SUMMARY
? Celgene announced today 2006 expense guidance projecting 20%-25% y/y inc
in R&D due to ph III studies of Revlimid in CLL, NHL and multiple myeloma
as well as CC-4047 in potentially pivotal trials for sickle cell anemia and
myelofibrosis, JNK-401 in ph II in AML, and CC-10004 in ph II for psoriasis.
? Celgene also plans to inc SG&A exp by 10%-15% y/y to account for domestic
launch costs and plans to spend an additional $30-$35M to support ex-U.S.
commercial and manufacturing infrastructure for Revlimid.
? Celgene will not provide rev guidance in '06 due to difficult of forecasting
Revlimid sales at this early stage in the launch. Our $270M estimate should
have upside driven by approval of Revlimid in multiple myeloma in mid-06.
? In our view, investors will not be dismayed by the higher spending due to
Revlimid's potential.We continue to view Celgene as our best lg-cap idea since
the Street is still under-appreciating the potential impact of GM improvements.
OPINION
Celgene today announced initial 2006 expense guidance. Management anticipates y/y
increases of 20%-25% for R&D due to increased spending on phase III studies of Revlimid
in CLL, NHL and multiple myeloma as well as advancement of CC-4047 into potentially
pivotal trials for sickle cell anemia and myelofibrosis, JNK-401 to phase II in AML, and CC-
10004 in phase II for psoriasis.
In addition, Celgene expects to increase SG&A spending by 10%-15% principally to account
for Revlimid launch costs domestically and expects to spend an additional $30-$35 million
to support ex-U.S. commercial and manufacturing infrastructure. The spending on ex-U.S.
capability reflects Celgene’s choice to market Revlimid in the European Union by itself.
Since we have not included sales of Revlimid in our model until 2007, we have not
previously front-loaded these costs into 2006.
In our model, we projected 16% y/y increase in SG&A expenses excluding the $30-$35M in
European startup costs since we do not include European sales until 2007 in our model. The
R&D increase is above our 18% y/y increase primarily due to higher spending on pipeline
projects.
The company did not provide top-line guidance given that forecasting Revlimid's sales at
this early stage of its launch is difficult and given the lack of clarity regarding the EMEA’s
review timeline for the Revlimid application for MDS. Recall that Celgene has filed the
application in the third quarter and we expect a decision at the latest by the end of 2006.
Celgene also expects to file the MAA for multiple myeloma during the first quarter. While
we do not currently include European sales of Revlimid in MDS in our model (given
inherent risk of phase II data), we do include sales in multiple myeloma (robust phase III
daa) starting in 2007.
The company also reiterated 2005 guidance for an increase in revenues of 30% to $535
million y/y, resulting in EPS of $0.36-$0.38 per diluted share, and will report Q4 results on
January 26th.
While the spending for 2006 are higher than we had anticipated, we believe that these are
justified given Celgene’s robust growth both in the U.S. and internationally. Thus, we
believe that investors will not be dismayed as long as Revlimid delivers on its potential.
CHANGES TO OUR MODEL
We are increasing expenses for 2006 to be in-line with Celgene’s newly released guidance.
In our view, we expect that Revlimid will be approved for use in multiple myeloma by late
June. During the first 6 months, we expect that sales will be mostly restricted to the MDS
market given the lack of availability of the 25mg capsule for multiple myeloma. This will
make using Revlimid off-label before approval prohibitively expensive since reaching the
25mg dose will require 3 capsules (2 10mg capsules and 1 5mg capsule) that will essential
triple the cost of therapy given the relatively flat pricing scheme.
Thereafter, we expect that Revlimid will be off to a strong launch in multiple myeloma and
believe that upside to our sales estimates is likely.
CHANGES TO CELGENE MODEL
Source: CIR
2
2005 2006 2007 2008 2009
Old New Old New Old New Old New Old New
Thalomid $393.9 393.9 $387.3 $388.1 $359.8 $359.8 $341.8 $341.8 $326.4 $326.4
Revlimid $0.0 0 $267.9 $270.3 $690.0 $705.7 $1,029.1 $1,020.4 $1,249.4 $1,270.9
Total Revenues $524.9 524.9 $769.7 $772.9 $1,176.0 $1,191.6 $1,493.8 $1,485.2 $1,695.0 $1,716.6
COGS $72.5 74.6 $92.4 $100.5 $141.1 $143.0 $149.4 $148.5 $169.5 $171.7
R&D $189.2 190.6 $223.2 $228.0 $305.8 $309.8 $373.5 $366.8 $423.8 $429.2
SG&A $178.8 181.5 $207.8 $235.7 $282.2 $286.0 $343.6 $341.6 $372.9 $384.5
Tax Rate 28% 28% 30% 30% 28% 28% 28% 28% 28% 28%
Pro Forma EPS $0.40 $0.38 $1.05 $0.90 $1.91 $1.93 $2.64 $2.64 $3.04 $3.04
MILESTONES
Source: Company reports
VALUATION
We are raising our target price to $87 from $72, as our target multiples have increased due to
both the recent approval of Revlamid and higher than expected pricing by Celgene. Our $87
target price is based on an average of three different valuation metrics: 1) 50x (40x
previously) our discounted 2007 EPS estimate of $1.93 ($1.91 previously); 2) 10x (9x
previously) our discounted EV-to-projected 2007 revenues estimate of $1,192 million
($1,176 million previously); and 3) a ten-year DCF analysis.
A multiple of 50x our $1.93 2007 EPS estimate represents a premium to the 34x 2007 EPS
multiple of the large-cap group, which is trading in a range from a high 20’s to low 40’s
multiple excluding historic bubble years within the sector. This premium is justified in our
view given that Celgene is expected to post a 79% CAGR EPS from 2005-07 compared to
37% CAGR of the peer group. This valuation implies a target price of $96.
We assign Celgene a 10x EV-2007 revenue multiple, representing a premium to the peer
group’s 9x average. The large-cap biotech group is trading at a range of mid single digit to
mid-teens. This multiple is justified given that Celgene could grow revenues by 50% CAGR
in 2005-07 vs. 16% for its large cap peer group. This analysis yields a target price of $68.
In our ten-year DCF analysis, we use Celgene’s 11% discount rate. This discount rate
reflects a 12% cost of equity, 11% weighted average costs of capital (WACC), and 1.25 fiveyear,
weekly adjusted beta. We assume a 15% debt and 85% equity as our target capital
structure. The cost of debt is 9%, 100 bp higher than cost on non-investment grade debt.
Finally, we project a 5% terminal growth rate. This valuation analysis yields a target price of
$96. |
