Weighing Pros And Cons Of Celgene

Introduction

I’d like to do something just a little different in this article on Celgene (CELG), and present the pros and cons of the stock as I see them following the latest earnings report and conference call. There are 773.5 MM diluted shares outstanding (fourth-quarter average). CELG closed Friday at $99.80, so the market cap is $77 B by this share count method. The acquisition of Juno (JUNO) for $9 B is underway.

One question is whether CELG, back at a price it first reached in 2014, is undervalued. The other is whether any undervaluation is great enough to overcome any negatives that each investor may perceive.

Technically, CELG is in a downtrend with a weak chart, but that can only take a serious investor so far, and not very far at that in my view.

I’ll try to make this concise and as comprehensive as possible, but a truly comprehensive concise article on this topic is not possible. CELG has a lot of ways to be thought about. Here are the ways I think about the stock in positive and negative aspects, followed by a brief summary of my current conclusions on this name.

Readers are assumed to be familiar with the Q4/full-year press release, and it would help if you are familiar with the conference call transcript, but neither is truly necessary to understand the points I am making next.

Positives on CELG come first.

Immense free cash flow from established products; immense pipeline; premiere takeover candidate can provide a floor

Wall Street has gamed this out and, per ETrade (ETFC), projects the following non-GAAP earnings per share for the following years. These are close to free cash flow profits per share, though almost certainly they exclude the dilution from share-based compensation. Note, these are in my view not likely to be close to the actual free cash flows the company will receive, as CELG has been a serial acquirer and I expect it to stay one. Here are consensus non-GAAP EPS numbers as far as ETrade presents them:

• 2018: $8.50
• 2019: $10.28
• 2020: $12.18
• 2021: $14.68

I also project 2022 as an “up” year, as well. After that, there are uncertainties on Revlimid’s status both in the EU and US. Thus the non-GAAP earnings numbers may sum to about $62 per share through 2022, with further earnings from Revlimid and the others in 2023 and 2024 likely. However, around 2022, Abraxane may go generic, and a couple of years later, Imnovid/Pomalyst. That will leave Otezla by mid-decade as probably the only significant profit center of existing drugs. Revlimid will go generic in the EU either in 2022, 2023 or 2024 depending on the results of CELG’s challenges to two adverse patent decisions made in 2015. In the US, Revlimid should retain sizable profits through about 2024 if no additional generic challengers succeed, which is a big if.

So, depending on how one accounts for the above (I would not give dollar for dollar value), one can very likely say that a significant part of CELG’s current share price of $100 must come from the pipeline (including partnership arrangements) to justify the current share price. Existing products will not likely come close, though Otezla has hopes for important new indications and Imnovid/Pomalyst should grow nicely for several reasons.

Thus, the pipeline matters a lot. CELG is being valued lower in somewhat of a similar manner as Gilead (GILD) suffered the past couple of years, and as GILD actually suffered back in 2010-11. CELG has something of “the GILD disease.”

In a bullish mood, I would look at the immense CELG pipeline and say, how can this not be worth a great deal of money?

Then, there is the obvious point that several mega-caps would probably love to own CELG. This could include all the following names, which I think could afford to do the deal and would have plans to mesh CELG’s pipeline with their own:

• Pfizer (PFE) – Its pipeline could use a boost.
• Merck (MRK) – Same comment as PFE.
• Roche (OTCQX:RHHBY) – Though a huge deal may not be its style.
• J&J (JNJ) – This would cement its status as a pharma company, not a healthcare conglomerate.
• Amgen (AMGN) – This would finally focus it as an oncology company; inflammation products and pipeline could be sold if needed to make the numbers work.
• AbbVie (ABBV) – Almost perfect complementarity between its business lines and those of CELG. ABBV is leveraged, but I think could do the deal.

To put matters another way, on the bullish side, CELG may have limited fundamental downside – though not trading downside – because takeover chatter may push it up if it drops further. CELG is a unique, highly focused drug company, which would help its valuation in a takeover. But note the word “may” in this paragraph. No guarantees!

Now to the negatives. While the positives are one well-known coherent story, with the addition of summary thoughts on the many companies that I suspect may want to own CELG, the negatives may not be as well known, so each gets a brief section.

Management turmoil

Two years ago, Robert Hugin was suddenly replaced as CEO by Mark Alles. But Mr. Hugin moved up to be executive chairman. The executive aspect of that role is undefined. Was he de facto CEO, or de facto co-CEO? We were not told. Now he is suddenly leaving the company, not even staying on the board. Political ambitions are bruited about. But this is too sudden – once gain – for comfort.

Also sudden were the previous departures of President Jackie Fouse, who not long before had been CFO and a key member of the decision-making team, and the head of CELG’s most important R&D division, heme-onc, Dr. Michael Pehl.

Additionally, Mr. Alles is a young CEO. His team misled investors last year with bad guidance on Otezla sales, once mildly and once worse than mildly.

Best practices require the board chairman not to be the CEO. So I question CELG’s governance now.

Too many deals at too high a price?

Why is Juno worth $9 B, plus interest costs on debt assumed, plus the substantial investment required to turn it into a profit center? Novartis (NVS) and GILD/KITE have real leads. These may be durable given the ancillary investments and relationships necessary to make CAR-T therapies work in practice. I like CAR-T, and CELG has the bluebird bio (BLUE) deal as well, but A) I don’t love $9 B+ deals which do not make a company #1 or at least #2 and B) I’d like to see the deal for ozanimod work, noting that CELG probably has at least $9 B into this one now as well.

CELG has done a number of dubious acquisitions and partnerships as well as good ones and ones for which results are as yet unknown. The mongersen deal with Nogra was a failure. The deal with AstraZeneca (NYSE:AZN) for hematology rights to durvalumab is not looking too good. The jury is out on ozanimod for MS, but CELG commented in response to a question from Brian Abrahams that its base case now is for “a class label with monitoring.” This does not thrill me, because if all that ozanimod gets is a class label, why shouldn’t payors strongly favor Gilenya, a Novartis drug that may go generic soon, and upon which ozanimod may or may not be a true next-generation improvement? The jury is also out on ozanimod for inflammatory bowel disease and for the latest plans that CELG revealed in the conference call for ozanimod to be studied in secondary progressive MS.

In addition to the number of deals, CELG has a history of paying full retail prices. Two Decembers ago, CELG had recently completed a deal for an oncology asset, and I believe it was Dr. Pehl who said at the ASH meeting that the company knew it overpaid for it, but it just had to have it (or words to that effect).

We simply do not have a handle on how successful or unsuccessful CELG’s many deals will prove to be. Yet it continues to pour current profits into them, retaining little or no annual profits. It’s something like Amazon’s (AMZN) strategy in which showing profits means being out of ideas, but if CELG’s “ideas” come simply from paying market price for products invented and developed elsewhere, how can that lead shareholders to an expectation of alpha?

Finally:

Is the company addicted to hyping the future?

One of the reasons I was beginning to really like Mark Alles was that he was letting Mr. Hugin’s projections for sales and non-GAAP earnings to be achieved in 2020 remain there, not roll them forward. Yet in the most recent conference call we see Scott Smith saying the following in his prepared remarks about the (unknowable) future:

JCAR017 together with BGB-A317 and fedratinib represent three late stage products added to the pipeline in the last nine months. Our pending acquisition of Juno Therapeutics and strong ongoing collaboration with bluebird on bb2121 will help Celgene become the preeminent cellular immunotherapy company. These products together with Ozanimod, luspatercept, and others could yield over $16 billion in incremental peak revenue through 2030.

I look with great disfavor at these projections. First, when CELG actually becomes the preeminent cellular immunotherapy company, the Street will say so. It’s boastful to say this now, with no approved products on the market, NVS and GILD ahead of them, and others in the chase. Second, daring to look at peak sales 12-13 years from now is a new one to me. Why not project $30 B? But what if it’s $4 B? The lesson I learned a quarter of a century ago was to under-promise and over-deliver. These sorts of comments are a turn-off to a serious investor. Have they any purpose other than to pump the stock?

Summary – Thinking about CELG as a buy-sell-hold story

My “take” is simple: there are no easy answers here. The matrix of possible outcomes for CELG’s future profit stream and how Mr. Market reacts to the changes is incredibly complex. Most deals could work out, or not. CELG could be acquired, or not. Most of its important deals could work out, or not. General issues with biotech, such as more pricing pressure in the US, could harm CELG and its peers, or not. And perhaps the EU would create a little more inflation by getting easier on pharma prices.

So my answer on CELG is not to try to predict the unpredictable. I’m just going to sit tight, and in view of all the uncertainties, I just do not see enough reason to make any trades in this name at this time, just stay long as is. Regarding the two questions I asked in the Introduction, the answer is that I have no answer to either one. Time will just have to answer for us.

I see clearer “buy” opportunities in other stocks after last week’s sell-off in CELG and in the general market (SPY), as well as in the biotech sector (IBB).

It is my hope that discussing some prominent big picture positives and negatives of CELG has been of some interest to you and of some benefit in your understanding of the company and the stock. Many details, such as specific pipeline candidates and its platform CELMoD technology, have been discussed by me and many others previously. I look forward to the opportunity to discuss them further as they advance near and then to commercialization.

Thanks for reading and sharing any comments you wish to contribute.

Disclosure: I am/we are long CELG, GILD, ABBV, RHHBY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Not investment advice. I am not an investment adviser.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.