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Holly LaFon
Holly LaFon
Articles (8062) 

David Rolfe Comments on Celgene Corp

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July 17, 2017 | About:
Wedgewood has not owned a biotech stock since we sold out of Gilead Sciences in the spring of 2014. Over the following three years we saw the biotech space go through quite a cycle. From 2014 through mid-2015, we witnessed essentially the entire biotech space move up in frenzied unison, causing a strong relative performance headwind for us in the process. The biotech space then sold off sharply as political rhetoric began to focus on taking action to reduce prescription drug pricing. Indeed, our cautious stance on the group was validated when biotech stocks (IBB) literally crashed (–40%) from July 2015 in just six short months. It should come as no surprise that this broad sell off raised our interest in the space, and we began buying shares of Celgene Corporation (NASDAQ:CELGZ).

Celgene is a global biopharmaceutical company engaged primarily in the development of therapies for the treatment of cancer and immune-inflammatory diseases. Celgene's current blockbuster drug is Revlimid, an indication for the treatment of patients with multiple myeloma, a cancer that forms in plasma cells. While Multiple Meyloma is considered a relatively uncommon cancer, it is the second most common blood cancer in the world with approximately 114,000 new cases diagnosed each year.5 Revlimid is considered a leading therapy for Multiple Meyloma and as a result of its success, accounted for more than 60% of Celgene's 2016 revenues.

Such strong sales in a single drug has resulted in the stock trading at a lower valuation than its biotech peers as investors are concerned about whether Celgene will be able to replace its revenue stream once Revlimid goes off patent in 2027 and generics enter the market (which will begin gradually as early as 2022). Management is not concerned; rather, their focus remains on business development to grow beyond the loss of exclusivity, particularly in Revlimid, with a pipeline and R&D model that they believe will create significant growth potential through 2030.

Management has regularly provided long-term goals with current 2020 targets for revenue to grow +17% on a compounded basis and earnings growth of more than +20% on a compounded annual basis. Their confidence, as well as ours, in this long-term guidance is backed by a plethora of pending data that could result in potential value-creating events as data readouts are expected from 17 Phase 3 trials over the next 18 months. In addition to these late stage results, the company has 30 unique molecules in development with 50 programs supporting those molecules. Management is confident that several of these have blockbuster potential and that a few even have peak potential in the multi-billion dollar range. We believe it would be difficult to find another biotech name with a pipeline as deep as Celgene's.

One of Celgene's drugs that investors are awaiting with much anticipation is Ozanimod, which Celgene added to its line-up via its acquisition of Receptos in June 2015. Ozanimod is expected to enter the market next year but has already been noted as having the potential to be a best-in-class oral agent in Phase 3 trials for Inflammatory Bowel Disease (IBD) and Relapsing Multiple Sclerosis (RMS). While deemed expensive at $7.2 billion, this acquisition significantly enhances Celgene's Immune-Inflammatory (I&I) portfolio and further diversifies the company's revenue stream beginning in 2019 with projected revenue generation in the billions of dollars in the IBD space alone.

By fiscal year-end 2017, Celgene is expected to have four drugs with sales exceeding $1 billion dollars each – Revlimid, Abraxane (treatment of solid tumors), Pomalyst (another myeloma drug), and Otezla (an oral alternative for advanced psoriasis and psoriatic arthritis) – and well on their way to diversifying their revenue stream. Management continues to reiterate confidence in meeting or beating their current long-term expectations. We take comfort too in the fact that Celgene is attributing a significant portion of their growth to volume growth versus price increases in their drugs. From a cash flow standpoint, Celgene generates billions of dollars in free cash flow each year that the company can spend on drug development as well as share buybacks and additional acquisitions. With the stock trading at attractive valuations relative to the peer group, in our view, the addition of Celgene to the portfolio is a great opportunity to re-enter the biotech space and to benefit from the growth opportunities in Celgene's existing pipeline and R&D efforts.


From David Rolfe (Trades, Portfolio)'s Wedgewood Partners second-quarter 2017 shareholder letter.


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