Can This Big Biotech Keep Outperforming Its Industry Peers?

Over the past 12 months, one big biotech company has risen above the rest in terms of price performance -- Celgene (NASDAQ: CELG  ) . However, looking at Celgene's rise in comparison to its big biotech peers -- Amgen (NASDAQ: AMGN  ) , Biogen Idec, and Gilead Sciences -- many investors are rightfully wondering if Celgene's price has gotten ahead of its fundamentals.

CELG Chart

Source: YCharts.

The Foolish fundamentals
To better answer that question, we should first take a look at how Celgene measures up fundamentally to its industry peers.

 

5-year PEG

Return on Equity

Qty. Revenue Growth (y-o-y)

Qty. Earnings Growth (y-o-y)

Celgene

1.20

27.28%

17.00%

30.10%

Amgen

1.76

23.03%

4.50%

-0.60%

Biogen Idec

1.48

22.69%

21.30%

26.80%

Gilead Sciences

1.26

30.01%

15.10%

8.60%

Advantage

Celgene

Gilead

Biogen

Celgene

Source: Yahoo! Finance, as of Oct. 3, 2013.

Celgene has one key advantage over its industry peers -- earnings growth. If analysts' five-year earnings estimates are accurate, Celgene is actually cheaper than its peers, according to its lower PEG ratio. However, Celgene's drug portfolio is unbalanced and top heavy, as seen in this chart of its core treatments.

 

Primary application(s)

2Q2013 sales

Year-over-year growth

Percentage of total revenue

Revlimid

multiple myeloma

$1.05 billion

13%

65.6%

Abraxane

breast, lung, pancreatic cancers

$155 million

41%

9.7%

Vidaza

bone marrow disorder (MDS)

$211 million

5%

13.2%

Pomalyst

multiple myeloma

$66 million

N/A: approved in February 2013

4.1%

Thalomid

skin disease (ENL), multiple myeloma

$66 million

(13%)

4.1%

Sources: Company release,s author's calculations.

Celgene's future heavily depends on the continued growth of Revlimid, its first-line treatment for multiple myeloma. Revlimid will be safe from generic competition for several years, since it is protected by 12 patents that expire between 2019 and 2026. Yet it is also an extremely expensive treatment, costing $163,381 per patient per year.

Celgene's core strengths
Demand for Revlimid remains strong, and its sales rose 16% domestically and 8% internationally last quarter, driven by market share gains and an increase in the duration of the therapy. However, the fact that Revlimid accounts for nearly two-thirds of its top line puts it at risk against competing treatments.

Meanwhile, Abraxane could be the treatment that will eventually balance out Celgene's lopsided top line growth. Sales of the cancer drug rose 38% domestically and 55% internationally. Abraxane started out as a breast cancer treatment, but was approved for non-small-cell lung cancer at the end of 2012, then for pancreatic cancer last month -- which indicates that its double-digit sales growth could continue well into the future.

Another promising treatment is Pomalyst, which was approved in February for the treatment of refractory multiple myeloma patients. Refractory multiple myeloma is a form of the disease that has shown resistance to previous treatments. Sales of Pomalyst rose 163.6% sequentially to $66 million, but analysts believe that it could eventually achieve peak sales of $1 billion to become a third pillar of growth for the company.

Competition in the multiple myeloma space
Despite these three strengths, Celgene has one glaring vulnerability -- its dependence on multiple myeloma treatments as a source of top line growth. Celgene's success in the field hasn't gone unnoticed by competitors.

The top threat to Revlimid is Velcade, a competing first-line treatment for multiple myeloma. Velcade was co-developed by Johnson & Johnson (NYSE: JNJ  ) and Takeda Pharmaceutical (NASDAQOTH: TKPPY  ) . Last quarter, Velcade generated $379 million in revenue for Johnson & Johnson -- a 19.2% year-over-year gain. Meanwhile, Takeda reported $244 million in Velcade sales last quarter, a 34.8% year-over-year gain. Velcade's strong growth shows that Celgene is still far from dominating the multiple myeloma field unopposed.

Another threat is Kyprolis, a refractory multiple myeloma drug from Onyx Pharmaceuticals that's now in the hands of Amgen, which recently acquired Onyx for $10.4 billion. Kyprolis was approved by the FDA last July for refractory multiple myeloma, making it a direct competitor to Celgene's Pomalyst. Kyprolis generated $61 million in sales last quarter for Onyx, a decline of 4.7% from the previous quarter. The apparent slowdown in Kyprolis sales, which analysts believe could hit peak sales of $1.5 billion, raises an interesting question for Celgene -- will sales of Pomalyst also slow down sooner than expected?

Generic competition and better alternatives
Another sore spot for Celgene is the decline of Vidaza, which lost U.S. patent exclusivity in 2011. Generic competitors took awhile to catch up, but last month they struck two major blows against Celgene.

Sandoz, the generic arm of Novartis, announced the U.S. launch of its generic version of Vidaza on Sept. 23. A week before that, generics maker Dr. Reddy's Laboratories (NYSE: RDY  ) announced the FDA approval of its generic Vidaza as well. This means that the U.S. market -- from which Celgene's Vidaza generated $84 million in sales last quarter, is about to get even more crowded. However, the good news is that the majority of Vidaza sales, at $127 million, came from markets abroad.

Meanwhile, sales of Thalomid have fallen due to the availability of safer alternative treatments for its wide array of regular and orphan indications. Thalomid, also known as Thalidomide, has the potential to cause birth defects, and is only approved to be administered in tightly controlled conditions.

The Foolish takeaway
Celgene is one of the fastest growing biotech companies in the market today, and it isn't showing any signs of slowing down. Yet the main thing investors should remember about Celgene is that its highly dependent on Revlimid and the market for multiple myeloma treatments.

If competing first-line and refractory multiple myeloma products from J&J, Takeda, and Amgen gain traction, Celgene's market share could start shrinking. However, rising sales of Abraxane and Pomalyst could offset that slowdown. As a result, Celgene's top line could eventually have three pillars of growth rather than one, better positioning the company for long-term growth.

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