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Morningstar | Celgene's Strong 2Q Largely Reflected in Our FVE; Cell Therapy Remains Key Catalyst

We don't expect any significant changes to our Celgene fair value estimate of $104 following strong second-quarter results, as strong Revlimid international sales and better SG&A expense control are countered in our model by higher expected R&D costs and more constrained (5%) annual U.S. price increases going forward for Revlimid. In the second quarter, product sales grew 17% to $3.8 billion as Revlimid saw sales of nearly $2.5 billion (21% increase) and strong volume growth internationally. We expect continued double-digit global Revlimid sales growth through 2020 as duration could extend even further with positive results from another triplet study in first-line multiple myeloma (MAIA study with Darzalex should have data later this year). Celgene is countering pressure on operating margins from increased R&D investment with massive share repurchases, which have reached $6 billion so far this year. This allowed adjusted diluted EPS growth to remain nearly level with top-line growth at 16%. Going forward, we expect Celgene to see some operating leverage relative to 2018 levels, as it digests the Juno acquisition and begins to see sales from several late-stage pipeline products. We like Celgene's increasingly diversified portfolio and pipeline, but dependence on Revlimid keeps our moat rating at narrow.

In the pipeline, we expect Celgene to have several regulatory filings to support new product launches in 2019-2020, led by myelofibrosis drug fedratinib (filing this year), Revlimid in follicular lymphoma (first quarter of 2019), ozanimod in MS (first quarter of 2019), luspatercept in beta-thalassemia and MDS (first half of 2019), and liso-cel (filing by early 2019). Celgene also expects to complete enrollment in its first pivotal trial for BCMA CAR-T therapy bb2121 later this year and launch by 2020.

We continue to anticipate that CAR-T therapies--including bb2121 through a partnership with Bluebird Bio and liso-cel and JCARH125 via the recent acquisition of Juno--will account for roughly 20% of Celgene's revenue ($3.6 billion) by 2027. For ozanimod, we think MS approval is very likely, but $1.7 billion of our $2.7 billion in ozanimod sales in 2027 still stems from other, higher-uncertainty indications, including Crohn's and ulcerative colitis, and competition from other products in the class (Novartis' Gilenya) still weigh on MS sales potential.