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Celgene Corp. (CELG) Message Board

  • rob_cos rob_cos Jan 9, 2013 2:33 PM Flag

    Bernstein "Tgt to $106. Expect CELG to continue higher for wks & months through mid-yr.

    Much easier to read version of this and other reports on IV CELG board.

    Bernstein "LT Guidance Low. Raising TP to $106...expect rally to continue in coming wks/mos & to remain strong through mid year. Pom Jan approval,MM015/MM020 results=Q1 upside! Aprem detail, abrax ,oral aza & AVL292 = Q2 upside"

    BERNSTEIN

    CELG: After Pre Announce, Guidance, Where Can Stock Go?

    Long Term Guidance May Be Low, New Target Price $106, Outperform

    Highlights

    · Alone of the large cap biotech companies Celgene pre-announced significant revenue and earnings results for Q4 this week, and also provided significant new guidance for 2013, and initial long term guidance for 2017. Based on our outlook for the company, the updated guidance and commentary, and meetings with management this week, we are adjusting our company model and earnings estimates, and raising our target price from $96 to $106 and maintain our outperform rating. We expect the stock to continue to rally in coming weeks and months, and to remain strong through mid year, despite their ususal season slowdown in Q1. We expect the stock to offer upside around a Pomalyst approval in January, MM015 results in Q1, MM020 analysis in Q1 or Q2, disclosure of psoriasis phase III data for apremilast in Q2 and then the definition of comprehensive development plans for overlooked but emerging development programs at the company, specifically abraxane, oral vidaza, and AVL292 in Q2.

    ·For Q4, the company reported revenue of $1.44 bn, 1% lower than consensus of $1.46 bn and 2% lower than our estimate of $1.48 bn. The company reported EPS of $1.31, in-line with consensus and 1% below our estimate of $1.33. Revlimid sales of "just over $1.0 bn" were roughly in-line with consensus and our estimate of $1.01 bn. Celgene reported full-year operating profit margin (OPM) of ~48%, slightly higher than our estimate of $47.7%.

    · For 2013 Celgene guided to revenue of $6.0 bn, 1% below consensus of $6.04 bn and 4% below our estimate of $6.22 bn. The company guided to 2013 EPS of $5.50-$5.60, the midpoint of which is 1% below consensus of $5.61 and 7% below our estimate of $5.94. After a 300 bps OPM improvement from 2011 to 2012, Celgene expects the improvement to decelerate to ~100 bps (to 49%) from 2012 to 2013. This is consistent with our expectation of decelerating OPM improvement in 2013 (we forecasted OPM of 49.5%). This initial guidance also offers opportunities for upside should revenue results exceed initial estimates (provided recent expense discipline is maintained).

    · It is important to note that over the last six years, Celgene has beaten its initial revenue guidance for the year by 10% and its EPS guidance by 6% on average.

    ·Celgene provided more clarity on its long term guidance: reaffirmed 2015 guidance and introduced 2017 guidance that is significantly higher than us and consensus. Celgene reaffirmed its 2015 guidance of $8-$9 bn in net product sales and $8.00-$9.00 in EPS. For 2015, we forecast net product sales of $8.47 bn and EPS of $9.05, while consensus forecasts revenue of $8.14 bn and EPS of $8.34. On either basis the company’s stock looks cheap today against comparable company multiples of 2015 revenue and EPS. Celgene also introduced their first 2017 guidance of $12 bn in net product sales and EPS of $13.00-$14.00. This is significantly higher than our forecast (net product sales of $10.75 bn and EPS of $12.62) and well above recent consensus estimates (revenue of $10.31 bn and EPS of $12.00). Celgene is guiding toward Abraxane revenue of $1.0-$1.25 bn in 2015, vs. our estimate of $829 mm, and $1.5-$2.0 bn in 2017, vs. our forecast of $1.1 bn. The company expects total product sales CAGR of 19% between 2013 and 2017, 13% for the existing business, 15% including Abraxane pancreatic cancer and 19% including apremilast. As far as we can tell, this guidance does not appear to include significant revenue for other development programs beyond their phase III trio of apremilast, pomalidomide (Pomalyst) and new indications for Abraxane.

    ·Celgene also updated the timeline of a number of clinical trials. Celgene now expects MM015 overall survival trend data to read out in 1Q13, vs. 1H13 guided previously. Celgene still expects the PFS analysis and primary read out for the important MM020 trial to come in Q1, with a likely filing in the US in H2 2013 and submission in Europe at the same time and with the MM015 75 years package. Celgene also confirmed that they now expect to submit a supplemental new drug application (sNDA) for Abraxane's pancreatic cancer indication in 1H13, which suggests that their recent meeting with the FDA about this program was successful.

    · Celgene announced that apremilast has achieved statistical significance in the Phase III trials ESTEEM1 and ESTEEM2 in psoriasis. The company will present detailed results in an upcoming medical meeting. An NDA submission for psoriasis, based on data from these two pivotal trials, will be filed in 2H13. As announced previously, Celgene plans to file an NDA for psoriatic arthritis in 1Q13 and combined MAA for psoriasis and psoriatic arthritis in Europe in 2H13.

    ·In conversations this week, Celgene's management indicated that their long term guidance remains relatively conservative. The plan behind the guidance includes revenue contributions from programs and new indications that are in phase III or awaiting approval today and where the regulatory path to approval is relatively defined (expaned myeloma label for Revlimid in Europe, Pomalidomide launch in RRMM, Abraxane pancreatic cancer indication, Revlimid approval and use in NHL and CLL ) but have not included revenue for programs that lack this clarity of time and path to market. This implies some big omissions, that still seem relatively high probability to us.

    ·Some of these are themselves relatively advanced already (eg Abraxane in melanoma), and could contribute significant revenue by 2017 over and above their existing guidance. Such programs include oral azacitidine (Vidaza) now entering phase III, the company's oral BTK inhibitor AVL292, as well as their emerging new iMIDs entering the clinic this year and the products emerging from their collaborations with emerging biotech company's such as Epizyme and Acceleron. There is no revenue contribution in the plan from other new indications for Vidaza (solid tumor induction is becoming interesting) or for potentially many new indications for Abraxane after the positive results this year. We believe the evidence for broader utility of both these products is increasing, and is likely to result in multiple new exploratory and then proof of efficacy studies in the next 2-3 years.

    · Probably the only area where the company's management may be considered to be aggressive is in their forecast contribution from apremilast. With 400 bps of revenue CAGR between 2012 and 2017 coming from apremilast, it implies that they are expecting apremilast to reach $1.2bn by 2017. Management have now seen at least some of their phase III results in psoriasis, and suggested that the results were materially better than the skin-efficacy seen in patients in the psoriatic arthritis trials. If this is indeed the case, then investor expectations for apremilast may be boosted by the presentation and/or publication of those psoriasis results, likely in the first half of 2013.

    · The company also appears to have taken a relatively conservative approach to their expected generic erosion of products facing near term patent expiry. In the case of Thalomid, which is declining slowly now, Celgene has forecast continued and terminal decline through 2017, despite the probability that there will not be any true generic alternative. More importantly, the company's forecast also includes loss of exclusivity for Vidaza in the US in 2014, with rapid subsequent erosion (although continued growth in sales to ex US markets).

    · Another important driver for the compan's earnings guidance is their margin outlook. In the last year the company has improved their operating margin by around 300bps; their initial guidance for 2013 implies a significant slowing of this trend (which is consistent with our model), although it does include another 100bps or so of margin improvement. Longer term their expectations embeddedin the forecast are that their operating margin increases by another 200-300bps between 2013 and 2015 (to the 52-53% range) and then improves again to the 54-55% range by 2017. Again this is consistent with our expectations and model, however, incremental revenue could result in greater leverage to both R&D and SG&A spending than is implied by this guidance.

    ·Importantly, the company's guidance is also based on the same share count as they guided for the end of 2012. In recent years the company has been reducing their share count by 3-4%/year in real terms, rather than simply maintaining stable sharecount by offsetting the dilution of equity compensation programs. We believe it is likely that the future share repurchase activity will be considerably larger than this forecast, and significantly lower sharecount offers additional earnings upside to the new long term guidance.

    · Celgene are planning to outline the components of their long term forecast, as well as the potential of new indications and portfolios of trials, at an analyst and investor event on or around May12 this year. These plans are likely to feature multiple new trials and indications for Abraxane, for AVL292 and for oral azacitidine, all of which should generate significant new investor interest.
    · Based on the company's pre-announcement, guidance and commentary this week, we are increasing our revenue forecast for Celgene by 1% for 2013, 2% in 2014, 3% in 2015 and 4% in later years. Our adjusted forecast is 4% above recent consensus for 2013, and then 8-9% higher in later years. While our model already reflects some margin improvement, we have not adjusted our expected margin trend at this stage. Nevertheless our EPS estimates increase by 2-3% in future years beyond 2013, and our adjusted estimates are now 8-9% above recent consensus for 2013 and 2014 and then 11-15% higher in later years.

    ·Based on these changes to our EPS estimates, as well as changes in peer company multiples, estimated EPS for FY1 in our valuation and lower risk free rate in our DCF models, we are increasing our target price from $96 to $106 and maintain our Outperform rating. While seasonally Q1 can be a challenging time for Celgene, we expect the company's pipeline-driven newsflow to more than offset the negative effect of the usual Q1 slowdown in sequential growth of Revlimid in the US. We would anticipate that the stock stabilizes in the near term in the $90-95 range, and then moves strongly again on newsflow throughout the first half of 2013.

    Investment Conclusion

    We rate Celgene Outperform with a target price of $106. Celgene has taken an old and discarded drug (thalidomide) and invented a whole new class of compounds and a novel approach to cancer treatment based on research into thalidomide’s original activity. Although it has taken many years for that strategy to come to fruition, it now appears that Celgene will capture significant incremental use of its first novel compound in this family, Revlimid, in its two existing indications, myeloma and myelodysplastic syndrome, as well as in other diseases such as NHL and CLL and potentially even in solid tumors.

    Over the next three years, we expect Celgene to deliver ~25% EPS CAGR. The acquisition of Abraxis boosts the company's long term growth outlook, consolidates its position in oncology and leverages the company's established global development and commercialization infrastructure. The returns on this acquisition will depend on successful development in lung cancer at least, and potentially pancreatic and other indications too, as well as international expansion. Other important pipeline opportunities include oral azacitidine (Vidaza) and pomalidomide; we remain lukewarm about the potential of apremilast.

    Valuation Methodology

    Our $106 price target for Celgene is based on three different approaches, which includes P/E multiple of large cap healthcare growth companies which comes to $111 (by applying 12x multiple to $9.33 2015 EPS), DCF which arrives at $99, and PEG ratios analysis (1.1x PEG ratio for large cap biotech companies, implies 18.1x multiple of 2013 EPS of $6.00 gives $108). We take the simple average of these three approaches

    Sentiment: Strong Buy

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