RBC-raising target (again) to $115 on MM-020, pipeline, derisking.....
RBC - CELG - Understanding MM-020 (Likely Positive), Early Pipeline, and Dynamics (Derisking - "Three Product Story" now) in 2013 -- Raising target (once again) from $110 to $115
RBC CAPITAL MARKETS
CELG - Understanding MM-020, Early Pipeline, and Dynamics in 2013
Target Raise $110 to $115
Q4 results were previously preannounced; thoughts on continued momentum and catalysts for CELG in 2013.
We are buyers of CELG as we believe based on our analysis of prior studies (see notes) MM-020 is 65-70% likely positive in Mar/Apr and stock goes up because of fundamental positive but also Street perceived derisking that should lead to money flow as we enter a new growth cycle with a "Three New Product Story" (abraxane, apremilast and pomalyst). Also, if MM-020 is not positive, the fundamental work suggests it's not a huge setback and stock would overreact and create a buying opportunity. We've said the long-term risk is with MPT regimens going generic 2014-17 might see more utilization in a cost-constrained EU environment, but a) Rd is not used in front-line today anyways so no loss of revenues in that setting, and b) the treatment of MM is still mostly driven (particularly in US) on significant PFS and tolerability and US docs are not likely to use MPT. Plus, front-line EU is only ~$500--600M in 2017 guidance or a 6-8% EPS hit which is manageable.
We also look forward to new early May analyst event, where visibility on "early pipeline" will emerge. We've talked about this in prior notes (Epizyme targeted therapy, Avila BTK, Acceleron, etc) and CELG might get more visibility and longer-term credit (where there is none now) and this is part of why BIIB gets extra premium valuation (also after its R&D event) because of recent successes in past few years.
On Markman hearing, our analysis suggests hearing not likely until 2013 or early 2014. Natco and Celgene are likely to submit Markman briefs by Jul/Aug, with a hearing date set perhaps late '13 or early 2014. This puts summary judgment of hearing (usually 60 days after but could be longer) in H1:14, at which point the parties could 1) settle or 2) proceed with trial. 30-mo stay ends around YE:14.
CELG reported Q4 mostly in-line as they pre-announced and already gave guidance. Revlimid US grew 5.5% and OUS was flat- mgmt attributed this to lumpy orders in geographies. Revs were $1.45B vs. cons $1.45B and EPS $1.32 vs. cons $1.31.
· We are increasing our price target to $115 from $110 as we increased our blended average multiple to 20x 2013E EPS (from 18x), due to increased confidence in CAGR exceeding 15-17%+ (positive pancreatic update, MM-020 likely positive) in 2013-2017 timeframe.
Our $115 price target is a blended average of 20x 2013E EPS (20x forward multiple is warranted as CELG is entering a growth cycle that could double both top and bottom line in 4-5 yrs with CAGR of 15%+; large cap peer GILD trades at 18-19x 2013E EPS, but CELG has industry-leading margins), supported by a SOTP analysis valuing its base business at $85/share ( 90% probability that it will obtain front-line approval in EU and 80% probability that the polymorph patent will protect the franchise until 2026), abraxane at $10/share ($1.5B+ peak sales, $800M+ of which will come from pancreatic cancer, 4x sales discounted at 8% for four years), pomalidomide at $7–9/share ($1–1.5B peak sales, 3–4x sales discounted at 9% for four years), and apremilast at $8/share ($1B peak sales, 3.5x sales discounted at 10% for four years). We also value other pipeline opportunities at combined $4/share