Celgene (Nasdaq:CELG) has been consistently profitable for a while, which is rare enough in the biotech space. What stands out to me with Celgene, though, is that the company has largely been riding just one drug in recent years (Revlimid) and the contributions of newer compounds should offer some very lucrative revenue growth over the next five to ten years. Although the multi-year bull market in biotech has stripped away most of the value from the sector, Celgene is operationally still a very interesting company to watch.

Beat And Raise In Q2
Celgene continues to deliver strong financial results. Revenue rose 17% for the quarter, with Revlimid growing 13% in part due to favorable U.S. pricing. Abraxane revenue rose 41%, but still makes up only about 10% of total revenue, while Vidaza revenue rose 5%. Thalomid continues to decline (down 13% and less than 5% of revenue),while Pomalyst debuted with $66 million in full-quarter revenue.

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Celgene's margin structure continues to be part of the reason I'm bullish on the company's long-term prospects. Gross margin stands at an almost unbelievable 95%, while operating income rose 28% and pushed the operating margin up above 35%. While the company's performance this quarter was dramatically better than expected, management nevertheless raised full-year guidance by a pretty healthy margin.

Building Revlimid And Abraxane
One of the stronger bullish arguments for Celgene is that the company has ample room to grow simply from expanding the sales of already-approved products. To that end, Revlimid has already become a very successful drug for hematological cancers, even with competition from Velcade (marketed in the U.S. by Johnson & Johnson (NYSE:JNJ)) and Onyx's (Nasdaq: ONXX) Kyprolis. While Celgene's study of Revlimid as a first-line treatment for CLL in the elderly didn't go well, the recent successful study results in newly-diagnosed multiple myeloma should expand the drug further and other studies in lymphomas are still underway.

Abraxane, too, should become a much bigger contributor in the coming years. The drug's approval in lung cancer should take sales north of $1 billion relatively quickly, and while the data from Abraxane in pancreatic cancer wasn't as strong as hoped, I would still expect approval and hundreds of millions of dollars in incremental sales.

New Drugs Offer Significant Potential As Well
Celgene should also be able to reap meaningful leverage from newer drugs as well. Pomalyst isn't going to be another Revlimid, but it could nevertheless still be a $1 billion drug in 2016/2017. What's more, given that the incremental SG&A costs of selling Pomalyst are quite low (likewise for Abraxane's newer indications), a very large percentage of that incremental revenue should flow to the bottom line. That is, of course, unless the company chooses to launch additional studies to expand the label – a decision that would trade near-term profitability for longer-term sales potential.

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Celgene is also closing in on the point where it will be more than “just” an oncology company. Apremilast, an oral inhibitor of PDE4, achieved its primary endpoint in a pivotal study in psoriatic arthritis and management has already said that it intends to price the drug at a “meaningful” discount to existing biologics like AbbVie's (Nasdaq: ABBV) Humira. While apremilast doesn't offer quite the same margin leverage for Celgene as new oncology drugs, this could yet prove to be an underrated drug – management has not backed off its expectations of $1.5 billion to $2 billion in 2017 sales, though the Street is still at around $1.1 billion to $1.5 billion in expected sales.

The Bottom Line
Sooner or later Celgene is likely to face “how will they continue to grow?” worries, though I believe the company's early-stage pipeline is pretty interesting. What's more, Celgene has not been shy about acquiring other companies with promising drugs and when this biotech bull market cools (making valuations more reasonable), I wouldn't be the least bit surprised to see Celgene go back to the M&A well.

That aforementioned biotech bull market is what's keeping me on the sidelines with respect to these shares. Up almost 100% over the past year, I don't think the company's present valuation leaves all that much room for the shares unless Abraxane, Pomalyst and apremilast really trounce expectations. Given that I like to leave a margin of safety in biotech models, there's just not enough room for comfort here for me. While I'd probably consider some protective stops if I owned these shares, I wouldn't be in a hurry to jump off the biotech bandwagon just yet, and certainly not with a high-quality name like Celgene.

At the time of writing, the author did not own shares of companies mentioned in this article.


Tickers in this Article: CELG, JNJ, ONXX, ABBV

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