Celgene (NASDAQ:CELG) admittedly does not leap off the page as a cheap stock, at least not with a cursory glance. The shares are up about 40% over the past year (and more than 100% over the past two years) and trade at more than nine times sales and 11 times book, not to mention more than 16 times forward earnings.

Look closer, though, as this oncology-focused bio/pharma not only has a deep early stage pipeline of oncology drugs, but meaningful label expansion opportunities for approved drugs. Celgene is also preparing to launch its first immunology drug and the Street's expectations are quite a bit lower than those of management. A patent challenge to the company's lead drug is definitely a serious matter, but the shares appear undervalued even amid an ongoing bull market in the health care space.

Taking the "over" on Otezla
Otezla, the proposed brand name for Celgene's oral PDE-4 inhibitor apremilast, is arguably the biggest and most controversial near-term revenue opportunity for Celgene. The company's application for psoriatic arthritis has a March 21 PDUFA date and approval is widely expected. Later in the year, the FDA should also approve the company's application to market Otezla for psoriasis (PDUFA date of September 23).

Otezla is a very different sort of drug that leading treatments like AbbVie's (NYSE:ABBV) Humira or Amgen's Enbrel. Otezla is a pill, not an injected drug, and it works as an immune modulator instead of an immunosuppressant. With that, the drug has shown fewer serious side effects, particularly with regard to infections and cancer. There is definitely a difference in efficacy, as Otezla has been shown to be less powerful than Humira or Enbrel, but there is a sizable percentage of patients with less severe disease that could benefit from the drug, and the monitoring requirements for health care providers will be quite a bit lower.

Like AbbVie has done with Humira, Celgene is looking to secure multiple indications for Otezla. The company should present Phase III data on ankylosing spondylitis before mid-year, and the drug is being studied in indications like Crohns, ulcerative colitis, and Behcet's. The Street currently does not believe the company can hit management's goal of $1.5 billion to $2 billion in 2017 revenue (due to competition with AbbVie's Humira, Pfizer's Xeljanz, and other drugs), as the current average estimate for that year is around $1.1 billion. I would argue that the Street seems to be underestimating the number of patients with less severe disease who could benefit from a milder (and cheaper) treatment alternative, and Otezla could offer some upside.

Revlid growing, but under threat
Celgene has turned Revlid into one of the best-selling oncology drugs in the market, and the company continues to work on studies to support label expansions that will add to its addressable market. That could take the sales of this drug (already annualizing above $4.5 billion) to $9 billion or higher by the end of the decade.

Wall Street seems to be increasingly concerned about potential threats to this very valuable drug. Indian generic manufacturer Natco and Actavis (NYSE:AGN) have partnered to develop a generic form of Revlimid and Celgene is contesting this. Investors fear that Celgene's polymorph patents will not hold up. Basic composition of matter patents cover the drug through 2019 and method of use could extend that coverage to 2023, but Celgene argues that its polymorph patents protect the drug through 2027. With the possibility that Revlimid will be generating close to $9 billion in revenue around 2019, this is clearly a very serious issue for Celgene (and Actavis), but patent litigation is notoriously difficult to predict.

Should Celgene prevail in the courts or choose to settle with Actavis/Natco, there are other threats to consider. Bristol-Myers Squibb is almost certainly going to explore the use of its potential blockbuster-in-the-making nivolumab (a PD-1 inhibitor) in hematological cancers, and efficacy in line with what has been seen in early studies in renal cancer or melanoma would make it a formidable option. It is also likely that nivo won't be the only immuno-oncology drug tested in hematological cancers, as Merck and Roche are both looking to test their PD-1/PDL-1 antibodies in a broad range of cancer types. I wouldn't sleep on the risk that nivo (or another PD-1/PDL-1 drug) shows strong results, but investors should also remember that immuno-oncology is still in the giddy bullish phase where it is the answer to every problem, and actual pivotal results may not live up to the hopes of these early days.

On the positive side
Part of my bullish thesis rests on the idea that the Street is too skeptical about Otezla and too worried about potential competition (generic and branded). There are other parts to the story beyond "it's not this bad". Abraxane is doing very well (sales up 91% in the fourth quarter) and seems to be on its way to becoming a new standard of care in pancreatic cancer. Coupled with label extensions for Revlimid and Vidaza, I believe Celgene already has drugs in hand that can fuel strong growth for the next five years.

I am also bullish on the pipeline, with ACE-011 and ACE-536d for various hematological disorders (including beta-thalassemia), the TORK inhibitor CC-223, and the BTK inhibitor CC-292. The one problem is that there is a gap in Celgene's pipeline between the aforementioned label extension opportunities and this early stage compounds. Given Celgene's past acquisitiveness, another deal or licensing agreement wouldn't be a major surprise.

The bottom line
Assuming Celgene averts a worst-case scenario with the Revlimid patent situation, I believe the company can generate long-term revenue growth of around 12%, with FCF growth of 15%. These assumptions do include comparative bullish expectations for Otezla, as well as expectations for Abraxane to approach $2 billion in revenue and Pomalyst to exceed $1.5 billion.

On a discounted cash flow basis, I believe fair value for Celgene is in the $170's. I also believe that the stock's forward EBITDA multiple of around 16.5x is suggests undervaluation given that even bearish analysts are projecting three-year EBITDA growth in excess of 17%.

It's hard to call almost any large-cap drug stock a huge bargain in this market, but Celgene seems to be weighed down by bearish sentiment disproportionate to its opportunities. As a proven winner in oncology, Celgene seems to offer some value for investors looking to establish new positions late in this bull market.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.