WF - CELG: Q2 2014--Favorable Setup Into H2 2014
· Summary: On 7/24, CELG reported Q2 2014 results and revised 2014 financial guidance. Q2 was a solid quarter, with Revlimid and Abraxane in line and showing good growth, and pomalidomide experiencing a nice uptick; Otezla was weaker, but initial metrics looked okay. Overall, we believe the earnings and call highlighted the long-term growth prospects both within the marketed portfolio as well as the deep pipeline, which we believe should drive strong long-term earnings growth and share appreciation. We continue to like the setup for H2 2014, and believe current valuation underappreciates strong fundamentals. CELG remains on our Priority Stock List. Adjusting 2014E/2015E non-GAAP EPS to $3.68/$4.56 from $3.76/$4.64 and keeping valuation range at $113-116.
· Solid Revlimid revenues in bounceback quarter; guidance raise as expected. Q2 2014 Revlimid sales of $1.21B approximated consensus' $1.22B estimate, and the rest of the products were generally in line, with pomalidomide particularly strong both U.S. and ex-U.S.--encouraging given what appeared to be some slowing of the 3rd-line MM market last quarter, and likely relating to longer durations as physician comfort improves. For Revlimid, duration gains appear to have accelerated, which should help growth heading into the newly-diagnosed MM indication-- where filings remain on track with a 2/22/15 U.S. PDUFA date. Guidance was raised for total revenue (to $7.6B from $7.5B) and non-GAAP EPS (to $3.60-3.65 from $3.50-3.60), which we view as achievable and appropriately reflecting current run rates.
· Establishment of new immuno-oncology center of excellence should help CELG make greater inroads. Though CELG pointed out that they are planning several studies exploring existing treatments in combination with PD-1 inhibitors, we believe the company has been perceived as being behind the curve in the immuno-oncology area. The establishment of the new center in Seattle--where several leading-edge immuno-oncology KOLs and companies are based--is prudent, in our view, helping leverage the company's immuno-oncology assets such as anti-CD47, CAR-T, and next-generation IMiDs to enable it to maintain its leadership position in cancer therapy.
· Otezla off to a gradual start but trends looking okay. Q2 2014 saw $5MM in sales reported for Otezla, at the lower end of expectations, though this was partially impacted by free sample titration packs as a bridge to reimbursement and patient growth, reimbursement trends, and physician awareness all look favorable. We are decreasing are estimates and now expecting sales of $77MM in 2014 and growing to $739MM by 2017, remaining below the company's long-term guidance, though there could be room for upside, especially if the drug's introduction in psoriasis resonates well with clinicians.
· Underappreciated pipeline sets up well for 2014. CELG confirmed GED-301 ph.II data will be presented at the United European Gastroenterology Week meeting in October. We believe positive data will be an upside catalyst. Anti-CD38s such as CELG/Morphosys’s MOR202 (data expected at ASH) are of high interest to KOLs, in our view, something we believe should enable CELG to study the niche MM indications they said they plan to pursue to help them catch up to competitors in this space. We think the call highlighted a number of interesting opportunities, with partners such as Agios, Acceleron, Epizyme, and Oncomed, that should provide multiple shots on goal for the company.
