Why Celgene Corporation (NASDAQ:CELG) Looks Like A Quality Stock In A Promising Industry

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  1. Revlimid accounted for 62.4% of 3Q sales.
  2. Need to diversify revenue streams become urgent
  3. Improving cash balance could pave the way for dividends.

There is both risk and opportunity in Celgene Corporation (NASDAQ:CELG) relying on Revlimid for more than 60% of its annual sales. The opportunity is that there exists more growth headroom for the drug as Celgene works to extend its label and launch it in more global markets. However, the risk is that intense competition in cancer treatment space could limit the sale of Revlimid faster than Celgene expects. That means that as much as Celgene can count Revlimid to continue driving its sale, there is a need to rapidly extend the drug’s label and diversify the overall product portfolio.

3Q2015 results highlight

Celgene Corporation (NASDAQ:CELG) reported a mixed 3Q2015 whereby EPS of $1.12 beat the consensus estimate at $1.09. But revenue of $2.3 billion fell short of the expected $2.4 billion. Revlimid was once more the top revenue contributor as it has been in the recent past, contributing 62.4% of sales in 3Q.

What can Celgene rely on for continued growth in 2016 and beyond?

Celgene’s potential growth catalysts

Revlimid label extension: Revlimidis Celgene’s main source of revenue and the company is not willing to put it down. Celgene is determined to continue milking money from Revlimid and one of the strategies it is using to do that is extend the treatment mandate of the drug. Extension of Revlimid’s label actually takes more than one approach.

In one case Celgene has worked to secure approval for early use of Revlimid on qualifying patients in the U.S. and Europe. To put that in perspective, where Revlimid could only be used in a relapse situation, it can now be used in nearly diagnosed patients, thus expanding its addressable market and widening its revenue potential. In another label extension campaign, Celgene continues to research for additional treatment cases where Revlimid can be used. That should also help boost revenue coming through Revlimid. Moreover, Celgene remains committed to rollout of Revlimid to more international markets so as to also expand its revenue potential.

But, what kind of a revenue machine is Revlimid?

The chart below shows revenue from Revlimid vs. the total revenue over the last four quarters:

Capture

Celgene spent 2015 building sales infrastructure for Revlimid thus 2016 should be a year of harvest with less expenses associated with the marketing of the drug. That should mean a boost to profits coming through Revlimid.

Unrealized potential in Abraxane

Abraxane is Celgene Corporation (NASDAQ:CELG)’s other blockbuster potential oncology-themed treatment. Celgene is projecting that Abraxane’s sales will increase 14% YoY to $967 million in fiscal 2015, but that could just be the beginning of unveiling a blockbuster.

There is so much that is already going on around Abraxane. Internally, Celgene is busy working to expand the treatment mandate of Abraxane to enable it fetch maximum value from the drug. Celgene has already made a breakthrough on that front with the label of the drug being extended to include treatment of pancreatic cancer and other conditions.

Externally,other cancer drug developers are showing interest in Abraxane as part of their combo treatments. Roche Holding Ltd. (ADR)(OTCMKTS:RHHBY) is one of them as it is collaborating with Celgene for the sake of Abraxane to use the drug in a combo cancer immunotherapy it is developing. If Roche is successful, the arrangement could help extend the shelf life of Abraxane, thus allowing Celgene to extra value from the drug for a longer time.

Revenue diversification

Celgene Corporation (NASDAQ:CELG) is likely to use 2016 to advance the efforts to diversify its revenue streams. Not only does the company rely on a single product for nearly 70% of its sales, but its portfolio is mainly focused on cancer treatments. Given the increasingly competitive environment in cancer drug sales, the company is better of trying its luck in other drug categories to sustain its growth. Furthermore, a diversified portfolio is also important in minimizing risks.

Towards revenue diversification, Celgeneis combining in-house efforts with inorganic assets. Internally, the company has developed a treatment for psoriasis that it calls Otezla. The drug has been approved for the condition by the FDA. Celgene is currently in the process of developing a therapy for Crohn’s disease to pave way for further revenue diversification.

Inorganically, Celgene acquired Receptos for $7.2 billion to add to its diversified product lineup. Receptos brought in Ozanimod, a treatment for multiple sclerosis and other conditions outside Celgene’s core oncology. Celgene estimates that Ozanimod could be a $4 to $6 billion per annum revenue opportunity if it wins regulatory approval.

Clearing of dark cloud over Revlimid

Celgene recently settled a major patent dispute that was threatening to cloud the future of Revlimid and delay other programs in the company. The settlement allows Natco to bring its generic version of Revlimid to market before the expiration of the last patent for marketing exclusivity of Revlimid. As such, Natco will be able to introduce a limited volume of its Revlimid copycat in the U.S. from 2022. The volume allowed will increase gradually every year until 2025 when it is expected to peak without exceed a certain preset limit.

The settlement with Natco clears a major overhang in the sale of Revlimid and should lift investor sentiment in Celgene.

Pressure points

Stiff competition in oncology space: Competition is growing rapidly in the cancer treatment market. For example, hospitals are having a long list of cancer treatments to choose from for various cancer types. With a portfolio that weighs heavily on oncology side, Celgene is at risk with growing competition in its core market. The company now has to innovate under pressure to diversify its portfolio away from cancer treatment, but risks can be high if you are developing a treatment under pressure to outlive the competition.

Overreliance on Revlimid: The fact that Celgene Corporation (NASDAQ:CELG) depends on Revlimid for the vast majority of its sales in any quarter of year creates several risks for the stock. Any sign that Revlimid is not living up to revenue expectations could weigh heavily on the stock price. Failures to expand the treatment mandate to meaningful levels could also temper with the growth of Celgene not to mention the impact on the stock.

Shareholder returns

Celgene doesn’t distribute dividends to its shareholders, but its improving cash position could inspire the board to approve dividend payouts. In the absence of dividends, though, the company returns value to shareholders directly through buybacks. In the last quarter, the company purchased of $815 million worth of its own stock. With that, about $4.3 billion remains in the current buyback program.

Celgene’s cash balance was more than $6 billion at the end of the last quarter, up from $4.5 billion in the previous quarter and $3.7 billion a year earlier.

2016 outlook

Celgene is predicting revenue in the range of $10.5 to $11 billion in 2016. EPS is expected to be in the band of $5.50 to $5.70. The consensus estimate calls for 2016 revenue of $11.14 billion and EPS of $5.68, which dwarf Celgene’s outlook. But you can always expected surprises on the upside assuming that the management of Celgene is conservative in the projections.

Conclusion

Celgene Corporation (NASDAQ:CELG) has so much to count on for growth and profitability in 2016, the question is whether the management can continue quality execution.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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