When stocks hit multi-year lows, there's usually an earnings contraction to point a finger at. That's not the case at Celgene Corporation (NASDAQ: CELG). Profits in 2018 are expected to be around three times higher than they were in 2014, which was the last time the stock traded near $90 per share.
The biotech's cancer drugs generate enormous profits now, but an enormous patent cliff looms on the horizon. A recent regulatory snafu will delay the potential launch of an important drug, leading investors to believe the company has reached a peak it won't return to in the foreseeable future. Could they be wrong?
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The bad news
Before we look at what could go right for Celgene, it's important to understand the risks. Revlimid is the company's top-selling product and its biggest problem. The popular multiple myeloma treatment will begin facing limited generic competition in 2022, and replacing the losses won't be easy. Revlimid sales are expected to reach $10 billion by 2020, and at the moment it's still responsible for 63% of Celgene's total revenue.
Celgene's been boosting its R&D investments in an attempt to offset the impending losses, with mixed results. Mongersen, a Crohn's disease candidate it picked up for $710 million upfront back in 2014, failed a pivotal trial late last year. The company's most expensive asset, ozanimod, produced outstanding results in a pivotal multiple sclerosis trial, but an embarrassing mistake in the application package Celgene submitted to the FDA will delay the review process.
With mongersen out of the picture and ozanimod on pause, an overall revenue contraction between now and 2022 might seem imminent. A closer look at some recent pipeline developments, though, suggests Celgene can avoid an earnings contraction in the long term.
The good news
Celgene has a lot of irons in the fire around the globe, and two separate ventures in China give the company access to a rapidly growing market for cancer drugs. Over the summer, Celgene inked a monumental deal with BeiGene (NASDAQ: BGNE) that could be worth billions. The biotech will market Celgene's therapies in China, which could significantly boost sales in the region.
BeiGene also licensed a drug in the same class as megablockbusters Opdivo and Keytruda. The partnered candidate, BGB-A317, is in two pivotal trials in China, with two more global studies slated to begin this year. Through its recent acquisition of Juno Therapeutics, Celgene's late-stage pipeline also boasts a CAR-T therapy in clinical-stage testing through a joint venture with the WuXi AppTec Group called JW Therapeutics.
Back in 2010, Celgene began a collaboration with Agios Pharmaceuticals (NASDAQ: AGIO) that resulted in a new leukemia drug last summer. Idhifa is expected to generate maybe $500 million annually at its peak as a treatment for a particularly aggressive leukemia.
After Celgene began collaborating with Agios, it entered similar agreements with at least a dozen other drugmakers. Idhifa is the first piece of fruit to ripen on Celgene's collaboration tree, and more are on the way. A CAR-T to treat multiple myeloma from bluebird bio (NASDAQ: BLUE) could be next. In a study with patients who had relapsed after a median of seven therapies, more than half of those given an active dose of bb2121 achieved complete remission.
A buy now?
The average stock in the S&P 500 trades at around 17.1 times forward estimates. Celgene shares have been trading at around 11.7 times this year's earnings expectations, even though it's set to grow by leaps and bounds over the next several years. The average analyst following the stock expects its bottom line to expand at an outstanding 19.4% annual rate over the next five years.
Around five years from now, though, is when Revlimid sales will probably begin plummeting. Ozanimod, CAR-T, and potentially explosive sales in China could go a long way to offset the losses. With that in mind, Celgene looks like a bargain at recent prices.
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