Celgene Competition Presentation

Sector Manager: Aidan O’Neill 

Presented by: Jack Curtin, PJ McGrane, Robert Hatton, Dean McKenna

Healthcare sector presentation,

November 2013

CelgeneCompany OverviewCelgene is an American biotechnology and biopharmaceutical company, specialising in drug therapies for cancer, immunology and inflammatory.

With a corporate headquarters situated in Summit, New Jersey, they markets their products in three regions: the US, Europe and All other areas.

Share Price Performance

Segment breakdownKey FinancialsPrice: $160P/E: 45Forward P/E: 16.6Market Cap: $65.9 billionReturn on Equity (TTM): 25.8%Debt-to-Equity: 0.7

58%35%

8%

Regional Sales

USAEuropeAll Other

Investment Summary

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Inv Summary specific image

Investment Thesis

Investment Summary

1. Strong market positioningCelgene has a strong and proven reputation in the fields of oncology, hematology and immunology; they have leading products in each field. We expect each of these fields to grow in the future, with the bulk of growth being in Celgene’s main sales region, the US and Europe.

2. Promising pipelineCelgene’s pipeline is cleverly targeting underserved markets, with promising signs. Furthmore, they relentlessly seek to capitalize on the success of approved treatments by testing them for treatment of other conditions.

Company Overview

1 Founded in 1986.2 Specialises in drug therapies for cancer,

immunology and inflammatory.3 Targets Developed, Growing Markets.4 Major Products: Revlimid, Vidaza, Thalomid,

Abraxane and Istodax

Investment Summary

Celgene

Company OverviewCelgene was founded in 1986 and has a proven record of targeting growth markets. It operates in several key markets.

Investment Summary

Company Overview

Investment Summary

AcquisitionsYear Company Cost Outcome2012 Avila

Therapeutics Inc.

350 2013 earnings?

2010 Abraxis BioScience

2,900

2009 Gloucester Pharmaceuticals

640

2008 Pharmion Corporation

2,900

2003 Anthrogenesis

45

Company Overview

Investment Summary

Current Products

Industry OverviewOncology

Investment Summary

Industry OverviewKey Points:• 1 in 3 will be diagnosed with cancer• Survival rates have doubled in the past 40 years• Treatments are becoming more lengthy, complex and effective

Investment Summary

Industry Overview

Investment Summary

Haematology & Immunology

Multiple Myeloma rates

Industry OverviewKey Points:• Multiple Myeloma is more prevalent in the elderly, a demographic

expected to grow.• Complementary drugs: Revlimid, Pomalyst

Investment Summary

Industry Overview

Investment Summary

Key Points:• Psoriasis is the most prevalent autoimmune disease in the

U.S. • Psoriatic arthritis has no cure, but Celgene are close.• Rheumatoid Arthritis affects between 1-2% of the

worldwide population

Financial Analysis

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Ratio Analysis

Financial Analysis

  Celgene Gilead Merck Amgen Industry Average

P/E 46.55 41.3 33.3 18.7 59.9Forward P/E

16.36 12.0 12.8 13.3  

P/B 11.6 10.5 3.1 4.1 7.5P/S 9.46 11.8 3.4 5.0 8.1EPS 5.96 1.64 3.03 5.52  Return On Equity

26.1 32.30 11.47 22.82 13.7

Profit Margin

22.33 28.6 10.2 26.81 13.7

Div. Yield - - 3.47 1.59  Debt/EBITDAD/E 0.8 0.5 0.5 1.3 0.7

Revenue

Financial Analysis

58%35%

8%

Regional Sales

USAEuropeAll Other

67%

13%

10%

4%5%

1%

Product Sales

RevlimidVidazaAbraxaneThalomidPOMALYST/IMNOVIDOther

2007 2008 2009 2010 2011 2012 2013 20140

1000200030004000500060007000

Revenue $

Year

Mill

ions

Earnings

Financial Analysis

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 TTM

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

Earnings per Share ($)

Key points:• Earnings have grown impressively since 2008.• EPS was $5.96 in 2013, guidance for 2014 is in the range

$7.00-7.20.• Bullish estimates based on expected revenue for Revlimid and

the rapidly growing Abraxane.

What are they doing with their earnings?

Year Net Profit ($ billion)

2013 1,449

2012 1,456

2011 1,318

2010 881

2009 777

Assets

Financial Analysis

Key points:• Upward trend in cash, one we expect to accelerate.• Rising goodwill from acquisitions.

2008 2009 2010 2011 20120

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Total CashGoodwill

Liabilities & Equity

Financial Analysis

2009 2010 2011 20120

500

1000

1500

2000

2500

3000

3500

4000

4500

Long-term DebtCash & EquivCum. Acq.

Key points:• Large amounts of long-term debt have been incurred – financing

acquisitions and share buy-back schemes.• At the same time cash and equivalents have grown.• Equity is quite stable: retained earnings show robust growth,

treasury stock is high

Cash Flow

Financial Analysis

Key points:• High earnings growth drive Operations cash flows.• Acquisitions and share buy-backs create erratic Investing cash

flows.• Issuance of long-term debt create erratic Financing cash flows.• Net change in cash is reliable positive.

Year2013 9 Months 2012 2011 2010

Net Cash Flow from Operations 1675 2019 1776 1182

Net Cash Flow from Investment Activities -1443 -1554 378 -2107

Net Cash Flow from Financing Activates 104 -249 -1622 1177

Net Change In Cash 332 231 508 249

Free Cash Flow

Financial Analysis

09-3

09-6

09-9

09-

12

10-3

10-6

10-9

10-

12

11-3

11-6

11-9

11-

12

12-3

12-6

12-9

12-

12

13-3

13-6

13-9

0200400600800

Free Cash Flow ($ millions)

Key points:• Overall, the trend is growth.• Dips tend to match acquisitions, while peaks match returns from

these investments.• Despite a recent dip, FCF’s are remarkable - $1983 million.

Valuation

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Stock Price Analysis

Valuation

The stock currently trades around $160 and has a 52 week range of $96.30-174.66.

Historical P/E

Valuation

• Over the past 10 years, Celgenes P/E has converged closely with that of the S&P500.

• With a current P/E of around 46, Celgene is trading at around half of its 10 year average of 95.4, though this may be misleading.

2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

50

100

150

200

250

300

350

Historic P/E

CELG

S&P 500

DCF

Valuation

DCF & Football Field Analysis

Valuation

We recommend a target price of $195.

Risk analysis

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Financial Risk

Risk Analysis

• Increase in long term debt to 2771, 0 in 2009• Subsequent increase in debt/equity to .79,

above industry average of .66• Debt/assets healthier at .34, industry

average .30• No dividend payments• But, outlook is good due to strong cashflow

and growth potential• Cashflow ops/total debt .43, ind average .08

Operational Risk

Risk Analysis

• Risk of further consolidation of American wholesalers

• Difficulties surrounding integration of acquisitions

• Liability due to use of hazardous materials in research

• Currency risk, although it is hedged• IT breakdown• Legal risks• Improper conduct by employees, agents etc.

Strategic Risk

Risk Analysis

• No impending patent cliff risk, with both Revlimid and Thalomid patents not expiring until mid 2020s

• Vidaza is very open to generic competition with its patent already expired. Vidaza accounts for 15% of total revenue

Strategic Risk

Risk Analysis

• Velcade by Millenium is the main competitor to Revlimid, as market leader in 1st and 2nd line treatment

• Velcade successor, MLN9708, could pose a very serious threat in the future

• Elotuzamab by BMS and AbbVie also very promising, but still in phase III

• However, Revlimid may be prescribed in conjuction with these new drugs