Celgene trades close to its doomsday scenario

Analysis

Investors are no longer willing to give Celgene the benefit of the doubt. This much is clear from the company’s share price, which is at four-year lows in the wake of an eight-month rout that has erased almost half of the big biotech’s market value – a loss of $44bn.

The situation can be illustrated by applying a doomsday scenario to model the company’s valuation, as EP Vantage has done, and the resulting numbers are not far off Celgene’s cratered position; it seems that the market is assuming that the company will fall at every approaching hurdle. This leaves room for those with a more optimistic stance to find value, perhaps, although unless a bidder emerges it is hard to see confidence being restored quickly.

A series of failed business development deals and pipeline setbacks have undermined confidence in Celgene’s management, and fears are growing that R&D will struggle to replace the huge revenues that Revlimid generates – annual sales reached $8.2bn last year.

The substantial cash flows that the blockbuster cancer drug generates will present a tempting prospect for industry rivals, many of which are surely figuring out whether to make a move. An important question is whether Celgene’s valuation can fall any further, and Revlimid is a big swing factor here, specifically because of its uncertain patent life.

  Current case for Celgene Worst case for Celgene
NPV of marketed products $131.6bn $60.5bn*
NPV of pipeline $22.4bn $0.5bn*
Celgene's total NPV  $154.0bn $61.0bn
Current market cap $54.1bn $54.1bn
Current enterprise value $71.6bn $71.6bn
Conclusion? Undervalued by ~$80bn Could fall by ~$10bn
Source: EvaluatePharma, EP Vantage. *See calculation in second table.

The sellside is currently modelling a gradual erosion of sales from 2022, based on a settlement that Celgene came to with Natco, one of the first generic challengers. Natco is allowed to enter the US market in March 2022 with a mid single-digit percentage of total Revlimid dispensed, growing to approximately one third by March 2025. 

Others want a piece of the action, however, and Dr Reddy’s is the most dangerous challenger on the scene. The Indian firm claims to have come up with a generic form that does not infringe so-called polymorph patents that stretch out to 2027. Revlimid’s composition of matter patent expires in October 2019 and other key patents in 2022, so there is an outside chance that Dr Reddy’s could launch without constraints before Natco.

A settlement between Dr Reddy’s and Celgene is expected, however, though when this will happen, and what terms Dr Reddy’s will manage to extract, are unknown. And until they are the future value of Revlimid is hard to calculate. What is certain is that Celgene has a huge amount to lose: the drug is forecast to generate $59bn in sales between 2017 and 2022, making it the second-biggest money-making franchise in this period across the whole industry (The mega-blockbusters – biologicals dominate biopharma’s hall of fame, March 8, 2018).

Celgene how bad can it get?
  Current NPV ($bn) But what if… Doomsday NPV ($bn)
Marketed products
Revlimid 104.8 Patents collapse mid-2020 36.8
Otezla 8.8 Peak sales miss by 10% 8.1
Pomalyst 8.7 Gx Revlimid craters demand 6.9
Abraxane 4.8 Performs as expected 4.8
IDHIFA 2.9 Peak sales miss by 25% 2.2
Vidaza 1.0 Performs as expected 1.0
Istodax 0.3 Performs as expected 0.3
Ritalin 0.3 Performs as expected 0.3
Thalomid 0.2 Performs as expected 0.2
Total NPV of marketed products 131.6   60.5
R&D projects
JCAR017 6.3 Never launches  0.0
Luspatercept 5.1 Never launches  0.0
Ozanimod 3.6 Never launches  0.0
bb2121 3.4 Never launches  0.0
Fedratinib 2.0 Never launches  0.0
JCARH125 0.8 Never launches  0.0
GED-0301 0.6 Never launches  0.0
Imfinzi 0.5 Performs as expected 0.5
CC-486 0.1 Never launches  0.0
Total NPV of pipeline 22.4   0.5
Source: EvaluatePharma; NPV derived from consensus sellside forecasts.

Current sellside forecasts generate a net present value of $105bn for Revlimid, according to EvaluatePharma. In EP Vantage’s doomsday scenario the patent expiry has been brought forward to mid-2020. While this seems unlikely, it illustrates how the value of Revlimid – and Celgene – could shift dramatically if the consensus view does not prevail.

Our model above also assumes some worst-case outcomes for marketed products, and a complete failure of the pipeline. Again, this is unlikely to unfold, though further setbacks cannot be ruled out.

Important R&D events for the coming months include the first phase III data on the blood disorder therapy luspatercept and a presentation of pivotal JCAR017 data at the EHA meeting in June. All are hugely important for rebuilding confidence in an expensive R&D effort that is struggling to prove its worth.

However, according to these calculations, the NPV of Celgene’s products and pipeline could actually be worth even less than its current enterprise value. It is notable that the market is not far off coming to this same conclusion.

For shareholders hoping for a swift resolution to this sorry situation the only hope is that a bidder emerges, one that holds a more optimistic view of Celgene’s prospects. Rebuilding confidence in management will take time, and there is always the possibility that things can get worse before they get better. 

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