Year End #7: CELG, My third biggest position

I bought into CELG first at a split adjusted $53, a little less than two years ago. I kept buying up until about $79 (when I stopped because my position was getting too big), and it’s now about $112 and my third biggest position at 12.2%. That makes it up roughly 110% since my first purchases. I’m more likely to trim a little now and then to keep it from getting too big.

I first was introduced to CELG by the Mar 2013 MF RB recommendation. Here are a few excerpts with some paraphrasing and cutting:

In the late 1950s, a “wonder drug” called thalidomide was introduced across much of the world. As you probably know, it was soon found to cause horrific birth defects, and by 1962, it was banned around the globe. That seems an unlikely starting place for the birth of a blue-chip biotech company, but it turns out thalidomide actually is a wonder drug of sorts. It hung around in obscurity for decades as a therapy for leprosy until academic researchers realized that it blocked the formation of new blood vessels, effectively choking off tumor growth in certain cancers. In 1992, the rights to thalidomide were licensed by Celgene. The treatment possibilities unlocked by Celgene helped make the stock one of the top performers of the past decade, with a tenfold rise in market cap. But this growth story is far from over — the drugs and catalysts Celgene still has ahead of it should reward new shareholders and new patients alike.

Today, thalidomide brings in about $300 million annually for the treatment of leprosy, making it perhaps Celgene’s least interesting product. However, it inspired a chemical analog called Revlimid that was approved in 2006 as a treatment for the blood cancer multiple myeloma. Revlimid has since become a massive blockbuster, topping $3 billion in revenue last year. It is also being constantly approved for more and more indications which will keep its sales climbing. Revlimid has patent protection through 2027, and we feel it’s safe for at least that long. The FDA never approved thalidomide back in the 1950s or 1960s, and Celgene spent a long time working with the agency on a risk mitigation plan to make sure the drug doesn’t get into the wrong hands. The chance of the FDA approving a generic manufacturer seems small.

Celgene has much more coming down the pipeline. Abraxane, a drug the company acquired in 2010, brought in $427 million last year, mostly for its use as a second-line treatment in breast cancer. A recent approval in non-small-cell lung cancer will boost sales. Better still, the drug has produced compelling Phase 3 results in pancreatic cancer, a disease with an extremely poor prognosis and few options.

The company’s newest drug, Pomalyst, was approved just this month for multiple myeloma patients who have failed prior courses of treatment. Its market is estimated to be worth at least $750 million, and additional indications would bump that figure up.

Perhaps the biggest wild card is Apremilast, in Phase 3 for psoriatic arthritis and psoriasis. This is a relatively safe pill that will be substantially cheaper than the biologics currently used in psoriatic arthritis, and this niche alone should mean solid sales. But a strong signal in psoriasis could set up another blockbuster.

All the things the recommendation predicted have turned out, pretty much. And Celgene has partnered with dozens of small biotechs. When they have a early stage drug that seems promising, CELG funds its development and testing in exchange for the rights to market it. This gives them a huge long-range pipeline.

I have their revenues for 15 quarters now, and they have never had a quarter down year over year. Here are some of them (in billions).

2012: 1.25 1.37 1.42 1.42 = 5.5
2013: 1.46 1.56 1.64 1.76 = 6.5
2014: 1.73 1.84 1.98

As you can see, it’s nothing exceptional, but just a steady rise. Estimates for 2014 are 7.6

Let’s look now at earnings. Since they had a 2:1 stock split, some will be in half cents so I’ll round up for consistency. These are big numbers so a half-cent won’t change anything.

2012: 54 61 65 66 = 2.46
2013: 68 76 78 76 = 2.98
2014: 84 90 97

Estimates for 2014 are for about $3.70. The company has also had the guts to estimate for 2015 at $4.50 to $4.75, and believe it or not, for 2017 at $7.50. At the end of 2014, with earnings of $3.70, their PE is 30, which is a little high, but not out of line for a company with prospects like that. I have no plans to sell out of this stock and will just keep riding it for the indefinite future.

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If anyone is wondering why CELG has been running wild, they pre-announced results, and game estimates out to 2020.

http://finance.yahoo.com/news/celgene-corporation-announces-…

It’s too much to summarize. Read the release.

Saul

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This is big news for them. Approval for most common lung cancer and most common cause of cancer death in Europe.

http://finance.yahoo.com/news/celgene-receives-positive-chmp…

Celgene Receives Positive CHMP Opinion for ABRAXANE® for First-Line Treatment of Patients with Non-Small Cell Lung Cancer
In Europe, Lung Cancer is the 4th most commonly diagnosed cancer and the leading cause of cancer-related mortality

Celgene International Sàrl, a wholly owned subsidiary of Celgene Corporation (CELG), today announced that the European Medicines Agency’s (EMA) Committee for Medicinal Products for Human Use (CHMP) has adopted a positive opinion for ABRAXANE® (paclitaxel formulated as albumin-bound nanoparticles, or nab-paclitaxel) in combination with carboplatin for the first-line treatment of non-small cell lung cancer in adult patients who are not candidates for potentially curative surgery and/or radiation therapy.

Lung cancer is the fourth most commonly diagnosed cancer in both men and women, however it is the leading cause of cancer-related mortality in Europe. Non-small cell lung cancer (NSCLC) is the most common form of lung cancer, accounting for 85 to 90% of all cases. The predominant cause of lung cancer is cigarette smoking, although environmental and occupational factors also can cause the cancer. Treatment options generally include systemic chemotherapy or protein kinase inhibitors. In the most advanced cases, only the symptoms of the disease can be managed; there is a clear need for innovative new medicines for the treatment of lung cancer.

“Progress in lung cancer will come first from early diagnosis with patients presenting promptly with symptoms and second, with new drugs that are well tolerated and improve on current therapies. Incremental steps can lead to a meaningful impact on patients and society, given the frequency and aggressiveness of lung cancer,” says Dr. Mary O’Brien, Consultant Medical Oncologist at The Royal Marsden NHS Foundation Trust, UK. “The positive CHMP opinion for ABRAXANE in combination with carboplatin for the treatment of adult patients with NSCLC is a significant step toward bringing a new treatment option to patients in Europe. The clinical data show patients had a significant positive response rate to the treatment, combined with an established safety profile. The therapy has also shown a significant response benefit for a subset of patients with squamous cell lung cancer, where there have been limited treatment advances in recent years.”

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Here’s my greatly simplified take on CELG’s earnings and incredible outlook:

Saul

Adj earnings of 101 cents per share, up from 75 cents on a split adjusted basis, a year ago.
Revenue was up 19%
Yearly Cash Flow from Ops of $2.8 billion (Note that that is billion!), up 26% from 2013.
Repurchased $2.9 billion worth of shares during the year.
Cash of $7.5 billion and 835 million diluted shares.

2015 Guidance
Revenue of $9.0 billion to $9.5 billion, up 22.3%.
Adjusted operating margin is expected to be approximately 52%, a 140 basis points improvement over 2014.
Adjusted EPS is expected to be in the range of $4.60 to $4.75, up 26%.

2017 financial targets
Revenue of $13 billion to $14 billion
Adjusted EPS about $7.50
Share count about 830 million (note that this is down from this year).

2020 financial targets
Revenue over $20 billion
Adjusted EPS over $12.50
Share count still about 830 million

Conclusion: Great results.

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Conclusion: Great results.

Hi Saul,
I bought into CELG last April after discovering it here on your wonderful board. (Cost basis around $70.)

I have been wanting to increase my position (on this and others, like CMG) but can’t seem to get comfortable with an entry position, more due to my lack of evaluation skills than concerns about their future.

Can you share how you think about a buy in price and when to jump in on a stock with justifiable momentum, like CELG? I’ve been toying with a channel showing its PE range and then just buying in when it hits the bottom line but haven’t figure out yet whether it should be the GAAP or non GAAP earnings data.

Thanks,
Mykie

I bought into CELG last April after discovering it here on your wonderful board. (Cost basis around $70.)

Has it really gone up $50 and 71% since April? Wow!

I have been wanting to increase my position (on this and others, like CMG) but can’t seem to get comfortable with an entry position, more due to my lack of evaluation skills than concerns about their future. Can you share how you think about a buy in price and when to jump in on a stock with justifiable momentum, like CELG? I’ve been toying with a channel showing its PE range and then just buying in when it hits the bottom line but haven’t figure out yet whether it should be the GAAP or non GAAP earnings data.

I always use non-GAAP, but that is just me. If you want to buy more, take into account that it’s at about 32 times adjusted earnings, which is about as high as I’ve seen it. It’s been moving up every month. It may continue to do so, but i’d be cautious, and not invest more than 20% of what you are planning to add at this point. You already have a position, after all. All the news is good, and it may keep going up, but you’d feel bad if you put it all in now and it dropped 20% and you had no cash left. (A 20% drop is possible. It would only bring the PE down to 25.6). You’d feel better if you put in 20% now, and added 20% in a month. If it was higher, your initial investment and the first 20% of your new investment would have profited so you won’t feel so bad.

Hope this helps.

Saul

I always use non-GAAP, but that is just me.

Saul,
Do you use what management puts up as Non-Gaap and use that or do you go through it and decide what you agree on them with and adjust it? It would seem that using their numbers would be faster and allow you to look at more companies. I am trying to get a sense of this because I feel that some of the things I have been doing have been dragging down my ability to look at more companies and track them.

Andy

Saul, Do you use what management puts up as Non-Gaap and use that or do you go through it and decide what you agree on them with and adjust it? It would seem that using their numbers would be faster and allow you to look at more companies.

Andy, If I have confidence in management (as I do for CELG), I just use the adjusted earnings they give. If I start messing around and adding and subtracting things I won’t remember next time what I did and why, and also the earnings won’t be comparable with past and future earnings. On the rare occasions that I do eliminate something (sometimes companies show big swings up and down in foreign exchange gains and losses, for instance), I make a big note in red in my notes about the quarterly results so I’ll remember to eliminate the same thing next time. This perhaps sounds overly trusting, but what I’m aiming for is seeing how the company has been functioning over time, and accepting management’s adjusted earnings usually works for me. After all, they are trying to evaluate the same thing.
Saul

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Thanks Saul, I like that idea.

Andy

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I always use non-GAAP, but that is just me. If you want to buy more, take into account that it’s at about 32 times adjusted earnings, which is about as high as I’ve seen it. It’s been moving up every month. It may continue to do so, but i’d be cautious, and not invest more than 20% of what you are planning to add at this point. You already have a position, after all. All the news is good, and it may keep going up, but you’d feel bad if you put it all in now and it dropped 20% and you had no cash left. (A 20% drop is possible. It would only bring the PE down to 25.6). You’d feel better if you put in 20% now, and added 20% in a month. If it was higher, your initial investment and the first 20% of your new investment would have profited so you won’t feel so bad.

Thanks Saul,
So you adhere to the nibble strategy even if it is at historic highs. That’s a good way to get in and not disrupt completely the average cost.

Thanks!
Mykie
PS On the other hand, GILD is just asking to be bought and I already have a slightly oversized position (for me that’s 6%) but I think I’ll add a bit more at this nice low price.

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For what it’s worth:

WASHINGTON, Feb 18 (Reuters) - The U.S. Food and Drug Administration has expanded the authorized use of Celgene Corp’s cancer drug Revlimid to include newly diagnosed patients with multiple myeloma, the company said on Wednesday.

Previously the drug was only approved for patients who had received at least one previous therapy. Physicians in the United States have long been prescribing Revlimid for new patients on an “off-label” basis, but the company had not been allowed to promote its use in this population.

The FDA’s action means Celgene can market Revlimid, in combination with a different drug, dexamethasone, as a treatment for all multiple myeloma patients and helps validate the company’s premise that treating patients earlier and for a longer period of time increases progression-free survival.

The approval is expected to only modestly increase sales in the United States since doctors are already prescribing the drug for newly diagnosed patients.

In Europe, where physicians are not allowed to prescribe off-label, the situation is different. Celgene expects European regulators to also approve the drug for newly-diagnosed patients within the next few weeks. If they do, the move could add meaningfully to sales.

About 50 percent of patients with multiple myeloma are newly diagnosed. The remainder have received one or more prior therapies.

CELG has been making lower low and lower high since mid January

I do not have a position with CELG yet, but this pull back may give me a chance

Henry

From SA news feed:

Revlimid expanded label approved in Europe • 7:02 AM
Douglas W. House, SA News Ed…

The European Commission approves the use of Celgene’s (NASDAQ:CELG) Revlimid (lenalidomide) for the treatment of adult patients with previously untreated multiple myeloma who are not eligible for transplant. This adds to Revlimid’s current marketing authorization for the treatment, in combination with dexamethasone, of multiple myeloma in adult patients who have received at least one prior therapy.

Multiple myeloma strikes ~39K Europeans each year. The mortality rate within the first year of diagnosis is over 60%.