, could allow CELG to become a platform technology company with sustainable competitive advantages into the 2030s - which would be huge from a P/E standpoint.

Adding significant value to CELMoDs + CC-486 could provide upside to my valuation estimates. Or, looking at matters from the other direction, success with them would provide a cushion for loss prevention or mitigation should the above analysis be too optimistic.

I am partway through a separate article on CELMoDs and CC-486. It's more technical than this article. Separating it out from the financial discussion in this article allows readers who are less interested in R&D discussions to get the core message now and skip the more focused, more scientific discussion in the upcoming article.

As usual, it's good to specifically point out that as a non-dividend-paying stock of an aggressive, R&D-focused company marketing very high-priced branded products, there are many risks to owning CELG shares. Permanent loss of capital is a distinct possibility. I do not provide financial advice, but I'm comfortable in saying that investing in CELG involves risk.

Thanks for reading and sharing any comments you might wish to provide.

Disclosure: I am/we are long CELG,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.