Celgene’s (CELG) high growth supports purchase.
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Celgene Corporation’s (CELG) drug Revlimid posted revenues of $286 million in the March quarter, on track to delivering $1.3 billion during 2008. That would make Revlimid one of the top 10 revenue producers for cancer drugs and one of the top 100 revenue producers for all drugs during 2008.
The question for valuing Celgene is how far can Revlimid sales go? The answer will depend on three key issues over the next five years: international growth of Revlimid, competition with other immune system drugs, and extension of Revlimid from its current approval for multiple myeloma into approval for a broader class of cancers collectively called non-Hodgkin lymphoma.
International Growth for Revlimid
International growth for Revlimid should be very strong; its pretty much in the bag. Celgene’s 2007 revenues of $1.4 billion included only 15% from non-US sources. The ratio of non-US revenues to US revenues will most likely rise to over 50% during the next five years.
By way of example, note that Genentech sold 50% of its drugs within the US and 50% outside the US during 2007. Actually, Roche sold the drugs outside of the US, but the point is that the non-US cancer drug market is currently larger and growing faster than the US market. Genentech’s non-US revenues grew three times faster than US revenues during the March 2008 quarter.
Celgene’s $2.9 billion acquisition of Pharmion in November of 2007 should smooth the way for success on the international front. Pharmion had international rights to Celgene’s Thalomid, and consolidating the international efforts for Thalomid and Revlimid will make it easier to gain the necessary regulatory approvals to expand Celgene’s non-US business.
I believe international growth is likely to double revenues for Celgene in the four years from 2008 to 2012. Executing on the international opportunity alone could drive Celgene’s 2012 revenues to $4.2 billion. With a market capitalization currently resting at $24 billion, however, the international opportunity is not enough to warrant buying Celgene’s stock.
Competition
That dip in Celgene’s six month chart back in December of 2007 (shown to the right) was caused by investor fears that Velcade, a competing multiple myeloma drug from Millennium Pharmaceuticals, was slowing Revlimid’s growth. A research firm called Oncology Inc. posted a report predicting $183 million in US revenues for Revlimid, a $15 million revenue shortfall.
Other analysts reiterated their estimates and Buy opinions, and Celgene’s share price recovered quickly. Revlimid revenues for Q4 2007 were eventually reported at $17 million over consensus, part of a continuing pattern of strong growth.
Celgene is trying to meet the concerns raised by competing treatments. One of the two abstracts Celgene submitted to ASCO this month addresses the issue of toxicity, a key point of comparison between Revlimid and Velcade. Basically, the study found that a 66% reduction in the amount of Revlimid taken by patients — from 12 doses during a 28 day period to 4 doses during a 28 day period — resulted in a comparable survival rate (over 90%). That’s good news for doctors concerned with Revlimid’s toxicity profile.
Biotech companies are generally volatile, but price spikes due to competitive threats seem to be less long-lasting than other issues — such as regulatory intransigence or safety concerns.
Acceptance of Revlimid for Non-Hodgkin Lymphona (NHL)
Celgene’s Revlimid is currently approved by the FDA as a treatment for multiple myeloma here in the US, but not for non-Hodgkin lymphoma. Getting approval of Revlimid for NHL is crucial for the Celgene investment case.
According to the American Cancer Society’s publication, Cancer Facts and Figures - 2007, multiple myeloma was expected to have had 19,900 new cases in the US during 2007. NHL was expected to have had 63,190 new cases, 3.2 times as many.
Gaining FDA approval for prescribing Revlimid for NHL in addition to multiple myeloma would therefore quadruple Celgene’s target market here in the US, from 20,000 new cases to 83,000 new cases per year.
Celgene’s second abstract at the ASCO this month presents new data for the efficacy of Revlimid in treating NHL patients. Actually, the study examines how patients responded to a treatment from Revlimid after having gone through a course of Genentech’s Rituxan. Rituxan, approved for NHL here in the US, had $5.5 billion in global sales during 2007. The ASCO abstract from Celgene had a positive conclusion:
- “Results: Lenalidomide [Revlimid] response was associated with low tumor burden (33% for <50 cm2 v 17% for >50 cm2) and time from last rituximab dose to lenalidomide treatment (44% for >230 days v 5% for <230 days). The response rate in patients with favorable values for these predictive factors (n=20) was 50% versus 12% in patients with unfavorable values (n=26; P=0.007) … Conclusions: Lenalidomide has activity in r/r aggressive NHL with a favorable safety profile. Early data appear to confirm that patients with low tumor burden and longer duration from prior rituximab [Revlimid] are more likely to respond.”
Celgene published another study showing Revlimid’s effectiveness in treating NHL at the American Society of Hematology meeting in December of 2007. Whether these studies will eventually result in an approval letter from the FDA, and the timing of such a letter, is unknown.
Celegene is Attractive Below $58
View the spreadsheet used for this valuation analysis.
I value a company by creating a 5 year target price, then discounting that target price back to what I will pay currently. The target price I have developed for Celgene is very optimistic. A series of regulatory clearances must come through, and the company must execute superbly on a global scale, quadrupling revenues and fending off competitive threats. All these uncertainties increase the risk rate at which I feel I must discount Celgene’s target price.
You can click the spreadsheet above to see the details, but basically I have developed a December, 2012 target price for Celgene of $110. The stock is trading for $61.09 right now, which would imply a 13.6% annualized return over the next five years. I require a 15% annualized return to buy Celgene, because of the uncertainties outlined above, so the stock is not a buy for me above $58. For readers who disagree with that 15% risk rate, the spreadsheet above includes a table showing annualized internal rates of return delivered at various price points given the $110 target price.
I’ve made several assumptions in developing this five year target value of $110.
- I have projected huge growth in Celgene’s revenues, from the $1.5 billion in trailing twelve month revenues to $8 billion in calendar year 2012. This growth is driven by expansion of Revlimid both internationally and into new cancers such as NHL. For perspective, Genentech’s four cancer drugs delivered an aggregate of $15.5 billion in global revenues during 2007.
- I am projecting operating margins of 43% in 2012, up from 38% in 2007. Driving this operating margin improvement are my expectation of continued declines in R&D and SG&A as a percentage of revenues.
- I am projecting a 1% increase every year in shares outstanding. This is not a lot of dilution, but Celgene has good cash flow and a relatively small options program at 7.8% of outstanding shares.
- I place a 7 multiple on 2012 estimated sales and a 20 multiple on 2012 estimated earnings.
Developing a value that contemplates an increase in revenues from $1.5 billion to $8 billion over five years makes me a little queasy, but the story is actually straightforward. If Celgene can get through the regulatory hurdles and execute on the international opportunities, the company can continue to grow at a very rapid pace.
See also: Cancer - Imclone Systems (IMCL)
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