RBC-Q1 should drive stock higher. Potential for large value unlock with settlement based on briefs/unclean hands. - WE RECOMMEND BUYING HERE. $190 target....
April 17, 2014
Celgene Corp.
Thoughts on Q1 and what matters this year
Our view: Our call on CELG is simple – we believe the fundamentals are
good, but in the bigger picture this year we see potential for a large
unlocking of value via an eventual settlement with ACT/Natco. This is
based on our review of Markman hearing documents and a new wild-card
of the "unclean hands" defense described in a filing last week. We rate the
stock Outperform.
Key points:
The stock might bounce after Q1 earnings, but key is investors'
confidence in the outcome of the Markman hearing. Our sense is that
investors haven't wanted to own the stock in size early in the year since
the Markman hearing was "risky" and far off in the summer and biotech
was correcting. Now the hearing is imminent (starting around May 15), and for investors who don't own the stock, we recommend buying on the basis that risk-averse investors will wait until after the ruling and some will wait until after a settlement (suggesting money flows over time once the overhang has gone). We think CELG could see an above-market multiple if investors gain confidence in a 2024+ vs. a worst-case 2019 patent. Thus, 5+ more years could lead to an 18–20x multiple on 2015E EPS or a $170–200 stock price this year and $200+ on 2016E.
Q1 is seasonally weak (donut hole, insurance resets/re-verification),
but the stock has had a healthy pullback and Q1 might surprise due
to Revlimid accelerating after MM020 results at ASH, new Abraxane
pancreatic launch in the US/EU, and Pomalyst going well. There is minimal
info on Otezla scripts so far, so early metrics on the launch should be well
discussed on the conference call. We know that expectations for Otezla
are low and consensus has been coming down already to revenues of $90–
95M, which we think is beatable in year 1.
Our revenue estimates are $1,755M vs. consensus $1,762M and Revlimid
$1,161M (+2% Q/Q) vs. consensus $1,160M. Last year, it was flat Q/Q in
Q1. Our Q1 EPS is $1.72, a bit higher than consensus $1.64, but we note
that R&D payments to partners could drive our estimate lower (two new
partnerships in Q1).
Longer-term, we believe that a settlement with ACT/NatCo could
happen and this would unlock significant value since it would remove
considerable uncertainty and provide a long period of stability within
which cash flows could continue to build. The company has 21 partners
(Agios, Epizyme, Acceleron, Bluebird, etc.) that could contribute upside
not in consensus. Management has also suggested that a settlement is a
possibility to consider.
Investment summary
Our investment rationale is based on CELG's improved long-term growth trajectory that is becoming increasingly diversified, with imminent launches of three new products with near-blockbuster potential: pomalidomide for relapsed
refractory myeloma, Abraxane in pancreatic cancer, and apremilast in a variety of autoimmune indications. We believe there is visibility for double-digit growth on top and bottom lines, also helped by improving operating margins as the
revenue base substantially expands. We believe CELG has a reasonably attractive and sustainable growth strategy (20%+ EPS growth in the next five years), which justifies a premium multiple of 20x 2015E EPS of $9.42, and puts PEG at less than
1x.
