I'd like to think all investors are picky to some degree, otherwise we'd simply throw a dart at a newspaper and buy whatever it lands on. But some of us are pickier than others -- and I certainly would lump myself in that crowd. Since September, when I bought my first shares of Intercept Pharmaceuticals, I hadn't added a new stock to my portfolio. Sure, I added to some existing positions since then, but nothing had caught my eye enough to pull the trigger and click the buy button on my brokerage account... until this past Monday.
Why Celgene has lost almost half of its value since early October
Since hitting an all-time intraday high of $147 in early October, shares of Celgene have been shelled. On Monday, they closed below $75 (a decline of 49% since October) for the first time since May 2014. Rather than one issue being at fault, a multitude of problems have haunted Celgene in recent months. In no particular orders, these include:
- The company's third-quarter operating results, where it wound up reducing its revenue and earnings-per-share outlook for 2020. Having previously expected more than $21 billion in sales and over $13 in annual EPS by 2020 (as issued on Jan. 12, 2015), the company now anticipates sales ranging between $19 billion and $20 billion, with EPS in excess of $12.50.
- Sales of oral anti-inflammatory medicine Otezla have recently lagged Wall Street's growth expectations. During the fourth quarter, U.S. sales of Otezla increased by just 13% on a year-over-year basis.
- Sales of cancer drug Abraxane have stalled as a result of new cancer immunotherapies entering indications that Abraxane currently treats. Full-year sales in 2017 rose by a meager 2% to $992.
- Worries persist regarding multiple myeloma blockbuster Revlimid and the possibility of generic-drug entrants.
- Celgene had to eat crow after announcing that its new drug application (NDA) for next-generation multiple sclerosis treatment ozanimod, which was acquired via its $7.2 billion purchase of Receptos, contained deficiencies. These deficiencies will require Celgene to run additional studies, delaying the review and possible debut of ozanimod.
- Executive turnover has picked up, with Chief Operating Officer Scott Smith exiting in early April following the ozanimod filing snafu and business development head George Golumbeski leaving the company last month.
It's quite the list, and it certainly puts into perspective why Celgene has faced so much pressure in recent months. But where most investors sees concern, I see opportunity with this blue-chip biotech.
Five reasons now is the time to start buying Celgene's stock
Just as there are numerous reasons for the company's decline, I see a basket of reasons to be encouraged. Here are the five catalysts that coaxed me to add Celgene to my portfolio.
1. Revlimid is a rock through Jan. 31, 2026
To start with, concerns over Revlimid are completely unfounded. Celgene's most important drug, which is on track to generate approximately $9.5 billion in sales in 2018, representing a 16% increase from the previous year, and 64% of Celgene's total revenue as forecast in 2018, is seeing steady organic growth. Improvements in multiple myeloma diagnostic equipment, along with a growing population, has led to a growing number of diagnoses, longer duration of use, and strong pricing power for Celgene's key therapeutic. Double-digit annual sales growth each and every year isn't out of the question.
What's truly important here is that Celgene has done its homework, and it's settled litigation designed to keep a flood of generic Revlimid from entering the marketplace until the end of January 2026. According to the agreement Celgene made with a handful of generic drugmakers in December 2015, a small amount of generic Revlimid will enter the market in March 2022, with generic supply growing modestly in each successive year (beginning in March) through 2025. Still, generics will remain only a small component of total supply until the end of January 2026. This means Celgene can expect more than 7 1/2 additional years of sizable cash flow, courtesy of Revlimid.
2. Collaborations lead to a smart use of capital
According to Celgene's business development partnership list, the company currently has 40 development partners. Many of these partnerships cover what would be first-in-class ways to treat cancer or inflammation, which, if successful, would give Celgene the opportunity to license a game-changing, next-generation therapy.
Understanding that it can't possibly tackle every cancer, immunology, or inflammatory indication, Celgene has aggressively sought out licensing deals. Though these deals mean parting with upfront capital, as well as putting billions of dollars in milestone payments potentially on the line, it also means that Celgene is putting its money to work on only the most promising projects. It's essentially outsourced the development of first-in-class cancer and inflammatory drugs.
Some of the company's most intriguing business development deals include its ties with CAR-T drug developer bluebird bio, which has a number of blood cancer therapies in the works, as well as Agios Therapeutics. Last year, Celgene and Agios brought acute myeloid leukemia drug Idhifa to market. Long story short, these collaborations make Celgene's pipeline bigger than most folks realize.
3. Celgene's portfolio is growing organically
In addition to its broad collaborative portfolio, the company is doing just fine with the development of in-house therapeutics. Revlimid's label may have an opportunity to be expanded to treat first-line follicular lymphoma, relapsed and refractory indolent lymphoma, and first-line diffuse large B-cell lymphoma (ABC subtype).
Meanwhile, anti-inflammatory blockbuster Otezla may offer promise in treating Behcet's disease and ulcerative colitis. Cancer drug Abraxane, despite being a mature drug, may offer hope as an adjuvant therapy for pancreatic cancer patients.
The point being is that Celgene's Food and Drug Administration-approved drugs have regularly grown organically within their existing indications, and they have plenty of opportunity to add new indications to their existing labels. Even ozanimod, which could generate $4 billion or more in peak annual sales, may have a future in treating Crohn's disease and/or ulcerative colitis. There are no organic growth worries here.
4. Management has levers it can pull
Never underestimate the importance of a knowledgeable management team. Though Celgene's ozanimod NDA wasn't its finest moment, the management team has levers it can pull to improve the company's long-term outlook, as well as create value for shareholders.
Take, for example, the 2015 acquisition of Receptos for $7.2 billion. Even though we're going to have to wait a bit longer for ozanimod to hit the market, it still offers peak annual sales potential of perhaps more than $4 billion. If it reaches those peaks, the $7.2 billion Celgene paid for Receptos will be well worth it. It would also help diversify the company's revenue stream away from Revlimid, which I'm certain Wall Street will appreciate.
Though a dividend isn't in order as long as Celgene is growing sales by a double-digit percentage each year, management has aimed to put shareholders first through a share repurchase plan. In February, an additional $5 billion share buyback plan was announced to reduce outstanding shares by approximately 20 million, according to the company's updated 2018 outlook offered in early May.
5. The fundamental metrics are too enticing to ignore
Finally, Celgene simply looks too cheap to ignore by traditional fundamental standards. Even taking into account the risks of having almost two-thirds of its sales coming from a single drug, and having to potentially wait a few more years before ozanimod debuts on pharmacy shelves, the fundamental metrics make sense.
In terms of forward P/E, Celgene is valued at only seven times Wall Street's expected 2019 EPS and just six times its own 2020 forecast. Taking into account its double-digit sales growth rate, its price/earnings-to-growth ratio, or PEG ratio, is now below 0.5. Generally, any figure below 1 is considered to be "cheap," and in Celgene's case, it's now well below that mark. At no point has Celgene ever been this inexpensive. And what biotech stocks are this cheap, such as Gilead Sciences, have seen their top-line growth stall out, which isn't the case by any means with Celgene.
Though I may not have snagged the bottom on Celgene, which is being whipsawed at the moment by emotional traders, I look forward to the opportunity to nibble from time to time. Over the long run, I expect to be handsomely rewarded for my patience.