Celgene (CELG) has fallen on hard times of late -- or its stock has, at least. At the beginning of October, the biotech's share price was up 25% year to date. By the end of the month, Celgene stock was down more than 10% for the year.
The huge plunge stemmed from a couple of negative developments. First, Celgene announced disappointing results from a late-stage study of GED-0301 in treating Crohn's disease. Second, the company missed revenue expectations in the third quarter and lowered its full-year 2017 guidance, as well as its long-term outlook.
All of this bad news has some people questioning if Celgene should buy a biotech to improve its prospects. I think the answer is a definite "yes." In fact, if Celgene buys the right biotech, I believe investors could win big time.
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Selection criteria
What kind of biotech should Celgene look to buy? Several selection criteria rise to the top of the list. Most important, the target company should have a promising pipeline, preferably with one or more late-stage pipeline candidates that hold the potential to be blockbusters. Ideally, the biotech would be focused either on autoimmune diseases, hematology, or oncology.
It certainly would be helpful, though, for Celgene to buy a company that already had at least one drug already on the market. After all, Celgene itself just found out that there's no guarantee of success with late-stage candidates. Buying a biotech that already has some financial stability would be a nice plus.
Celgene needs a deal that provides a solid return on investment. Biotechs with strong pipelines and perhaps one or more existing products that are successful could provide the return, but don't forget about the investment part of the equation. Celgene needs to be able to afford whatever biotech it buys, and it shouldn't overpay. The perfect candidate would be at least priced attractively -- and, even better, priced at a discount.
Potential candidates
There aren't too many biotechs available that have promising pipelines and successful current drugs, and are also priced reasonably. Exelixis (EXEL 0.53%) meets at least one of the selection criteria. Cabometyx is already successful as a second-line treatment for renal cell carcinoma (RCC). The company hopes to soon win approval for the first-line RCC indication. Exelixis also plans to submit Cabometyx for approval in treating hepatocellular carcinoma (HCC) in early 2018.
Exelixis doesn't have a particularly deep pipeline, though. Other than two studies evaluating Cabometyx in RCC and HCC, Exelixis isn't sponsoring any other clinical trials on its own. To be fair, however, Bristol-Myers Squibb is evaluating Cabometyx in combination with its immunotherapies, and the National Cancer Institute's Cancer Therapy Evaluation Program is supporting quite a few studies. In addition, Roche has studies underway for Exelixis' MEK inhibitor Cotellic. As for valuation, Exelixis stock trades at nearly 39 times expected earnings. That's certainly not a bargain price.
Celgene could look within its partner network. bluebird bio (BLUE -3.85%), for example, has a couple of late-stage candidates in Lenti-D and LentiGlobin. Celgene liked the prospects for phase 1/2 CAR-T therapy bb2121 so much that it has licensed the drug. Bluebird doesn't have a product on the market yet, though. Also, with a market cap of around $6.4 billion and no sales at this point, a lot of Bluebird's potential is already baked into its stock price.
If Celgene were willing to look outside of its core therapeutic areas, BioMarin (BMRN -0.70%) might be a good pick. The biotech already claims six rare-disease drugs on the market, and it's awaiting approval for another. BioMarin also has a late-stage candidate and another that isn't too far away from phase 3 testing. Its stock, however, is on the pricey side and would require Celgene to add to its debt.
The hands-down winner
There is another biotech, though, that checks off all the boxes. This biotech has several successful drugs already on the market. It claims a robust pipeline with multiple potential blockbuster candidates. And the stock is a bargain right now, with shares trading at less than 11.5 times expected earnings. Which fantastic biotech could this be? It's Celgene.
The company should take advantage of the panic-selling that occurred during October and scoop up boatloads of its shares. I can't think of a better use for Celgene's $10 billion cash stockpile. Quite frankly, there's no better deal on the market. Executive chairman and former CEO Bob Hugin said during Celgene's third-quarter earnings call that the company has "an incredibly bright future," with a "broad pipeline and market-leading top-line and bottom-line growth." He's right.
Despite the setback with GED-0301, Celgene's pipeline still has multiple candidates that could be huge winners. Topping the list are ozanimod and luspatercept. Revlimid, Pomalyst, and Otezla (even with its headwinds), combined with late-stage pipeline assets, should drive earnings growth of close to 20% over the next few years.
I wouldn't be opposed to Celgene buying any of the other biotechs mentioned earlier as potential candidates, but none of them can claim all of the positives that Celgene itself has. If Celgene buys back its own stock, I'm convinced that shareholders will win.
