BC"3 launches will add $3-$5 billion a yr to sales. Will EASILY meet 2015 goals. Initiate with $100 target, buy"
BM full summary "We are initiating coverage of CELG with a Buy rating & target of $100---3 new product launches over the next 12 months could add $3-5B in peak sales within the next 3-5 years. Will EASILY meet 2015 goals even with conservative ests"
Brean Capital - Initiation of Coverage - November 21, 2012
BUY ---- Target: $100
Initiating Coverage With Buy Rating and $100 Target
We are initiating coverage of Celgene Corp. with a Buy rating and 12-month target price of $100, based on a P/E multiple of 18x applied to our 2013 fully diluted EPS estimate of $5.53, in line with consensus. Our 18x price-to-earnings multiple is at the high end of the large-cap biotech group (13-20x), but appropriately reflects the 18% CAGR in EPS that we forecast between 2012 and 2015, driven by top-line growth from three new product launches over the next 12 months that we forecast could add $3-5B in peak sales within the next 3-5 years. CELG has offered long-term guidance of achieving $8-9B in peak revenue by 2015, and our conservative estimates suggest the company will easily meet the low end of that guidance.
In the near term, CELG’s share price is likely to be driven by how investors contemplate the peak revenue potential for Pomalidomide, Apremilast and Abraxane, in light of recent progress reported. Pomalidomide has a PDUFA date scheduled for February 10, 2013, and we believe the drug has up to a $1B potential in the relapse refractory and salvage myeloma settings. We expect regulatory submissions for Apremilast (psoriatic arthritis) and Abraxane (melanoma and pancreatic cancer) in early 2013, based on recent positive results from pivotal studies. Apremilast data from the PALACE studies, which was reported last week at ACR, suggests up to $1B in peak sales potential from low-to-mid double-digit penetration into the DMARD eligible psoriatic arthritis patient population. Furthermore, we expect pivotal data for Apremilast in psoriasis indication from the ESTEEM Phase 3 program to be available starting YE12. Expansion into psoriasis could
add up to $1B in additional peak revenue for Apremilast.
Melanoma and pancreatic cancer indications put Abraxane on $1B trajectory. Our FY12 revenue estimate for Abraxane is currently $460M. We estimate the revenue potential from melanoma is in the $200-250M range while pancreatic cancer could add another $500M-1B depending on the magnitude of the clinical benefit. CELG presented positive data from a pivotal Phase 3 trial for Abraxane in melanoma cancer earlier this week at the Society for Melanoma Research annual meeting. In January 2013, CELG will present the results of their Phase 3 registration study for Abraxane in pancreatic cancer at the ASCO GI Symposium.
We expect there will be much debate in the coming weeks over Abraxane’s potential ahead of ASCO GI. Historically, older generation taxanes have not shown a significant clinical benefit over gemcitabine alone creating low expectations for Abraxane. However, there have been more promising results with the inclusion of taxanes in drug regimens involving two or more agents in combination. At a minimum, we believe Abraxane’s approval in pancreatic cancer will at least open the door for further development with other chemotherapies and newer targeted agents.
Revlimid 3Q12 sales of $970M grew 18% year over year and are on pace to meet our $3.8B FY12 estimate. We expect Revlimid in multiple myeloma to remain CELG’s largest, single revenue generator through patent expiration in 2027, yielding an additional $1B in revenue growth ($4.8B) by 2015 through expansion geographically and expansion in current and new myeloma settings. Importantly, CELG will approach E.U. regulators with mature survival data from the MM-015 study during the 1H13, which we believe will begin to clarify the timing on label expansion in the E.U. to include newly diagnosed patients. We expect MM-015 to continue to be supported by the IFM and CALGB studies that are also ongoing. MM-020 is the largest MM trial that has been conducted, with over 1,590 patients enrolled, and was designed to establish Revlimid + low-dose dexamethasone as the front-line standard of care in Europe, as it has come to be known in the U.S. Initial data from MM-020 will be available 1Q13.
Valuation / Target Price
We reach our price 12-month price target of $100 by applying a 18x price-to-earnings multiple to our 2013 fully diluted EPS estimate of $5.53, in line with consensus. Our 18x price-to-earnings multiple is at the high end of the large-cap biotech group (13-20x), but appropriately reflects the 18% CAGR in EPS that we forecast between 2012 and 2015.
Celgene Corporation is a global biopharmaceutical company, primarily engaged in the discovery, development and commercialization of innovative therapies designed to treat cancer and immune inflammatory-related diseases. The company currently markets Revlimid, and Thalomid for the treatment of various forms of multiple myeloma, and VIDAZA for the treatment of myelodysplastic syndromes.
CELG’s 2012 guidance includes total revenue of $5.45-5.55B, with Revlimid accounting for $3.75- 3.80B – our estimates are in line with that guidance. In 2010, CELG rolled out long-term guidance for 2015 that included revenue of $8- 9B that roughly consists of the following:
· $6 billion to $6.5 billion for hematology (Revlimid, Vidaza, Istodax, Pomalidomide).
· $1 billion to $1.25 billion for ABRAXANE.
· $0.3 billion to $1 billion in Other (Apremilast).
We believe that, even with our conservative assumptions, CELG will easily achieve the low end of guidance, with ample room for upside.
FY2012 EPS guidance is a range of $4.85-4.90 and, though CELG has not issued specific operating expense assumptions for 2011, we expect spending to remain largely in line with 2011, with an anticipated decline in overall percentage of revenue, despite the continued development of a rich, late-stage pipeline that includes Pomalidomide, Apremilast, and Abraxane, as well as the anticipated commercial launch of these new products and label expansions. We expect R&D and SG&A to grow an average of roughly 5-15% per year, over the next 3 years, which we think is a conservative range that CELG could improve upon, thereby containing cost expansion in the high single- digit range over the same period. As a percentage of revenue, CELG has improved net margins every year, over the past 4 years, and is on track to generate a 48% operating margin (OM) for FY12, improving from 45% in 2010. We expect CELG to exceed 50% OM by 2015, to deliver 18% CAGR in EPS -- the driver to our 18x multiple on 2013 EPS of 5.53 (see Exhibits 1-4). As of September 30, 2012, CELG had $3.8B in cash and equivalents on its balance sheet, allowing for good financial flexibility. We estimate approximately $1.6B in cash flow from operations for FY12 and forecast that will grow to $2.8B in 2015. In 2010, CELG completed its first public debt offering, and we expect the company to exit 2012 with approximately $2.8B in long-term debt.