Celgene's (CELG) purchase of Receptos (NASDAQ: RCPT) for a whopping $7.2 billion highlights that CAR-T drug possibilities are growing in appeal. What's behind the acquisition, and where does Receptos fit into Celgene's bigger picture?
A full transcript follows the video.
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Michael Douglass: Surprisingly we're talking all about Celgene today. This is Industry Focus.
Hi, Fools! Healthcare analyst Michael Douglass here today and I'm talking with Todd Campbell. We're talking all about Celgene Corporation today... there's a lot going on. I think it should be a good conversation, and a very closely aligned episode, since it's really different pieces around Celgene.
First off, let's talk about the news. Celgene announced on Wednesday July 15th that they were purchasing Receptos, which is a smaller biotech, for $7.2 billion. That's primarily to get a hold of their main pipeline candidate. Todd, what's your take?
Todd Campbell: This is a transformative deal. I think everybody was expecting that Celgene would jump in and do some sort of deal this year. I don't think I was the only one that was thinking this could happen. Celgene's been kicking off a tremendous amount of money. Quarter after quarter its cash stockpile has been growing and people -- myself included -- have thought they think they can more than double their revenue in the next five years.
If they're going to be able to grow beyond 2020 they're going to need to spend some of this money and buy up some great, game changing medicine. That's exactly what they've done here with this deal for Receptos.
Douglass: It's interesting as well because when you look at what they paid -- they paid $7.2 billion -- and the primary drug they're going after is Ozanimod. They're estimating $4 to $6 billion in peak sales for this drug. When you think about the valuation multiple it actually looks like a pretty reasonable deal for Celgene.
Sure, they're going to have to pay for these Phase III trials, which are very expensive, but if the drug actually ends up succeeding in those trials and ends up getting commercialized and achieving those peak sales; they'll have acquired it for a pretty reasonable multiple. In biotech you often see 2x, or 3x peak sales and this would be a bit under 2.
Campbell: The drug that Celgene is getting could very well end up being a best in class oral treatment for multiple sclerosis.
Douglass: With a possible kicker in ulcerative colitis as well.
Campbell: Yeah. Potentially Crohn's Disease as well. This is a drug that could be $4 to $6 billion. You always have to take those things with a grain of salt, but in this case I think they're not that far off the mark. Here's why: right now people who are getting diagnosed with MS and going with oral treatment, they're being prescribed either Biogen's Tecfidera, or Novartis' Gilenya. If you look at the first quarter sales and annualize them for those two drugs you're talking about $3.2 billion in annualized sales for Tecfidera, and $2.4 billion in annual sales for Gilenya.
You're talking about upwards of $5 billion in sales just from those two drugs. What makes Ozanimod more interesting and intriguing is, during its Phase II trials the safety profile was similar to placebo. If you can be Celgene and say "we've got this drug, we've already got sales forces out there pitching their first autoimmune drug Otezla." They can leverage experience that they've gotten from that, and they can say "We've got a drug that's as effective as these other oral drugs, but has a much better safety profile." It's hard for me to believe that they won't become the D-Facto, or the go-to drug in the oral class.
Douglass: Of course, there's always the caveat we have to put in there which is: Phase III trials are still years out from reporting. It could be that data doesn't look as impressive as the Phase II data did. If it is as good -- and clearly, Celgene thinks it will be otherwise they wouldn't have plopped down $7.2 billion for it -- there is really quite the opportunity here. It seems like a really transformative and smart, and even for biotech; reasonably cheap deal for Celgene. It's a really good sale from Celgene's point of view if everything works out.
Campbell: For full disclosure: I happen to belong to Celgene so I'm a little bit biased and I'm a fan of it and anytime a company goes out and spends $7 billion in shareholder money you've got to raise your eyebrows. In this case I think it's got a better-than-not chance of paying off. Obviously, time will tell. Data from the Phase III trial for Ozanimod in MS is expected in '17. Ulcerative Colitis should come in '18. Theoretically, you could get an MS approval -- or denial -- by the FDA in 2018.
You would get a drug that could be creating blockbuster sales by 2018, or '19. Think about it this way; Celgene is one of the few companies that will actually go out and give you forward guidance years of into the future. As part of this announcement they also increased their 2020 forecast from a minimum of $20 billion in sales to a minimum of $21 billion in sales. Again, their thinking -- which might a bit conservative given what their peak sales forecast is for this drug -- is that it's worth at least an extra $1 billion in sales by 2020.
Douglass: Celgene's management hasn't really been a management that's liable to go out there and say "This is a massive opportunity," and then really under deliver on it. Of course, no one can predict the future, but when I think about managements that are conservative with their guidance; Celgene is always high on my list in healthcare. That's always a good sign. Definitely a big development in healthcare, and for Celgene. For shareholder of Celgene like you and me, we'll be wanting to watch that moving forward. The second thing I really wanted to discuss today was a question that we got.
Folks, before I go any further, we love getting questions. Please shoot us an email at [email protected]. Again, that's [email protected]. We love answering questions from the mail bag. They're always really interesting things. If you've got a stock you want to talk about, or you're curious about what we think about something that's going on in healthcare -- whether it's Medicare, the aca, Medicaid expansion; anything at all. Drop us a note. [email protected]. We try to respond to every email we get. We certainly read every email we get and we try to feature as many of them as we can on the show.
With that said, Jonathan from California was asking us about Juno. Juno had signed a deal with Celgene. We'll get more into that in a minute, but the big question was "Why is their stock valued so high?" At the time of the note it was about a $5 billion market cap. How do you think about whether the pipeline justifies a particular valuation? How do you quantify the fact that, with these biotechs, you're really trying to look into the future and understand what that future could be, and how likely it is that a drug is going to get into that? Particularly in the fact that drugs are highly likely to fail. A vast majority of them do in human trials.
Todd, let's breakdown that question a little further. First off, let's give a bit of background for our listeners on the Juno-Celgene deal, and then we can move into thinking about Juno's pipeline.
Campbell: Sure. One of the hottest areas in research right now is immuno-oncology. Immuno-oncology is trying to reengineer a patient's immune system to better identify and then kill cancer cells. There's a few different ways you can go about doing that. One of the most promising is CAR T's approach where you take T-cells out of a person's body, you reengineer them to be able to identify a protein that's being expressed by the cancer cell, you put those T-cells back in the body, they propagate, and then they're able to go out and kill that cancer. Whether or not that works long term, no one knows. Juno Therapeutics is one of the leaders in developing those CAR T approaches, though.
Douglass: Thinking about Juno Therapeutics, when you look at their pipeline -- and folks, I encourage you to Google 'Juno Therapeutics Pipeline' and you can see the pipeline and even follow along with us if you want as we talk about it a bit. You see a lot of drugs in pre-clinical, and Phase I. One of the real struggles in biotech is thinking about when a drug is in pre-clinical, and that means it hasn't even been tried in humans yet; what does that mean in terms of what the drug could do? How do you think about valuing that?
For me, I find it impossible to value a pre-clinical drug because if something works in mice, that doesn't really tell me whether it's going to work in humans. There's still so much difficulty in terms of figuring out what will end up causing liver toxicities, or kidney toxicities; or whatever issue that might make something unsuitable for humans. Even with Phase I, a lot of times it's escalating dosage to see what sort of dosage you want to modulate to in order to make sure you're getting that dose dependent response.
Essentially you increase the dose and see if that does anything to the disease you're fighting. Theoretically, if a medicine is working, more of the medicine should work more. You've got these Phase I trials that are just so small so much of the time. I think it's really difficult to really know what he opportunity is there.
Campbell: In Juno it makes it even more difficult. You have asked about the deal with Celgene. Essentially what Celgene has done is said "We're going to give Juno $150 million up front for the rights and options to these CAR T therapies. We're also going to give you $850 million to buy 9 million shares, roughly 10% of the company." Celgene has looked at this pipeline and said "WE think Juno has the best in class option in the CAR T, and we're willing to give you $1 billion for 10%." Essentially, that's what it came down to.
Now, how they came up with that value is a bit of a mystery. In the case of Juno, the $1 million question is the $4.7 billion question, which is what their market cap is right now. Is it worth $4.7 billion? Is it worth some multiple to that? Is it worth $60, $70, $80? Like you said, Phase I is typically checking if the drug is safe and what dose should be given. Phase II looks at whether or not the drug works. Phase III is a confirmatory trial saying "Yes, it does work. It works in a lot of people." Anytime you're trying to figure out the peak sales potential for a drug to put a value on a company like Juno you have to make some assumptions.
Anytime you make an assumption you make a "blank" out of "u" and "me". You've got to be very careful in avoiding getting overly bullish in your assessment of how many patients the drug could treat, what price they could charge for the drug, how likely it is to get through trials and regulator's desks, and then what kind of market share it can collect. Then you have to discount all of that by the time value of money.
A dollar today is worth more than a dollar 10 years from now. It's not easy coming up with a model that's going to effectively tell you that it's worth $X amount. I think that's what is so vexing about investing in biotech. You have to do a lot of 'educated, learned, guesswork'.
Douglass: Back of the envelope math.
Campbell: Yeah. When push comes to shove you're doing everything you can to know as much about the pipeline and indication that a drug is targeting and what the competitive landscape looks like. Eventually you're going to have to say "buy, sell, or hold". Sometimes you'll be right, sometimes you'll be wrong. Sometimes it won't matter.
Douglass: Yeah. The fact of the matter is, because you have so much risk early on, I tend to avoid early stage companies -- even exciting early stage companies. I tend to go for companies with broad pipelines -- which Juno certainly has -- but also some depth to their pipelines where they've got some Phase III assets that prove out the overall platform, or at least indicated there's some incoming cash. Balancing against that though, you also have one of the things that I think is an excellent sign for any clinical stage biotech.
They've got a big, well [hilled] partner that's involve. When you think about Celgene or Novartis, or any of these 'large' biotechs, or big pharmas; when they get in they don't play around. They're looking for stuff that can really move the needle in a big way. So that tells you there's potential here.
Campbell: There's a little defense going on here, too. Celgene makes a lot of its money by selling drugs to treat multiple myeloma and lymphoma and blood diseases. By lining up CAR T therapies like those at Juno that could be used to treat these conditions someday, it's a good way to protect the franchise.
Douglass: Absolutely. This is classic Celgene. They spent a lot of this time going into these early stage companies. Sometimes they took equity stakes, sometimes they didn't, but they get involved early. Let's face it; they can pay a lot less money than they will later on if this works out. For me personally, I would say my 'company buying strategy' is that I tend to go for companies where there's a bit less risk, and I'm willing to accept missing out on some of that early growth because of that. For me, Juno is too risky.
For someone who's less risk-averse, or is really confident that these particular types of immunotherapies are going to work out that may be a different story. For me, that's why it's a watch list candidate, and something I want to watch the data, see what happens, and then potentially look into it further down the road.
Campbell: 100% agree.
Douglass: We're pretty similar investors, Todd. For better or for worse. Hopefully for better. It's been a good couple of years in the market, at least. Folks, that's all we've got today. Thank you, as always, for giving us a listen. Check back daily for the Industry Focus podcast, and of course our sister podcast like Market Flurry, and Motley Fool Money. Also, check Fool.com for all of your investing needs. Thanks much, and we'll talk to you soon. Fool on!
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