With its new investment in Juno Therapeutics, Celgene is swinging for the fences. It is a good thing for shareholders, then, that Celgene can afford to strike out.
Celgene is paying dearly to invest in Juno’s so-called CAR T-cell therapy, which aims to engineer the body’s own T cells to recognize and attack cancer cells. The deal calls for Celgene to pay $150 million for certain marketing and other rights while purchasing $846 million in newly issued stock at $93 a share, or roughly double Monday’s closing price. It also allows Celgene to buy additional shares at certain clinical milestones, for up to a 30% stake in Juno.
In short, Celgene is investing about $1 billion in a company formed less than two years ago and that doesn’t yet generate revenue let alone profit. Needless to say, that is a significant gamble.
Juno’s early-stage clinical data to treat certain forms of cancer has generated excitement among scientists and investors alike. But it doesn’t expect any of its treatment candidates to receive approval from the Food and Drug Administration before 2020.
Meanwhile, others such as Novartis AG and the upstart Kite Pharma are racing to develop competing treatments. Yet any clarity on the economic value of CAR T treatments is years away. Until then, Celgene may not see any return on its investment.
Celgene can afford to be patient, though. About two-thirds of its revenue comes from Revlimid, which treats blood cancer. While Celgene faces various legal challenges to its patents from generic drug makers and hedge-fund manager Kyle Bass , Revlimid isn’t slated to lose marketing exclusivity in the U.S. until 2027.
Meanwhile, thanks to Revlimid, Celgene can pay the bills. Net income over the past four quarters was $2.4 billion, according to FactSet, and Celgene has more than $7 billion of cash on hand.
Its strong financial position should limit the downside if the Juno investment falls flat. And should the company revolutionize cancer treatment, as some hopefully predict, Celgene shareholders will be taking a home-run trot.