Celgene Corporation (NASDAQ:CELG) stock looks attractive here, for a number of reasons. Celgene stock has sold off, losing about 43% of its value. Celgene touched a four-year low in May before a recent rebound. The decline leaves Celgene looking awfully cheap, at a little over 8.3x 2019 consensus EPS estimates.
That multiple seems close to absurd for a cutting-edge biotech. And while there have been some stumbles of late, even the bad news could be good news eventually. The failure of Phase 3 trials for mongersen was a setback. But the “refusal to file” letter related to ozanimod, while hugely embarrassing, is a fixable error. Bulls certainly would argue that Celgene has been punished enough.
But there are real risks here and more going on than headlines might suggest. The 40%+ haircut in Celgene stock isn’t just a reaction to a single drug failure and missteps around ozanimod. I can see why mongersen might seem attractive here, but at the least investors need to keep some of the potential dangers in mind.
The Revlimid Patent Cliff
8x EPS does sound cheap. But biotech and pharma multiples are lower than those of other stocks because key products simply don’t last as long as they do in other industries. Patents expire and sales fall, often sharply.
For Celgene, the key product right now is multiple myeloma treatment Revlimid. With over $8 billion in sales, the drug accounted for 63% of Celgene’s revenue last year. 2020 revenue targets of $19 billion company-wide suggest that figure should stay over 50% for the next few years.
But come 2022, generic competition begins. An agreement with Natco Pharmacy allows for “volume-limited” generics beginning in March 2022, with unlimited competition arriving in January 2026. Final patent expiry in 2027 will unleash a torrent of competition. (Note too that pending cases could speed even this timeline up.)
So while 8x earnings might be cheap, it’s not a cheap multiple if Revlimid can’t be replaced. With R&D spend already booked, Celgene is printing money off the product. And as those sales and profits fade next decade, Celgene will need new drugs to fill the gap.
Celgene already is making moves to prepare itself for that eventuality. It acquired Juno Therapeutics for $9 billion in January. But even that deal likely leads to maybe $3 billion in peak sales, a fraction of the contribution from Revlimid.
As for organic development, there’s a reason why the RTF letter on ozanimod rattled the market. It was a significant error that simply isn’t supposed to happen at a major biotech.
Celgene’s head of hematology and oncology blamed management at Receptos, which was acquired in 2015. But that’s not comforting either; an acquisitive company needs to do a much better job integrating those purchases. And as one observer pointed out, that explanation sounds like a “dog ate my homework” type of excuse.
In the meantime, Celgene’s internal R&D programs have had limited success. A Leerink Partners analysis showed just one out of 20 programs led to a marketed product (psoriasis treatment Otezla). With a giant hole appearing in the P&L next decade, Celgene needs to do better. The recent trading in Celgene stock suggests investors are seeing increasing concerns on that front.
Does Celgene Stock Sound Familiar?
None of this is to say that Celgene is a bad company. But this not a case where a few one-time effects have led the stock to lose nearly $50 billion in market value. There are real long-term concerns here – for both Celgene and the industry.
Notably, President Trump continues to call for lower drug pricing, most recently causing Pfizer (NYSE:PFE) to roll back a price increase. Yet Celgene has been aggressive in raising prices on Revlimid, which costs over $200,000 a year and Pomalyst.
In part due to those concerns, the biotech and pharma sectors have been tough spaces for investors of late. So while again Celgene stock seems cheap, it’s not necessarily an outlier. GILD is at less than 12x forward EPS, and PFE a little above that multiple.
Biogen Inc (NASDAQ:BIIB), with a more diversified portfolio, trades at 13x.
And the market has seen drug development companies follow the path of Celgene stock. Valeant Pharmaceuticals (NYSE:VRX), Teva Pharmaceutical (NYSE:TEVA), and McKesson Corporation (NYSE:MCK) all have seen huge declines – and looked ‘cheap’ pretty much all the way down.
That’s not to say that Celgene stock will follow the same path. But a cheap stock in the pharma/biotech space isn’t always cheap – particularly when 60%+ of sales, and a higher proportion of profits, come from a single drug.
If an investor wants to buy Celgene stock here, there’s a case (and indeed Wall Street remains behind the stock). But that case has to be based on more than a single-digit P/E multiple and a big sell-off. Recent history in the sector shows that’s not enough. Investors need to trust the Celgene business – and the Celgene pipeline.
As of this writing, Vince Martin has no positions in any securities mentioned.