Last month biotech blue-chip stock Celgene (NASDAQ:CELG) did what it always seems to do, throttle Wall Street's earnings expectations.
A little more than a week before Celgene was due to report its results, Celgene preannounced that its EPS would handily surpass what Wall Street had pegged for the quarter. Ultimately, when Celgene did report its Q2 results it wound up delivering $1.23 in adjusted EPS, up 37% from the $0.90 in adjusted EPS recorded in Q2 2014. Revenue for the period rose a "mere" 22% to $2.28 billion due in large part to the strength of multiple myeloma drug Revlimid. The company also beefed up its full-year adjusted EPS guidance to a range of $4.75-$4.85 from $4.60-$4.75.
All told, it was another great report if you're solely into headline numbers. However, if you're a true investor in Celgene and the biotech space you need to be willing to dig deeper than a few headline numbers to establish just how healthy Celgene's business model really is. How do we do that? By taking a closer look at Celgene's conference call and analyzing what its management team had to say.
With that in mind, here are five most important things that Celgene's management wants you to know about the company. Quotes are courtesy of S&P Capital IQ.
Abraxane is becoming an important blockbuster drug for us
"In pancreatic, [with Abraxane] we have been gaining share. The share in the impact patient population is right at 50% now. And it's -- once you jump up, it's a slower trajectory in terms of the shared gains, but we continue to see nice position there. Lung and breast are quite competitive, so I would say we're holding our own in that regard." – Jacqualyn Fouse, President of Global Hematology and Oncology
All eyes are typically on Revlimid, Celgene's multiple myeloma drug that accounted for 63% of its total sales in the second quarter. However, Celgene wants you to know that Abraxane is on the verge of playing a major role in its future growth prospects.
Since Celgene had its supplemental new drug application for Abraxane approved in Sept. 2013 as a treatment for pancreatic cancer, Abraxane sales have grown rapidly. It appears to be either holding or gaining market share in all of its respective indications. Best of all, Celgene is still in the process of introducing Abraxane as a pancreatic cancer therapy in select markets, meaning its share in pancreatic cancer should rise. Tack on the possibility of an expanded label into triple-negative breast cancer, and you have a drug capable of $2 billion (or more) in annual sales.
Plenty of questions with ozanimod, but plenty of potential, too
"We can't be definitive on what the exact label is going to look like [for ozanimod]. [T]he $4 billion to $6 billion [estimates] are nonprobability-adjusted, but they only include the 2 lead indications of multiple sclerosis and ulcerative colitis, did not include any revenues rather potential indications, including Crohn's disease, psoriasis or lupus, specifically SLE." – Scott Andrew Smith, President of Inflammation and Immunology
Arguably, there was nothing more transformative for Celgene over the past year (or couple of years) than its announced $7.2 billion purchase of Receptos (UNKNOWN:RCPT.DL). The crown jewel of its pipeline is ozanimod, known previously as RPC1063, a once-daily pill that works via the sphingosine-1-phosphate 1 receptor pathway. Ozanimod has demonstrated a lot of promise as a possible treatment for relapsing multiple sclerosis, and as a treatment for irritable bowel disorders such as ulcerative colitis.
When Celgene announced the deal, it offered a relatively broad $4 billion to $6 billion peak annual sales target for ozanimod. During its conference call, Celgene's President of Inflammation and Immunology, Scott Andrew Smith, helped add more color to its prior statement. Smith wants investors to know that it's difficult for Celgene to predict peak annual sales potential without first understanding what ozanimod's label might look like. But, he'd also like you to understand that Celgene's initial estimate doesn't include potential indications, such as Crohn's disease and lupus. With a favorable label, ozanimod could run the board and be well over a $6 billion per year drug.
Revlimid still has plenty of potential
"[P]ost the stem cell transplant maintenance, our share [for Revlimid] has always been quite strong. It's been over 80% for a long time. And we continue to hold there, and we continue to gain in the frontline, particularly, as I said, the nontransplant eligible. And I think we've still got a ways to go in terms of the share gains there." – Jacqualyn Fouse
Celgene may be pushing its non-Revlimid agenda in order to help develop some diversity in its portfolio, but that doesn't mean Revlimid's growth is showing any signs of slowing.
When answering questions from Wall Street, Jacqualyn Fouse notes that, in general, Revlimid's market share, like that of Abraxane, is either holding in certain indications or getting stronger. As a frontline multiple myeloma indication Revlimid has an opportunity to gain additional market share, while as a second-line therapy it continues to hold its share despite the recent approval of Kyprolis as a second-line multiple myeloma agent.
Remember, Revlimid has eight (yes, eight!) alternative indications it's currently being studied for. Celgene projects this could be a $7 billion-plus annual drug in the coming years, and they're probably right.
This aspect of our spending could soon fall
"SG&A will go up a bit in Q3 and Q4 as well. But really, the growth -- the increase is going to slow down. We're going to start getting leverage now that we've built this infrastructure and so forth, as we continue moving forward in 2016. So I think SG&A will not grow as fast as revenue in future years." – Peter Kellogg, CFO
With Celgene bringing a new company into the fold, costs are expected to go up. There are higher costs for employees, and the expected increase in marketing costs once ozanimod makes it to pharmacy shelves (which is both the consensus opinion of Celgene and Wall Street).
However, chief financial officer Peter Kellogg wants investors to understand that selling, general and administrative costs are actually near a leveling-off period. With Celgene able to merely expand the label indications of its key therapies, such as Revlimid, Abraxane, and Otezla (it's new anti-inflammatory product), the need to aggressively market these products probably isn't there as they'll already have an established base of loyal physicians. Long story short, operating margins should improve as revenue grows and SG&A growth levels off.
Yes, our total expenditures are rising -- but it'll be worth it
"We indicated on the announcement that we thought that for 2016, we would have a dilutive impact of about $0.40 per share in 2016, but we'd start working that down to $0.25 in 2017 and be breakeven in 2018. So we took a very ambitious approach. One thing I would highlight, though, is although we are investing in R&D, and that is so important for our future, it's so important to have these collaborations and these development deals, our operating margin, net-net, when you look through all of this, is continuing to increase ... If you take our 2020 guidance, really the math would imply that we're going to have our operating margins in the high-50s." – Peter Kellogg
This quote from Peter Kellogg might be a mouthful, but it so perfectly encapsulates what makes Celgene arguably the best biotech in the space.
Here, Kellogg is reaffirming that the purchase of Receptos, and much of its recent deal-making, will be dilutive or fail to provide an earnings boost until 2019. It's a point that some skeptics have harped on given that Celgene's stock has rallied so much since the end of the last recession.
But, Kellogg is quick to point out that these collaborations, its acquisition of Receptos, and its internal spending to expand the labels of existing therapies, is all going to be worth it over the long run. Coupled with those aforementioned flattening SG&A expense, Celgene's operating margin could rise from 52% in 2015 to the high 50-percentile by 2020. This implies a high level of efficiency, and it signals that Celgene's cash flow should grow with each successive year.
What now for investors?
The $64,000 question that investors probably want answered is whether or not Celgene is still a buy? In my personal opinion the answer is yes.
Even following Celgene's monstrous run over the past couple of years, and post the Receptos announcement, the company's primary means of growth is organic. It has more than 30 collaborations it can lean back on as a possible licensing company; it has more than a dozen possible indications it can expand its big three currently approved therapies to; and it now has a pathway to lighten its long-term reliance on Revlimid. With a PEG ratio around one and a prediction of roughly $13 in EPS by 2020, I'd strongly suggest Celgene remain high on your watchlist.