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3 Biotechs to Buy and 1 to Sell Now

An industry that holds promise in 2014 and beyond

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With a $70 billion market capitalization, Celgene (CELG) hardly flies under the radar of most investors.  The stock more than doubled in 2013.  Thus far this year the shares are up another 3%. But even at a recent price of $168 a share, there could be a bit more gas in the engine, depending on the clinical trial results of drugs that lie beyond the company’s current focus on blood and oncology.

Celgene differs from many of its smaller biotech peers in that the company has the requisite double digit growth in its top line matched by an almost as rapid rise in its net earnings.  Earlier this month the company said 2013 results would come in better than expectations, with revenues of $6.4 billion versus previous guidance of $6.2 billion. And though 2014 projections were under the Street’s consensus at the net income level – at $7 to $7.20 a share versus the Street at $7.26 a share, hit by continued launch of one of its drugs in Europe, investors should focus on the longer term horizon, where company management has forecasted that revenues can top $17 billion by 2017 and earnings are projected to come in at $15 a shareThat’s a heady growth rate, more than doubling off of 2014’s levels.

Major contributors to revenues at present include Revlimid, at just over $4 billion of sales.  Revlimid is used to treat multiple myeloma (MM), a blood cancer, and specifically “relapsed” multiple myeloma.  The company’s Revlimid sales are about two thirds of the total market of drugs currently used to treat multiple myeloma.  Interestingly, patents for this drug do not expire until 2027, which means that this revenue stream is relatively safe for the next several years.

Another drug, Thalomid, also is used to treat MM, while Pomalyst, which is used in the event that patients are unable to take the other two based on adverse effects (there is some inherent toxicity in those first two drugs), could top more than $1 billion in sales by 2017, according to some analysts.  Pomalyst has received both US FDA approval and European regulatory approval.

Another drug, Abraxane, treats breast cancer, non-small cell lung cancer, and last year was approved in the US to treat patients with pancreatic cancer.  Abraxane, which slows the growth of certain tumor types, also has gained a positive opinion from European reviewing agencies, likely paving the way for its approval to be marketed and used in EuropeAnalysts expect the company’s sales of Abraxane to grow from roughly $650 million to more than $2 billion by 2017.  These three drugs make up the backbone of the company’s portfolio, and Celgene also has Otezla, designed to combat psoriatic arthritis and psoriasis, in clinical trials.  If approved by the FDA this year, an additional $1 billion of sales could accrue to Celgene, according to some industry analysts.

Of course, a lot of puzzle pieces must fall into place between now and 2017 for Celgene’s projections to come throughThe flagship Revlimid is being positioned as a second line of defense and treatment for chronic lympgocytic lymphoma, and is under a phase 3 clinical trial.  The company also wants to expand Revlimid’s revenues by gaining approval as a treatment for “newly” diagnosed cases of multiple myelomaThis year there will also likely be phase 3 trials for Abraxane to be used against a particular form of pancreatic cancer and also as a “first line treatment” for late-stage squamous cell non-small cell lung cancer.

As the company moves toward achieving its targets, and possibly even surpassing them, I suspect that shares will rebound – and by moving to a multiple in line with the average yearly growth rate, in the mid 20% range, we could see a $200 stock, or more, within a year or two.

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