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Can This Biotech Go Even Higher?

Thursday - 7/18/2013, 2:37pm  ET

Celgene has emerged as the leading treatment provider for blood cancer. The company value has almost doubled in the last year due to rising sales of Revlimid and approval of Pomalyst. Both drugs are amongst the leaders in this industry and have combined peak sales potential of more than $6 billion.

According to recent news, Onyx Pharmaceuticals is on the market and the street is speculating on potential buyers. There is a strong possibility that Celgene can target Onyx’s Kyprolis to ensure its complete domination of the blood cancer treatment market. Any developments in this regard will positively impact its valuation. Even if it doesn’t acquire Kyprolis, Celgene is still a buy due to the high growth potential of its Revlimid franchise.

Business model

Celgene is a biotechnology company involved in discovering, developing and commercializing treatments for cancer and ‘immune inflammatory’ diseases. It most famous drug is REVLIMID for the treatment of myeloma and transfusion-dependent anemia. Other known drugs include VIDAZA, ABRAXANE, THALOMID, POMALYST and ISTODAX.

The company has a vast pipeline that contains approximately 27 different compounds divided into 9 treatment areas. These compounds are already available in the market as approved drugs or are still undergoing multiple clinical trials. The company is working to expand its Revlimid franchise and expand its pipeline into multiple treatment areas. It has adopted the strategy of partnering with small development companies that have promising candidates in pre-clinical/ early stages.

Fundamentals

Despite tough competition from Healthcare giants, Revlimid has been exceeding analyst expectations. The street was expecting Celgene to post an EPS of $1.35, but it beat expectations by posting EPS of $1.37 per share. This is the fourth quarter in a row that Celgene has exceeded expectations. The revenue was also impressive at $1.5 billion, marking a 15% improvement year over year. Net income came in at $592 million, a 22% year-over-year improvement.

The company has also revised expectations for 2013. It now expects EPS in the range of $5.55 to $5.65 on revenue of $6 billion. The street expects Celgene to post revenue of $6.16 billion and earnings of $5.74 per share. Revlimid is the key factor behind the stellar financial performance of Celgene; it contributes approximately $3.8 billion to sales. The second highest selling drug is Vidaza at approximately $820 million.

Pipeline news

Celgene has one of the richest pipelines in the entire biotechnology sector. The company is still working to further improve its pipeline by making partnerships with small biotechnology companies. This year the biggest news for Celgene investors was the FDA approval of Pomalyst. The FDA has approved Pomalyst for treating cancer patients which have shown resistance to other cancer treatments. The drug is in the same class as Revlimid, but unlike Celgene’s star drug it is able to treat patients that don’t show response to the first-line treatments. The company expects that the peak sales potential of Pomalyst can reach $1 billion. Revlimid and Pomalyst both face competition from Onyx Pharmaceuticals Kyprolis. Luckily for Celgene, it is currently only approved as a third-line treatment. However, there are reports that it is increasingly being used off-label as a second-line prescription. The company is also pursuing trials to get FDA approval for Kyprolis as a second-line drug.

Celgene has also acquired the cancer treatment MOR202 from MorphoSys. The company will develop the drug to treat leukemia and myeloma. According to analysts, the myeloma market is enormous, and there are approximately 27,000 new cases diagnosed every year.

Celgene is also investing in regenerative medicines under its cellular therapy units. It has signed a deal with Tengion to invest $15 million for first rights on its kidney tissue regeneration technology. Tengion has acquired $33.6 million in funding for Neo-Kidney Augment product candidate.

Chronic kidney disease is one of the most common medical issues around the world and more than 25 million Americans suffer from the disease. The disease is common amongst people who have diabetes or cardiovascular issues. Long-term treatment with antibiotics is also a common cause of chronic kidney disease. If successful, this treatment will allow cell tissues to be created from the kidney and reduce the need for painful processes such as dialysis or transplant.

Competition

A Couple of weeks back, Onyx Pharmaceuticals announced that it has rejected an acquisition bid from Amgen. The stock appreciated approximately 50% and speculation started on other prospective buyers for the company. The most commonly taken names are Bayer and off course Amgen. The street is missing the high synergy that could exist between Celgene and Onyx. It is true that Celgene is not as cash rich as Bayer or Amgen, but any form of a merger could be beneficial to shareholders of both companies.

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