Texas Stock Pitch - Celgene

$CELG
119.45USD 1.61 (1.33%)
Aneesh Desai
Avish Patel
Veshal Arul Prakash
Ziyyan Ali

OUTLINE
OUTLINE
INVESTMENT THESIS
COMPANY OVERVIEW
COMPETITIVE OVERVIEW
FINANCIAL OVERVIEW
RISK OVERVIEW
RECOMMENDATION
OUTLINE INVESTMENT THESIS COMPANY OVERVIEW COMPETITIVE OVERVIEW RISK OVERVIEW RECOMMENDATIONFINANCIAL OVERVIEW

Nasdaq
Celgene
Why does CELG trade at a discount to its
peers despite having average market share
and superior profitability?
We believe that the market has
overreacted to Celgene’s overreliance
on its flagship drug, Revlimid
We believe that the new and future
drug pipeline have not been priced in
to Celgene’s stock price
INVESTMENT THESIS

COMPANY OVERVIEW
HEMATOLOGICAL & SOLID TUMOR CANCERS
multiplemyeloma
chroniclymphocyte
non-hodgkin’slymphoma
glioblastoma
ovariancancer
myelodysplasticsyndromes
pancreaticcancer
prostatecancer12.7 million
diagnosed each
year
Celgene is a biopharmaceutical
company focusing on the discovery,
development and commercialization
of products for the treatment of
cancer and other severe immune,
inflammatory conditions.

OUTLINE INVESTMENT THESIS COMPANY OVERVIEW COMPETITIVE OVERVIEW RISK OVERVIEW RECOMMENDATION
COMPANY OVERVIEW
ABRAXANE® $1.2 B $1.3 B
ISTODAX®
OTEZLA® $1.0 B $1.7 B
POMALYST® $1.3 B $1.5 B
REVLIMID® $6.8 B $7.9 B
THALOMID®
VIDAZA®
2016 2017
$938 M
16.8%
CELGENE market cap $93.36 B
TOTAL biopharma market cap $811.5 B
CELGENE has 11.5% of the market space
FINANCIAL OVERVIEW

COMPANY OVERVIEW
I N D U S T R Y O V E R V I E W
“…under a Trump presidency the likelihood of new
legislation controlling the pricing of drugs and
healthcare services is severely decreased.”
- Business Insider

Barriers to
Entry
Large startup costs
to purchase
research and design
facilities and servers
to structure data
Regulatory issues
and initial
regulations make
the startup path
difficult.
Bargaining
Power of
Buyers
Low switching costs,
but there are
contracts that need
to be honored
sometimes
Some drugs have
moderate variations
that are potentially
significant.
Intensity of
Rivalry
Competition is
based on price only
when drugs are
(nearly) identical.
There are several
types of disease
needs, so
differentiation is
somewhat common.
Threat of
Substitutes
Moderate amount
of substitutes
available for
common diseases
Few substitutes
available for
lower-in-demand
and/or recently
discovered
diseases
Bargaining
Power of
Suppliers
Few suppliers for
certain drugs that
treat less common
and/or recently
discovered
diseases
The demand
needs of this
industry generally
allows high pricing
and margins.
HIGH MODERATE MODERATE MODERATE HIGH
PORTER’S FIVE MARKET FORCES
COMPANY OVERVIEW
I N D U S T R Y O V E R V I E W

Market Cap P/E Revenue Growth PEG P/S
Celgene 93.36B 45.27 27.79 1.38 8.91
Amgen 114.77B 14.89 1.54 0.76 5.01
Biogen 70.48B 18.06 6.41 1.15 6.14
Bristol-Myers 94.81B 28.08 20.96 0.31 5.13
RATIO ANALYSIS

Bristol-
Meyers
Squibb
12%
Biogen
9%
Amgen
14%
Celgene
11%
Remaining
Biotech
Industry
54%
BIOTECHNOLOGY MARKET SHARE
Segment: Revlimid
Celgene: 24.81%
Bristol-Meyers Squibb: 7.02%
Amgen: Drug coming soon
Biogen: None
Segment: Otezla
Celgene: 20%
Bristol-Meyers Squibb: None
Amgen: 35%
Biogen: 3%
Segment: Abraxane
Celgene: 1.39%
Amgen: 5.92%
Biogen: None
Segment: Pomalyst
Celgene: 5.5%
Amgen: None
Biogen: None

40
15
13
34
19
7
2
1
18
12
2
7
CELGENE
AMGEN
BIOGEN
BRISTOL MEYERS-SQUIBB
CURRENT AND FUTURE DRUG PIPELINE
Phase 1 & 2 Phase 3 Phase 4

2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
Revenue 5506.70 6493.90 7670.40 9256.00 11320.1 13935.0 17377.0 22155.6 28758.0
Growth 18% 18% 21% 22.3% 23.1% 24.7% 27.5% 29.8%
Less: COGS 483.2 986.5 891.0 1949.2 2884.8 4448.4 5960.8 8470.4 11604.4
Growth 104.2% -9.7% 118.8% 48.0% 54.2% 34.0% 42.1% 37.0%
Gross Profit 5023.50 5507.40 6779.40 7306.80 8435.27 9486.6411416.14 13685.30 17153.65
Gross Margin 91% 85% 88% 79% 75% 68% 66% 62% 60%
Less: SG&A 1373.50 1684.50 2027.90 2300.30 2592.30 2940.29 3631.79 4541.91 5809.12
% of Revenue 24.9% 25.9% 26.4% 24.9% 22.9% 21.1% 20.9% 20.5% 20.2%
Less: R&D 1417.60 1580.10 1796.30 2089.60 2750.78 2522.24 2936.71 2237.72 2329.40
% of Revenue 25.7% 24.3% 23.4% 22.6% 24.3% 18.1% 16.9% 10.1% 8.1%
EBITDA 2232.40 2242.80 2955.20 2916.90 3092.19 4024.11 4847.64 6905.67 9015.13
Less:D&A 283.50 374.10 373.60 408.90 667.89 724.62 1181.63 1573.05 1783.00
% of Revenue 5.1% 5.8% 4.9% 4.4% 5.9% 5.2% 6.8% 7.1% 6.2%
EBIT 1948.90 1868.70 2581.60 2508.00 2,424.3 3,299.5 3,666.0 5,332.6 7,232.1
Less:Taxes 225.30 215.50 327.50 421.50 557.6 758.9 843.2 1,226.5 1,663.4
Tax Rate 12% 12% 13% 17% 23% 23% 23% 23% 23%
NOPAT (Net Operating Profit after
Taxes) 1723.60 1653.20 2254.10 2086.50 1,866.7 2,540.6 2,822.8 4,106.1 5,568.7
Add: D&A (Not Cash Loss) 283.50 374.10 373.60 408.90 667.9 724.6 1,181.6 1,573.1 1,783.0
Less: CapEx 111.50 119.70 150.30 286.30 215.0 233.0 266.0 281.0 297.0
Less: Change in Net Working Capital
(NWC) 440.80 -194.60 -196.00 -207.80 -212.00 -215.00 -216.00 -218.00 -224.00
UFCF 1454.80 2102.20 2673.40 2416.90 2531.60 3247.23 3954.46 5616.17 7278.74
Discounted Cash Flows $19,095.91
Terminal
Value $125,220.16
Discounted Terminal
Value $ 98,113.27
FINANCIAL OVERVIEW

Assumptions
Tax Rate 23%
WACC 5%
EV/EBITDA 13.89
Enterprise Value $117,209.18
Less: Net Debt -190.82
Equity Value $117,400.00
Current Share Price $119.45
Diluted Shares Outstanding 775.11
Implied Share Price $151.46
Implied Upside 21.1%
WACC
Equity 5919
Debt 14,250.4
Risk free Rate 2.27%
Beta 1.55
Market Risk
Premium 7%
Cost of Equity 13.12%
Cost of Debt 2.69%
WACC 5%
Grounded Assumptions
Revenue Growth
Future and current pipeline of drugs
Reduction in operating costs
Reduction in research and deveolpment
Trump's looser health policy
12 year contracts for drugs
FINANCIAL OVERVIEW

RISK OVERVIEW
• Pricing of Revlimid: $100K = Very High
• 65% of Celgene’s total sales is from
Revlimid
Amgen’s
Kyprolis: near
future less
expensive
alternative
Heightened
competition
for Revlimid
Loss of sales
Price
cuts
Loss in
market
share
R I S K O N E
Over-dependent Revenue Stream and Potential Competition
65%
35%
Celgene Total Sales
Revlimid Other

• New drugs expected to hit market soon
• FDA is increasingly lenient
Celgene Pipeline: Most
drugs in trial phase
three and four
• Protect market power of Revlimid
• Stronger diversification of 3-4 main
drugs by 2025
Exclusive patent
rights for Revlimid by
Celgene through
2025
RISK OVERVIEW
R I S K O N E – M I T I G A T I O N

Anti-trust Allegations from Competitors
Celgene’s refusal to
allow competitors to
purchase drugs
Competitors cannot
perform routine testing
Competitors cannot
develop generic version
FTC filed a case favoring
Mylan
Potential Result: Loss of
“Monopolization” of
Revlimid and Thalomid
RISK OVERVIEW
R I S K T W O

• Used as a measure to slow down competitor’s
progress
• Very unlikely for anti-trust allegations to pass
through
• Ex: Abbot Laboratories vs Teva Pharaceuticals
Anti-trust allegations
very common in
biotechnology and
pharmaceutical
industries
RISK OVERVIEW
R I S K T W O – M I T I G A T I O N

Drug-counterfeiting firms
sell drugs at lower price
Inaccurate and impure
drug manufacturing
Negative Publicity to
Celgene
Loss of sales and market
share for Celgene
Drug-counterfeiting Firms
Ex: Turkish Drug wholesaler pleaded guilty for
counterfeited Avastin cancer drug.
RISK OVERVIEW
R I S K T H R E E

• “Track and Trace” Technology
• Monitor supply chain using
technology
“Celgene has initiated
researching and
executing new strategies
and technological
developments to deter
counterfeiting”
•Partnership for Safe Medicines (PhRMA)
•Coalition Against Counterfeiting and Piracy (CACP)
•FDA: Combating Counterfeit Drugs
•International Anti-counterfeiting Coalition (IACC)
•European Alliance for Access to Safe Medicines
(EAASM)
•Ex: Legislation requiring tamper-proof security
technology on each medical package
“Celgene works
closely with
regulatory bodies,
law enforcement
agencies, their
industry peers, and
consumer protection
authorities
worldwide.”
RISK OVERVIEW
R I S K T H R E E – M I T I G A T I O N

RECOMMENDATION
From our qualitative analysis and
quantitative valuation on $CELG as well
as its competitors and overall industry,
we recommend a long on $CELG.

Texas Stock Pitch - Celgene

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