Celgene was incorporated in 1986 as a company that focused on chemical biotechnology, making chiral chemical compounds for pharmaceutical companies. The company licensed Thalidomide from Rockefeller University a decade later, which refocused the company’s effort towards pharmaceuticals. Celgene is now focused on the discovery, development, and commercialization of innovative therapies in unmet medical needs, particularly in cancer and inflammatory diseases. Celgene currently has several marketed products with Thalomid (Thalidomide), Alkeran (Melphalan), and the Ritalin (Methylphenidate) family of drugs, including Focalin (Dexmethylphenidate), driving the pharmaceutical sector.

PRODUCT PIPELINE

Celgene’s pipeline consists of Thalidomide (marketed as Thalomid), and Thalidomide analogs, which they have termed IMiDs. While Thalomid is currently the value driver of Celgene, we believe that Revlimid, a first generation IMiD, is the key lead product for Celgene in the immediate future. Celgene has broad intellectual property built around IMiDs and the newer generation IMiDs will likely contribute to the long term growth of the company. These IMiDs were manipulated to offer different potencies and specificities to target different diseases. Along with IMiDs, Celgene is also developing SelCIDs, or selectively cytokine inhibitory drugs that are in early clinical development for inflammatory diseases. With the acquisition of Signal Pharmaceuticals in 2000, Celgene has broadened its pipeline significantly to include small molecules that can target components of the cell signaling pathway. Therefore, we believe that Celgene has a rich pipeline of promising drugs that should help expand the company in the coming years.

A distinguishing feature of Celgene’s pipeline is that unlike most cancer treatments that are injectables, their drugs are orally available representing a significant advantage in ease of administration. Moreover, Celgene has been focusing on two difficult-to-treat hematological cancers: multiple myeloma and myelodysplastic syndrome. The efficacy of Thalomid and Revlimid in these indications leads us to believe that these two drugs will dominate those markets.

The off-label success of Thalomid has allowed Celgene to invest heavily in R&D and generate one of the most promising pipelines in the industry. Thalomid sees the majority of its usage in the MM setting. MDS also represents a meaningful revenue contribution to Celgene and is further along in regulatory development than Thalomid’s other indications. Despite declined market share in MM, Thalomid’s revenue is increasing in part due to large price increases over the past year. Thalomid should also benefit from the Medicare Modernization Act being enacted in 2006.

Valuation
Celgene’s valuation rests largely on Revlimid’s approval and success. While Thalomid has provided valuable revenue, Revlimid’s prospects are greater and Celgene will receive a greater percentage of revenue from Revlimid. We project Revlimid to be a potential blockbuster, multi-billion dollar franchise for Celgene in the MM and MDS settings.

Despite our favorable outlook for Revlimid’s approval and rapid uptake in both the MM and MDS markets, we currently view Celgene as FAIRLY VALUED at current levels. We value its 5 and 10-year pipeline at $46.47/share and $35.22/share, respectively.

Upcoming Catalysts and Valuation
Revlimid’s expected approval in October of this year does carry some risk, although we feel approval is very likely at 91% LOA. Because Revlimid carries such a high LOA, there will not be too much valuation benefit to Celgene in our model; less than a $2.00/share 5-year value benefit. The risk is more to the downside as an approvable letter would most likely cause us to reduce our LOA and push back revenue. Seeing that Celgene’s stock is up over 50% the past 12 months, it will be interesting to see if Celgene experiences a similar share price decline after an approval, as Eyetech and Amylin did with Macugen and Byetta.

For the full report please download the PDF version at the top of this page, or see our Coverage Initiation event under Revlimid for MDS.