We See a Solid Pipeline for Undervalued Celgene

Karen Andersen: Investor sentiment on narrow-moat Celgene appears to be at an all-time low, following the failure of a key Crohn's disease drug and FDA approval delays for multiple sclerosis drug ozanimod. But we see a solid pipeline with multiple data and launch catalysts through 2020. Shares recently traded at more than a 30% discount to our $116 fair value estimate.

Pipeline setbacks have brought investor focus back to core drug Revlimid, which generates more than 60% of Celgene's revenue today and is vulnerable to generics between 2022 and 2027. But we think the market is fixating on Revlimid declines, and our projections for the firm's pipeline are higher than consensus.

Key drugs include liso-cel, which is a cell therapy to treat lymphoma that should launch in 2019. The drug appears to have safety and efficacy advantages to other cell therapy options, and we assign it peak sales north of $2 billion. Another cell therapy program, bb2121, has shown impressive data in multiple myeloma, the same disease that Revlimid treats today.

We think bb2121, anemia drug luspatercept, and MS drug ozanimod are all poised to launch in 2020, and each of these therapies have peak sales potential of more than $2 billion. Also, we expect Revlimid will continue to produce healthy cash flows over the next five years, allowing the firm to easily absorb additional acquisitions without raising debt ratios.