Celgene’s High Valuation Compared to Peers



Celgene’s valuation

Compared to its peers in the biotechnology industry, Celgene Corporation (CELG) has continued to trade at high valuation multiples throughout 2015. The graph below shows the current PE (price-to-earnings) ratio of leading biotechnology players like Amgen (AMGN), Gilead Sciences (GILD), Biogen (BIIB), and Celgene (CELG).

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Relative valuation

The value of a biotechnology company is based on the commercial potential of not only its existing drugs, but also its drugs in the research pipeline. But with biotechnology companies, analysts don’t prefer the relative valuation method. Instead, analysts tend to favor DCF (discounted cash flow) and ROV (real option valuation) methods of analysis. In addition to evaluating existing product portfolios, these preferred methods can also calculate the future expected value of biotechnology companies’ R&D (research and development) assets.

The research pipeline also presents biotechnology companies with an option to delay or abandon a project, in case the project isn’t considered profitable. This flexibility option can be analyzed through DCF and ROV methods in order to derive the true value of the company.

Still, both these alternative methods are based on a large number of assumptions and calculations—a single erroneous entry can result in wrong valuation estimates. So, for all practical purposes, relative valuation can still help us understand the value attributed by the overall market to a biotechnology company.

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Celgene fundamentals

Since 2014, Celgene has continued to trade at P/E multiples between 13x and 20x. This valuation is a result of the company’s strong product portfolio, coupled with a high perceived value of its research assets.

Revlimid, a drug prescribed as a second-line treatment for MM (multiple myeloma), is Celgene’s most successful therapy. In February 2015, the drug was approved as a first-line treatment for MM, and Celgene’s Pomalyst has also been recently approved as a third-line treatment for MM. Meanwhile, Revlimid is also being explored as an ongoing maintenance therapy for MM patients, making Celgene capable of treating MM patients in all stages of the disease.

Additionally, Celgene is also exploring Revlimid for several label expansions for other types of cancer. If these indications are approved, Revlimid sales will further boost Celgene’s profit margins. Other potential blockbusters in Celgene’s product portfolio include Abraxane and Otezla, drugs the company expects to earn between $1.5 billion and $2 billion in 2017.

Inorganic growth

After the announcement of the Receptos acquisition in July 2015, Celgene’s P/E multiple reached 20x. Not only should the deal add Receptos’s Ozanimod and strengthen Celgene’s inflammation and immunity segment, it should also help reduce Celgene’s business concentration risk by adding diversity to its revenues from MM, which represent 80% of the company’s total revenue. Celgene has also entered into collaborations with AstraZeneca (AZN) and Juno Therapeutics (JUNO) for the exploration of oncology drugs and cellular therapies, respectively.

Investors can get diversified exposure to Celgene’s product portfolio and research assets by investing in the iShares NASDAQ Biotechnology ETF (IBB). Celgene makes up 8.66% of IBB’s total holdings.


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