Image source: Centers for Disease Control and Prevention.
Yesterday marked the kickoff to the Super Bowl of all healthcare conference, the 34th annual J.P. Morgan Healthcare Conference, and biotech behemoth Celgene (CELG +0.00%) wound up being one of the first presenters of the day. Despite the early start time, and with coffee in hand, Wall Street waited to hear what one of the fastest growing and most profitable biotech companies had to say about its performance in 2015, and what the future might hold for its current and developing product portfolio.
Based solely on the reaction of Celgene's stock, investors weren't thrilled, with its shares at one point dipping about 10% during intraday trading on Monday. However, as we'll get to below, it appears to have more to do with the company's near-term guidance than its long-term outlook. I'd certainly encourage investors with a stake in Celgene, or who have an interest in the biotech sector, to listen to Celgene's webcast to get a complete view of where the company is headed. For those of you without that sort of time on your hands, here are five presentation slides from the event that aptly sum up where Celgene has been and where it's headed.
Image source: Celgene.
All systems go in 2015
When looking back at 2015, nearly everything wound up firing on all cylinders for Celgene. Based on the preliminary results filed by the company in a separate press release on Monday, Celgene generated $5.8 billion in sales from multiple myeloma blockbuster Revlimid, up 16% year-over-year, just shy of $1 billion each in Abraxane and Pomalyst sales, and nearly cleared a half-billion in Otezla sales in the drug's first full year on the market.
Of particular interest, though, is that its operating margin increased 140 basis points over the previous year, and it repurchased an aggregate of $3.3 billion worth of common stock.
Tackling this last point first, Celgene's management has stated previously that it has no intentions of paying a dividend anytime soon. The reason is that it's investing heavily in research and development, which is critical to cementing long-term growth and diversifying its pipeline beyond its currently heavy reliance on Revlimid. Thus, it's been focused on rewarding shareholders with buybacks, which can ultimately have a positive effect on EPS and make Celgene look even more attractive on a valuation basis.
In terms of operating margin improvements, I believe we're seeing both its strong pricing power in oncology with Revlimid and its focus on collaborations shining through. Even though its collaborative deals could lead to large milestone payments at some point in the future, for now Celgene has found a way to effectively outsource R&D opportunities without any sizable direct costs. For the time being it's been a real boon to its operating margins.
Image source: Celgene.
Turbulent waters ahead?
However, Celgene's look into the future (namely 2016) didn't go as well with investors.
Looking toward 2016, Celgene is forecasting net product sales of $10.5 billion-$11.5 billion, a 17% increase at the midpoint, Revlimid sales of $6.6 billion-$6.7 billion, and full-year EPS of $5.50-$5.75, which would be up 19% at the midpoint. Operating margins are again expected to expand 150 basis points to approximately 53.5%.
The problem? First, analysts' full-year sales estimates for 2016 ranged from $10.77 billion to $11.57 billion, meaning its midpoint was a little below the Street's. More importantly, its new midpoint full-year EPS guidance is modestly below the $5.68 Wall Street was expecting. Dilution from the $7.2 billion acquisition of Receptos, which gave Celgene access to ozanimod, an experimental next-generation multiple sclerosis drug, is the primary culprit of the weakness. However, Abraxane's U.S. sales have also slowed as cancer immunotherapies have begun testing and expanding into indications that it covers.
The other concern was the announcement that beginning March 1, Bob Hugin would step into the Executive Chairman role and Mark Alles will be promoted to CEO. Hugin has been instrumental in leading Celgene's organic, collaborative, and acquisition-based growth, and investors are clearly worried that Celgene may stray off the path with a new CEO.
For what it's worth, Celgene maintained its long-term forecast for 2020. It still expects EPS of at least $13 per share, and revenue of at least $21 billion.
Image source: Celgene.
Now that's what I call organic growth
Arguably the most attractive aspect of Celgene is its ability to take its already approved products and expand their use to new indications. Otezla, the company's oral anti-inflammatory drug, could eventually be approved in a half-dozen additional indications, and as you can see above, Revlimid and Abraxane have plenty of expansion potential upcoming based on their success or failure in upcoming phase 3 trials.
This year we'll be getting phase 3 data from the REMARC trial on Revlimid as a maintenance therapy for diffuse large B-cell lymphoma. What I'm most interested in is the top-line data we'll get in the first-half of next year for first-line follicular lymphoma in the RELEVANCE trial. Label expansion, pricing power, and multiple myeloma demand growth could push Revlimid sales north of $10 billion by 2020 at this pace.
For Abraxane, whose sales have slowed recently, 2017 promises to be a big year. Collaborative partner Roche (RHHBY 1.09%) is currently working on three late-stage studies involving its cancer immunotherapy atezolizumab and Celgene's Abraxane as a combo therapy to treat non-squamous non-small cell lung cancer, squamous NSCLC, and triple-negative breast cancer (which will yield top-line data in 2018). Roche is a leader when it comes to oncology drug development, so additional label opportunities attached to cancer immunotherapies could help extend Abraxane's shelf life, and it could further cement Roche as the dominant player in oncology. Celgene is also working on its own trio of late-stage studies involving Abraxane for NSCLC, TNBC, and adjuvant pancreatic cancer.
Image source: Celgene.
Did someone say collaborations?
As noted above, Celgene isn't relying solely on organic growth and acquisitions to drive its growth – collaborations also play a key role.
As it stands now, and as you can see above, Celgene has around three dozen external collaborations with focuses ranging from oncology to immunology and inflammation. The advantage of a broad collaboration platform is that it allows Celgene to outsource growth opportunities without having to spend a fortune upfront on R&D. Should one of its collaborations succeed, then it can put its cash flow to work, thus maximizing the use of its cash. Best of all, the majority of Celgene's collaborations could fail and yet it would still be a success overall if just a handful of first-in-class licensed products hit blockbuster status.
What's a collaboration worth monitoring? I've always been drawn to its partnership with OncoMed Pharmaceuticals (OMED +0.00%), which is engaged in the research of anti-cancer stem cell drugs, or anti-CSC. OncoMed wound up receiving $155 million from Celgene in upfront cash, and Celgene also made a direct equity investment in OncoMed. The crown jewel for OncoMed is the more than $3 billion in development, regulatory, and sales milestones it could receive for the six drugs the duo is currently developing. CSC's have a knack for avoiding destruction by chemotherapy and radiation, and they're believed to be the source of cancer recurrence and metastasis.
Image source: Celgene.
Your checklist for 2016
I've been following the biotech sector for a long time, and I only WISH companies would provide a clean and understandable goal sheet like this more often.
This sheet above is your guide to 2016, and it breaks down exactly what the company hopes to accomplish in terms of trial enrollment and initiations, as well as data releases and financial goals. My suggestion? Follow along and check off the events as they occur so you'll have a good idea of what's still to come. I'd also pay close attention to Celgene's regulatory submissions, as every approval could be one more feather in the cap for an already impressive product portfolio and pipeline.
Yesterday's reaction may not have been exactly what investors had hoped for, but Celgene looks to have all the tools necessary to deliver double-digit percentage growth through 2020 and possibly beyond. It's still priced attractively even after its run higher since the recession and would, in my opinion, make for a solid investment for growth-oriented investors with a modest-to-high risk tolerance.
