How a Juno Takeover Could Boost Celgene

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of CELG.)

Juno Therapeutics Inc. (JUNO) stock is surging by nearly 50 percent on news that Celgene Corp. (CELG) is in talks to acquire the company, according to the Wall Street Journal. The big news comes days after Celgene said it would buy Impact Biomedicines for up to $7 billion. Despite Celgene shares trading lower by about 2.25 percent on the day, another acquisition should be a positive for Celgene over the long term. (See also: How Celgene's Big Acquisition Could Fire Up Its Stock.)

Juno is developing drugs to battle cancer, through immuno-oncology, with 11 clinical trials currently in phase 1 or 2. A potential acquisition of Juno, coupled with its recent purchase of Impact Biomedicines, would help Celgene build and diversify its drug pipeline while building up future revenue streams.

Weak Pipeline

With potentially two quick acquisitions in 2018, Celgene is showing investors it is serious about rebuilding its drug pipeline.

The stock tumbled in late October 2017, after the company terminated a clinical trial it was running for an ulcerative colitis drug. This caused Celgene to lower its long-term revenue growth prospects. (See also: Celgene's Sharp Sell-Off Is Likely Overdone.)

Too Dependent On Revlimid?

Celgene is also sending a message that it is focused on diversifying its future revenue stream away from just Revlimid, its blockbuster drug for the treatment of blood cancer. Revlimid accounted for nearly 63 percent of the company's total revenue of $13 billion in 2017, according to preliminary results released in early January at the JP Morgan Healthcare Conference.

The heavy dependence on Revlimid's growth is part of the reason why Celgene shares trade at only 10 times 2019 EPS estimates of $10.38. 

CELG PE Ratio (Forward 1y) data by YCharts

Rebuilding the Pipeline and Revenue Growth

With the pending acquisition of Impact Biomedicines and a potential deal for Juno in the works, Celgene's drug pipeline suddenly gets much broader. The addition of Impact gives Celgene a drug candidate that could see a new drug application submitted to the FDA by mid-2018. While Juno's programs are not as mature as Impact's, it could strengthen Celgene's drug pipeline for blood cancer, and potentially broaden its treatments to include lung, breast and ovarian cancers. 

Overall, the two transactions, although likely costly, will give the market what it wants to see from Celgene: A company that is working on developing its pipeline and on pushing revenue higher. Additionally, should any of these drugs prove successful and get FDA approval, it would diversify Celgene's revenue stream away from Revlimid. 

To this point in 2018, Celgene seems to understand what investors are saying loud and clear, and is setting the pace for its biotech rivals, Gilead Sciences Inc. (GILD), Amgen Inc. (AMGN) and Biogen Inc. (BIIB). 

When all is said and done, 2018 may very well be the year biotech M&As made a major comeback. 

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.