CELG downgrade this morning by Pru-Vecor:
* We are reducing our investment rating on CELG shares to Accumulate
from Strong Buy and removing our Single Best Idea designation.
* The stock has achieved our target price and, based on our current
perspective, we now see more limited upside over the next 12 months.
* While Celgene's fundamentals appear intact, we would acknowledge
that much of Thalomid's near-term growth prospects might already be
accounted for in the stock.
* We expect in line performance in 3Q and believe the prospects for
upside surprises are minimal.
* Alza's anticipated success in launching Concerta could raise the
competitive bar for the Celgene/Novartis attention deficit program and
dampen Wall Street's perspective of its commercial potential.
* We are maintaining a $67 target and would advise more aggressive
purchases on pullbacks.
Investment Summary
We are downgrading our investment rating on CELG shares to Accumulate
from Strong Buy and removing our Single Best Idea designation. Our
reduced rating is primarily based on valuation as the stock has achieved
our target by appreciating 200% YTD vs. 50% for the NASDAQ Biotech Index
and 2% for the S&P 500 Index. Celgene's meteoric rise has come as a
result of the impressive growth in Thalomid sales (167% y/y growth
forecast for 2000) as well as the advancement of the company's pipeline
prospects, its commercial alignment with Novartis in the neurology field,
and its recent acquisition of discovery player Signal Pharmaceuticals. We
continue to view the company's fundamentals as intact and we are not
changing our top- or bottom-line estimates. However, the stock now trades
at a significant premium to its biotech peers and, while we believe that
this premium is justified, the prospect of further near-term multiple
expansion is not anticipated. In our opinion, the greatest risk that
Celgene faces going forward is the competitive threat of Alza's Concerta,
recently approved for the treatment of Attention Deficit Disorder (ADD).
We expect the launch of this drug to attract significant Wall Street
attention and also to raise the question as to how well the
Celgene/Novartis ADD program, a key growth driver, will compete with
Concerta upon its anticipated launch in 2H01. Additional pipeline
products are not expected to be factored further into Celgene's market
value until sound clinical utility is established. We are retaining our
one-year target of $67 and continue to position the stock as a core
biotech holding. However, given its current valuation we would advise
more aggressive purchases on potential weakness.
Rationale for downgrade
* Valuation--CELG shares have achieved our one-year target and look
pricey relative to comparables. The stock has appreciated 110% since
March 31 versus 18% for the NASDAQ Biotech index and -1.5% for the S&P
500. CELG is now trading at 100x 2002 EPS and 26x 2002 revenues, well
above the biotech group average of 55x 2002 EPS and 13x 2002 revenues.
Even normalized to account for growth, Celgene's PE/G based on 2001
numbers is 3.1 (versus a group average of 2.3) and based on 2002 numbers
is 2.0 (versus a group average of 1.8). This analysis assumes consensus
estimates of 50% annual growth for Celgene and 32% average annual growth
for the profitable large-cap biotech group. Our present view is that the
large-cap biotech group's prospects for further multiple expansion in the
near-term are limited and would require substantial fundamental out-
performance that is not expected at the present time.
* 3Q performance should be in line with expectations, and out-performance
is not likely. 3Q Thalomid sales are expected to be in line with our
$16.6 million estimate (within the consensus range of $16-17 million),
which implies 3% sequential growth and 163% year-over-year growth. Script
trends quarter-to-date show a 5% sequential decline relative to where
they were at this time last quarter and in our view reflect the seasonal
slowdown evident in most oncology products during the vacation months.
Our adjustment to 3Q EPS-$0.00 becomes $(0.06)-is cosmetic; we are
including a one-time charge related to the closing of the Signal
acquisition. Our 2000 EPS estimate is reduced to $(0.04) from $0.00,
accordingly, and is now a penny below consensus. We continue to believe
that Celgene will transition to profitability in 4Q00. Our 2001-2004 EPS
estimates remain at $0.43, $0.66, $1.18, and $1.84, respectively, and we
envision a 5-year CAGR of 50%.
* Much of Thalomid's near-term growth potential may already be accounted
for. Near-term, higher-than-expected Thalomid growth is possible but the
timing and magnitude of new market penetration (i.e. colorectal cancer)
over and above our forecast is difficult to gauge. We recently increased
our Thalomid estimates to account for potential expansion of the drug
into a combination setting and more data will be presented in the coming
months in support of this thesis. Our current 2000-2004 forecast is for
sales of $64 million, $100 million, $145 million, $194 million, and $269
million, respectively. This implies close to 50% compound growth as well.
We believe that much of this growth is already reflected in the stock's
current premium valuation and that further multiple expansion may require
the agent to consistently exceed our expectations.
* Alza's Concerta could raise skepticism regarding prospects for
Celgene's ADD program. Based on extensive market research, we anticipate
that Alza's commercial launch of Concerta, its once-daily methylphenidate
drug for the treatment of ADD, will be an enormous success. Concerta's
once-daily dosing appeared to be particularly appealing to physicians and
should position the agent competitively in the market over the coming
year. Celgene and partner Novartis are expected to file an NDA for D-
Ritalin (Attenade), a twice-daily dosing formulation of methylphenidate,
within the next several weeks. A once-daily version is expected to follow
this filing in the next 6-12 months. Celgene is entitled to 40% of net
sales from all of the Ritalin family of products beginning in 2001, and
we estimate 2001-2004 royalties of $10 million, $43 million, $74 million,
and $113 million, respectively. This royalty stream is expected to have a
significant impact on Celgene's earnings growth and by our analysis
contributes 40-45% to the bottom line. While we are maintaining our
current estimates and have accounted for Concerta's market presence, we
believe that the early success of Concerta could be viewed as raising the
competitive bar for the Celgene/Novartis ADD program and could dampen
Wall Street's perspective of its commercial potential.
* Pipeline looks promising but may not be further factored into Celgene's
valuation in the near-term. Added visibility for Celgene's thalidomide
analog program (IMiDs for cancer and SelCIDs for autoimmune disorders)
could favorably impact investor's views of the company's future, but may
not necessarily be considered incremental components of the stock's
valuation until clinical utility is established. Additionally, the recent
acquisition of Signal Pharmaceuticals is expected to provide a continuous
stream of promising clinical programs but will likely not receive much
Wall Street attention for another year. We believe that these programs
offer the promise of additional avenues of growth going forward and they
are still seen as key sources of upside value.
* We recommend purchase on weakness and maintain a $67 target. In our
view, Celgene remains one of the most exciting of the newly emergent
biotech companies and we continue to position it as a core holding in the
space. However, given its current valuation, we see the prospects for
strong market out-performance as more limited in the near term and we
would now recommend that investors build or add to existing positions on
pullbacks. We believe strong management, a solid commercial franchise,
and a pipeline that offers future prospects for growth, all speak to the
likelihood of Celgene's future success. We believe that our one-year
target of $67, or 70x 2004 EPS of $1.84 discounted back at 20%, is
certainly attainable, but also feel that investors will need a greater
degree of comfort with our forecast Thalomid growth curve as well as the
prospects of the ADD program before this multiple expands much higher.
Expected news events that should keep Celgene on investor's radar screens
* File NDA for the approval of Attenade in 2H00.
* Expected milestone payments from Novartis in 3Q and 4Q 2000
* Presentation of Thalomid data at the Chemotherapy Foundation conference
in November
* Presentation of preliminary data of Thalomid for the treatment of early
stage multiple myeloma at the American Society of Hematology in December
* Lead IMiD, CDC-501, expected to enter clinical testing for multiple
myeloma in late 2000
* Release of data from a pilot study of lead SelCID, CDC-801, for the
treatment of moderate-to-severe Crohn's disease expected by year-end 2000
* Initiation of Phase I trial of CDC-998 in late 2000 (in an anti-
inflammatory disease indication)
* Release of results from a NCI trial of Thalomid in glioblastoma in late
2000
* Potential in-licensing activity of oncology technologies
* U.S. approval of Attenade in 2H01
* NDA filed for Thalomid in the treatment of colorectal cancer in 2H01
Company Description
Celgene Corporation is a biopharmaceutical company based in Warren, NJ
that is discovering, developing and commercializing small molecule drugs
for cancer and immunological diseases. Its lead product is THALOMID
(thalidomide) received FDA approval in 1998 for moderate to severe erythema
in leprosy. THALOMID is also being tested for use in various cancers, Crohn's
disease, rheumatoid arthritis and various AIDS-related conditions. Celgene
also has discovered two exciting classes of pipeline clinical candidates called
IMiDs, or thalidomide analogs, and SelCIDs, or selective cytokine antagonists.
The company's attention deficit disorder candidate, Attenade, is a chirally
pure version of methlyphenidate that offers the prospects for a superior
treatment for afflicted children.
Prudential Securities Incorporated makes a primary over-the-counter
market in the shares of CELG.
Prudential Securities Incorporated and/or its affiliates or subsidiaries
have managed or co-managed a public offering of securities for CELG.
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