A series of setbacks including a late-stage trial failure and an FDA rejection letter have sent Celgene Corp (CELG) shares reeling. However, the company's revenue and profit continue to grow, and several new, money-making drugs could make their way to market in the next two years. Is this the perfect time to add shares of Celgene to your portfolio?
Peppered with problems
Celgene markets a slate of highly successful drugs, including two top-selling therapies for multiple myeloma. The company's proven track record of identifying, developing, and commercializing billion-dollar blockbusters has made it into one of biotech's biggest companies. However, its track record of success suffered some dings in 2017 that caused its shares to stumble.
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First, the company announced last fall that its once-promising Crohn's disease drug, GED-0301, had failed to deliver the goods in phase 3 trials. Then it reported that growth for its fast-growing psoriasis drug, Otezla, was slowing. That one-two punch resulted in management ratcheting back its long-term sales forecast for 2020 to at least $19 billion from $21 billion previously.
The bad news didn't stop there, though. In January, management revealed that the FDA had sent it a refusal-to-file letter for its oral multiple sclerosis drug, ozanimod. Ozanimod has a similar mechanism of action to the $3 billion-plus Gilenya, but it's arguably safer, so it's one of the most enticing drugs in Celgene's R&D pipeline. Because addressing deficiencies outlined by the FDA takes a while, Celgene had to push back its timeline for when it could begin to benefit from commercial ozanimod sales.
The setbacks increased worry that Celgene's plan to offset risk to revenue when its patents expire on Revlimid wasn't up to snuff. Revlimid is expected to account for $9.7 billion of the $15 billion Celgene expects to deliver in revenue in 2018, or roughly 65% of sales. The first generic versions of Revlimid aren't expected to appear until 2022, but its outsize impact on the company's financials can't be ignored.
A compelling value
Despite its problems, Celgene is far from a company on the brink. Label expansions are leading to more people using Revlimid for longer periods of time, and that's boosting sales by double-digit percentages. Sales are still growing for Otezla and its third-line multiple myeloma drug, Pomalyst. And the company's pancreatic cancer drug, Abraxane, continues to generate about $1 billion in revenue.
Assuming Celgene delivers on its guidance for $15 billion in sales this year, revenue will increase 15% year over year from 2017. Importantly, management expects earnings per share will improve to at least $8.70 this year, up from $7.44 in 2017.
Because the company's financials are improving, yet its share price has fallen, investors can acquire Celgene's shares on the cheap. Its 4.93 trailing 12-month price-to-sales ratio is near a 10-year low, and its trailing 12-month price-to-earnings ratio of 24.7 is at more than a 5-year low. Investors are paying only 10.3 times 2018 EPS estimates to own this stock.
The argument that Celgene's cheap becomes even more compelling when we consider the company's 2020 outlook. Based on its projection for sales of at least $19 billion and earnings per share of at least $12.50, investors are only paying 3.3 times 2020 sales and 7.2 times 2020 EPS at current share prices.
Irons in the fire
Limited life cycles due to patent expiration, competition, and high clinical trial failure rates make biotech stocks notoriously hit and miss, and Celgene isn't immune to the industry's risks. Nevertheless, there's a lot going on in Celgene's R&D department that investors ought to like.
The company is finalizing an application for approval of fedratinib, a myelofibrosis drug it acquired earlier this year. If it's approved, it will compete against the billion-dollar-per-year drug Jakafi. Collaboration partner Acceleron Pharma (XLRN) recently reported successful phase 3 trials for a beta thalassemia and myelodysplastic syndrome drug, luspatercept, that has blockbuster potential, and an FDA application for it is planned for the first half of 2019. Celgene's application for approval of ozanimod should be refiled early next year too.
Additionally, liso-cel, the chimeric antigen receptor T-cell gene therapy Celgene acquired when it bought Juno earlier this year, and bb2121, a CAR-T under development with bluebird bio (BLUE 3.29%) for multiple myeloma, continue to progress toward regulators.
In short, given how much could go right for Celgene over the next 12 to 24 months, I think buying Celgene's shares at their current price might be a smart decision.
