Is Celgene the Smartest Buyer in Biotech?

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Image source: Getty Images.

Celgene (NASDAQ: CELG) is well known for its superstar drugs, includingblood-cancer drug Revlimid, which hit $5.8 billion in sales last year and could well reach $10 billion in 2020.But what fewer investors realize is how the company's deal-making savvy differentiates it from its peers and could make it -- especially in light of this year's share price pullback of 11% -- one of the best buys in biotech.

The way we spend defines who we are

Although Revlimid currently powers Celgene's revenue, contributing 63% of the 2015 total, Revlimid's main patentexpires in October 2019. Meanwhile, Celgene's management projects net product sales growing by 18% (CAGR) from 2015 to 2020, approximately doubling $9.2 billion sales in 2015. Earnings per share are projected to grow even faster, achieving a 23% CAGR, advancing from $4.71 to over $13.00 in the same time frame.

That kind of blistering performance isn't sustained by in-house growth alone; instead, Celgene spends more on its deals than most other biotech or big-pharma company. From 2012 through 2015, Celgene spent $3.3 billion on deals with smaller companies. By comparison, much larger companies Sanofi spent $2 billion, Merck, $1.8 billion, and Pfizer $1.4 billion.

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Celgene already has collaborations with more than 30 young companies in some of the hottest drug development areas, such as antibody drugs, gene therapy, immunotherapy, and regenerative medicine.Add it all together and the company has fifty some products that could be approved by the end of 2025.

Image source: Celgene presentation.

Here's anexample of how just one of these deals can pay off. In 2013, Celgene bought into OncoMed Pharmaceuticals for $155 million upfront and took a $22.5 million equity investment. OncoMed's shares doubled after Celgene bought in, not before, as often happens. In addition, Celgene also acquired rights to OncoMed's six candidate anti-cancer stem cell pipeline. Imagine buying a new car, having it double in value as you drive off the lot, and expecting it be worth a hundred times more in a few years. Not going to ever happen, right? That is, unless you're Celgene.

Another deal Celgene made was last summer's $7.2 billion buyout of Receptos. Celgene was after Ozanimod, a treatment for ulcerative colitis and multiple sclerosis whose peak sales could reach $6 billion, with a hoped-for approval in 2018. And Celgene's management is so confident this deal will pan out, it recently moved its long-term sales and profits forecasts from $20 billion to $21 billion by 2020 based on those expectations.

And then there's Abraxis BioScience Inc., acquired in 2010 for $2.9 billion for key cancer drug Abraxane. The drug saw an increase in revenue of 33%year-over-year in 2015, from $848.2 million to $1.13 billion. By 2017, it should hit blockbuster status and contribute $1.8 billion per yearto Celgene's coffers.

Letting the little guy win

Celgene differentiates itself when it comes to deal-making. Celgene puts together multiple different deal structures -- collaborative partnerships, follow-on licensing deals, equity only acquisitions, you name it -- based on what the smaller target company needs. By allowing the latter to retain some of its own products, and not capping the financial upside, the little guy keeps pulling for all its worth.

Make no mistake -- Celgene takes a lot of heat from analysts for these high-risk, high-trust deals. But it's a lot better than bringing the smaller company's assets in-house, and then letting them fall through the cracks as the big partner's R&D priorities focus elsewhere, as so often happens in traditional M&A deals.

Celgene leaves a lot of the decision-making and control with the smaller biotech. For instance, in its updatedAgios Pharmaceuticals (NASDAQ: AGIO) deal, Celgene agreed to pay $200 million up front for four-years exclusivity on two drugs that treat cancer, principally acute leukemia. Assuming it bears fruit, Celgene and Agios have a worldwide 50/50 cost and profit share. But meanwhile, exploratory research, drug discovery, and early developmentwill be led by Agios, according to deal terms.

It looks likely to pay off. Celgene expects to file for FDA approval of AG-221 -- one of the drugs it licensed from Agios --by the end of 2016. That's a faster path to market than many expected, and one more vindication of Celgene's genius at picking good partners.

We refuse tosit around a table reading a stack of papers

Celgene has also had some notable failures in deal making. But the company seems able to take every deal and learn from it. One deal that may or may not bear fruit in the next six months is its $1 billion stake in Seattle-based Juno Therapeutics(NASDAQ: JUNO). The two have a 10-year agreement to leverage their combined immunology and oncology expertise to develop CAR-T immune-oncology treatments for cancer. That's an unusually big bet to an approach to treating cancer that may not pan out -- so some wags see it as foolhardy.

I'm one of the wags who doesn't, although I'm not completely sanguine about Juno's chances either. While the deal probably won't end up Celgene's easiest homerun, it shows the big biotech's commitment to exploring risky new areas of cancer research. In fact, Celgene only has to hit an occasional homerunfor its aggressive deal-making to pay off. And with so many deals out there -- it offers a better chance than most any other biotech for happy news for investors.

Something happens when something is called a committee and metaphorically you don a robe and sit around a table to read a stack of papers. It's not as effective in getting that many deals done.

So said George Golumbeski, Celgene's lead deal maker, at a San Diego conference last year. Golumbeski has about twelve people on his team, much less than the 30 or so working on deals at other big biopharmas. Sure, it's risky. But when it comes to Celgene, there's a lot to be said for this kind of hustle.

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Cheryl Swanson owns shares of Agios Pharmaceuticals. The Motley Fool owns shares of and recommends Celgene. The Motley Fool has the following options: short October 2016 $95 puts on Celgene. The Motley Fool recommends Juno Therapeutics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.