(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of CELG.)
Celgene Corp. (CELG) made a big splash in the acquisition arena when it announced it would purchase Impact Biomedicines, a privately held company, for up to $7 billion should specific milestones be met. The news should boost Celgene shares, alleviating concerns investors have about the diversification of the company's drug pipeline and future revenue streams.
The drug that Celgene is acquiring in the deal is fedratinib for the treatment of myelofibrosis and polycythemia vera. According to the Fly.com, Deutsche Bank estimates fedratinib can have peak sales of about $1 billion per year.
This would offset some of Celgene's lost revenue from its experimental drug GED-0301, after it terminated a trial in ulcerative colitis on October 19, 2017. The study discontinuation has resulted in the biotech company's shares falling by more than 22 percent since then.
Celgene has become dependent on the success of Revlimid, a blood cancer drug. In the third quarter of 2017, Revlimid accounted for nearly $2.1 billion in sales, out of Celgene's total sales of almost $3.3 billion. Revlimid 3Q sales represented nearly 64 percent of Celgene's total revenue.
The company's next two most significant drugs, Pomalyst and Otezla, posted total revenue of $417 million and $308 million in the third quarter. This gap between Revlimid and the rest of Celgene's drug portfolio has been a concern for investors and could be part of the reason why the stock price has fallen so sharply since late October.
Stock Price Takes A Big Hit
CELG Revenue Estimates for Next Fiscal Year data by YCharts
The chart above shows how analyst consensus revenue estimates for 2018 and 2019 have been reduced by about 4 and 6 percent, respectively, since the negative news hit the stock in late October. Yet Celgene's stock price has fallen by nearly 22.5 percent since then.
If its acquisition of Impact Biomedicines goes through, Celgene potentially gets a new drug that is ready to go in front of the Food and Drug Administration (FDA) to seek approval in late 2018, helping to add a potential new revenue source.
Favorable Deal Structure
The deal structure is favorable to Celgene, with a commitment of only $1.1 billion in upfront payments, another $1.25 billion in payments should the drug fedratinib receive approval milestones, and up to $4.5 billion should the drug reach global annual sales of $5 billion.
For now, the deal is a step in a positive direction and helps Celgene get one step closer to diversifying its drug portfolio away from Revlimid and helping to grow future revenue.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.