Celgene Evenly Poised - Analyst Blog

We are maintaining our Neutral recommendation on Celgene Corporation (CELG) with a target price of $58.

Celgene, founded in 1986 and headquartered in Summit, NJ, focuses on the discovery, development and commercialization of drugs in the areas of cancer and immune/inflammatory diseases. 

The company’s key growth engine is Revlimid, currently approved for myelodysplastic syndrome (MDS) and second-line multiple myeloma (MM). The company is expanding its label into other indications. The drug, which is approved in approximately 50 countries for treating patients suffering from MM who have received at least one prior therapy in combination with dexamethasone, recently received marketing approval in Japan for the same indication.

Another important growth driver at Celgene is Vidaza, which is approved for the treatment of MDS. The third marketed product at Celgene is Thalomid, approved as a first-line MM therapy in combination with dexamethasone. 

Earlier in the year, Celgene agreed to purchase Abraxis BioScience Inc. (ABII) for at least $2.9 billion in cash and stock. The merger has been approved by the boards of both companies and is expected to close later this year.

Celgene recently reported impressive second quarter 2010 results, driven by strong sales of Celgene’s lead product Revlimid. On a reported basis (including special items), the company earned 33 cents per share as opposed to 31 cents in the year-ago quarter. Total revenue for the reported quarter climbed 36% year-over-year to $853 million. The Zacks Consensus Estimate for revenues in the reported quarter was $822 million.

(Read our full coverage on this earnings report: Q2 Revenues Rise at Celgene)

We are pleased with Celgene’s efforts to expand its oncology portfolio, as we believe that the impending acquisition of Abraxis BioScience coupled with the purchase of Gloucester Pharmaceuticals earlier this year should boost Celgene’s cancer portfolio and drive growth. Furthermore, Celgene’s diversified pipeline is also encouraging. During 2010, the company intends to evaluate multiple compounds in more than 20 pivotal and late-stage studies. Celgene is evaluating Revlimid in all stages of multiple myeloma and conducting late-stage studies of the drug in non-hodgkin's lymphoma and chronic lymphocytic leukemia.

The company is looking to boost its pipeline further and currently has several late-stage candidates including apremilast, pomalidomide, Amrubicin and Istodax, which are targeting diseases like cancer and psoriasis among others. Celgene also intends to advance the development of other early-stage candidates in its pipeline. The successful development and commercialization of the pipeline would boost Celgene’s top line further, in our view.

However, the intense competition confronting Celgene’s products is a concern. Revlimid and Thalomid compete with products of big players like Takeda and Johnson & Johnson (JNJ) in the MM market. SuperGen‘s (SUPG) Dacogen is a tough competitor for Vidaza in the MDS market. Furthermore, big players like Biogen Idec (BIIB) and Genzyme Corporation (GENZ) are also developing drugs to target the oncology and immunology markets. The negative growth of its other product Thalomid is likely to continue due to competition from better alternatives in the multiple myeloma market.

Given these headwinds, we believe that Celgene’s current valuation adequately reflects its fairly balanced risk/reward profile. As such, we see limited upside from current levels.

We have a Zacks #3 Rank (short-term 'Hold' recommendation) on shares. This implies that the stock is expected to perform in line with the broader U.S. equity market over the next one to three months. We are Neutral on the stock in the long-term. Our Neutral stance Celgene in the long-run implies that the stock is expected to replicate its short-term performance but over 6+ months. Consequently, we advise investors to retain the stock over the time-period.