Celgene: S&P 5-star buy in biotech

by Steven Silver, equity analyst Standard & Poor's The Outlook

S&P Capital IQ considers Celgene (CELG) to be one of the biotechnology stocks best positioned for long-term growth, with solid core product growth, an advancing new product pipeline, and a strong financial position.

We expect Celgene to deliver earnings growth at a compound annual rate of 21% from 2010 through 2013, driven by expanding sales of its key cancer drug Revlimid. This figure represents the brightest growth prospects we see in the large-cap biotech industry.

We also believe that the positive resolution to a European review of the drug’s safety will further improve investor sentiment on the shares.

Celgene develops and markets pharmaceuticals to treat cancer, immunological, and inflammatory disorders.

The company has developed a potent, orally administered class of drugs called Immuno modulatory Drugs (IMiDs), which focus on treating hematological cancers, or cancers of the blood.

The New Jersey-based company’s primary commercial focus to date has been on treating multiple myeloma (MM). According to the International Myeloma Foundation (IMF), MM is the second most commonly diagnosed blood cancer behind non-Hodgkin’s lymphoma.

The IMF estimates that 100,000 people in the U.S. have multiple myeloma and nearly 20,000 new cases are diagnosed each year, representing 1% of all cancers and 2% of cancer deaths.

Celgene’s Thalomid is approved for front-line treatment of multiple myeloma. Thalomid is Celgene’s version of thalidomide, an antiangiogenic agent capable of inhibiting blood vessel growth and down-regulating TNFa.

Revlimid, a successor drug to Thalomid, is currently approved for multiple myeloma after a patient has failed on a standard treatment regimen, as well as for myelodysplastic syndrome (MDS), a genetic blood stem cell disorder.

Revlimid has not yet been approved in the front-line setting though it has been used “off- label,” based on strong clinical data, and the drug has garnered favorable reimbursement status through listing in peer-reviewed compendia.

Despite the limited label, we expect Revlimid sales to increase by approximately 30% in 2011 to almost $3.2 billion.

The drug is patent protected until 2026 and, as such, we believe Revlimid is well positioned for steady growth in the coming years.

Revlimid costs approximately $80,000 annually and has faced some scrutiny from European jurisdictions, which has resulted in price reductions in some areas.

The United Kingdom, whose regulators have taken a tough stance on drug pricing, have questioned Revlimid’s price and recommended that the drug be reimbursed only when initial therapies have failed.

Overall, however, we see these issues as mostly resolved and remain confident in Revlimid’s growth prospects. Celgene has broadened its marketed drug roster through acquisitions in recent years.

In March 2008, the company purchased Pharmion Corp for $2.9 billion to acquire European rights to Thalomid and Vidaza, which is approved for high risk MDS.

In 2010, Celgene acquired Abraxis Biosciences for $2.95 billion for its drug Abraxane, which is approved for metastatic breast cancer, and represents a platform for the company to expand into treatment for solid tumors from its core hematology programs.

Abraxane is also in Phase III study for non-small cell lung cancer, pancreatic cancer and melanoma, and other indications in earlier stages.

In our view, Celgene’s largely wholly owned clinical pipeline is not appropriately reflected in its current share price.

Pomalidomide, an IMiD, has shown compelling mid-stage data in multiple myeloma patients who have failed on Revlimid, and we see potential for Celgene to seek accelerated approval for its use in these high-risk patients as early as 2012.

Apremilast has advanced to Phase III study for inflammatory conditions such as psoriatic arthritis and ankylosing spondylitis.

Apremilast is an oral compound, whereas most leading currently marketed anti-inflammatory therapies are injected, which we think represents a possible competitive advantage for the drug.

Several other programs in earlier development stages include stem cell-based treatments and Celgene’s first biologic com-pounds after marketing small molecule drugs to date.

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