Biotechs are exposed to a litany of risks including patent expiration, clinical-trial failures, and advances by competitors. That can make it one of the trickiest industries for investors to navigate.
Even the biggest biotech stocks can stumble, and when they do, it can be tough to know if it's smart to buy shares. For instance, a run of bad luck has caused Celgene Corp. (NASDAQ: CELG) to tumble. Is now a good time to add it to your portfolio?
Continue Reading Below
An important date to remember
Celgene may be one of the most successful biotech companies on the planet, but that success has come largely on the back of one drug: Revlimid.
Since winning Food and Drug Administration (FDA) approval in 2006, Revlimid has become widely used in first-line and second-line multiple myeloma treatment. Recently, the drug's use has become even more common following its approval last year as a maintenance therapy to delay disease progression in patients who have undergone a stem cell transplant.
Due to its expanding addressable market, Revlimid's one of the best-selling cancer drugs in the world. Last year, the drug's sales increased 17% year over year, to $8.2 billion, accounting for 63% of Celgene's total revenue.
Revlimid's success has been a big reason why Celgene's shares have climbed from about $20 in 2009 to over $90 today. However, if Celgene doesn't diversify, its sales and share price could suffer when Revlimid loses patent protection.
The drug has patents that extend protection to 2027, but generic drugmakers are challenging them. In 2015, Celgene cut a deal that allows Natco to begin selling limited quantities of generic Revlimid in 2023. As part of that settlement, Natco can sell increasingly more Revlimid every year from 2023 until 2026, when it will be allowed to sell an unlimited amount of its generic.
Natco isn't the only company eyeing Revlimid's market share, either. A number of other generic drugmakers, including Dr. Reddy's, are challenging Revlimid's patents. If they succeed, multiple vendors could wind up vying for Revlimid sales after 2022.
Diversifying its sales
Recognizing the patent risk to its chief moneymaker, Celgene's investing heavily in internal and external research and development (R&D) projects and financing its own drug development, while also acquiring and licensing promising clinical-stage drugs. For instance, its acquisition of Abraxis in 2010 landed it the pancreatic cancer drug Abraxane, which contributed nearly $1 billion to revenue in 2017. Pomalyst, a third-line multiple myeloma drug that's becoming commonly used in third-line multiple myeloma, contributed $1.6 billion to sales last year, up 24% from 2016.
The company also has successfully moved outside of cancer with the launch of Otezla, a psoriasis drug. Otezla won FDA approval in 2014 and it quickly reached blockbuster status, adding $1.3 billion to sales in 2017.
A series of stumbles
Celgene's R&D team has suffered stumbles recently, though, and they have been costly. Last fall, a late-stage study of GED-0301 failed to hit its mark, causing Celgene to shutter development on what could have been a billion-dollar Crohn's disease drug. That disappointment wasn't nearly as disheartening as the FDA's decision in February to reject Celgene's application for the approval of ozanimod, a multiple sclerosis (MS) drug that's one of the most important drugs in its research pipeline.
The company spent over $7 billion acquiring ozanimod in 2015 and the drug's phase 3 trials were a success. Not only did ozanimod deliver compelling efficacy in those trials, it also appeared to offer best-in-class safety, making it an intriguing alternative to the $3 billion MS drug Gilenya, a similar drug with a more worrisome safety profile.
Celgene's experience navigating the FDA made the Refusal to File notice incredibly surprising. Ozanimod is a key drug to Celgene's long-term strategy, so it's probably not surprising that Celgene's shares have tumbled from their peak near $140 last year.
A big bargain or a value trap?
Celgene's declining share price has caused common valuation metrics used by investors, including price to sales (P/S) and price to earnings (P/E), to fall to multi-year lows. For instance, Celgene's 5.63 P/S ratio now is the lowest since 2012.
Similarly, its trailing 12-month P/E ratio is at five-year lows, and based on next year's projected earnings estimates, Celgene's forward P/E ratio is only 10.7.
Clearly, these ratios suggest Celgene's shares are cheap, but that's only going to be true if Celgene's sales and profits continue to climb despite its challenges. Fortunately, that appears to be the case.
Management expects Revlimid, Pomalyst, and Otezla's sales to continue growing. As a result, it's guiding for revenue to increase 12%, to at least $14.2 billion, and earnings per share to increase about 18%, to at least $8.70 this year.
Where do we go from here?
The GED-0301 news contributed to management reducing its 2020 forecast to sales of $19 billion and EPS of at least $12.50. Depending on how quickly Celgene can address the FDA's concerns and refile ozanimod for approval, a delay could cause that outlook to ratchet even lower.
Nevertheless, we still are talking about sales that could clock in meaningfully higher than the $13 billion in sales and $7.44 in EPS reported in 2017. And that's without additional wins that could materialize, such as an approval of JCAR017 and bb2121, two cancer gene therapies with pivotal trial data fast-approaching this year. Other external collaborations could pan out soon, too, including one with Acceleron Pharmaceuticals on luspatercept, an anemia treatment. Additionally, Celgene expects to file for FDA approval of fedratinib, a myelofibrosis drug, soon following its acquisition of Impact Biomedicines in January, and that drug could have nine-figure potential if it wins an OK.
Overall, a flurry of upcoming trial results means a lot could go right or wrong for Celgene from here. Admittedly, that makes this stock a bit risky. Nonetheless, a few more years of growth from Revlimid and its already approved drugs could make this a good time to start adding Celgene to your portfolio.
10 stocks we like better than CelgeneWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Celgene wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of March 5, 2018