Celgene, a global large cap biopharmaceutical company, is an example of a company that has been highly effective at aligning its business and operating models. Celgene was created as a spin off from the Celanese Corporation in 1986, went public in 1987, and has since been one of Biotech’s biggest success stories. In recent years, Celgene has increased its market cap from around $25 billion in 2010 to almost $90 billion today.
Business Model and Operating Model:
As a major biopharmaceutical company, Celgene is in the business of discovering, developing and commercializing drugs. While Celgene has built a leading position in hematology and oncology through developing and marketing its blockbuster drug Revlimid (2015 expected sales around $6 billion; 65% of 2015 expected total sales), it has also diversified its revenue base by bringing six additional drugs across three broad therapeutic areas to market. Celgene’s existing drug portfolio has largely arisen from its extensive pipeline, which presents a crucial element of its value creation process. Not surprisingly, the company has historically spent more than 20% of sales on Research & development. It currently plans to initiate over 50 new clinical trials in 2016.
Celgene has complemented its organic growth strategy with multiple partnerships and acquisitions, producing an excellent track record of identifying, acquiring and integrating promising biotech companies. The acquisition of Abraxis BioScience in 2010 for $2.9 billion serves as a good example of Celgene’s deal-making strength, as the transaction’s key drug Abraxane, an oncology treatment, now contributes close to $1 billion in annual sales (expected to increase to c. $1.8 billion per year by 2017). Celgene has further demonstrated its clinical expertise, risk management abilities, and long-term vision through many early stage investments and collaborations. The company frequently targets high potential, but still affordable assets, relying on its R&D horsepower to gain FDA approval in the future. Recent examples include three multi-billion dollar deals and partnerships in 2015 alone, all of which were development-stage, long-term focused complements to Celgene’s pipeline and dilutive to earnings in the near term. This showcases another key element of Celgene’s business model: long-term commitment to patient outcomes and growth, as opposed to focus on short-term wins to satisfy investors.
Celgene’s key assets are intellectual property and patents, capital, and strong R&D and commercialization capabilities. While transforming patents into revenue-generating drugs and partnering with promising biotech companies have been crucial elements of Celgene’s strategy, patent protection has also been of the essence. Revlimid’s patent, for example, currently holds until 2027 in the US and until 2024 in Europe. However, the patent has been challenged by multiple competitors (Natco, Actavis) over the past few years. The company has come out on top in these litigations, but its legal expertise and proactive approach to patent protection have been hugely important – especially given the tremendous value implications of Revlimid’s growth assumptions. Of Celgene’s roughly 6,000 employees (as of year end 2014), about one third is part of Research & development. As already mentioned, Celgene’s R&D strategy is focused on quantity as well as quality. It constantly has a large number of promising early stage assets in development. In addition, Celgene is aggressively pursuing label expansion of its various marketed drugs, which is highlighted in the large number of post-approval research programs (see link to pipeline below). Label expansion on current drugs is expected to meaningfully contribute to overall sales by 2020, if not before.
Another third of total employees is part of Sales & Commercialization, up from a quarter in 2012. This increased focus on commercialization demonstrates that Celgene is adapting its operating model as the company’s is evolving from a pure-play biotech firm to a large, diversified biopharmaceutical player. In preparation for this process, Celgene has “over”invested in its infrastructure in recent years. Hence, the company has been able to leverage the completion of these infrastructure improvements to beat its competitors’ margin profiles (please note: Gilead’s recent outstanding margins are driven by its Hepatitis C “cure treatments” Sovaldi and Harvoni, which rank among the most successful drug launches in healthcare history).
Furthermore, Celgene has successfully expanded internationally, with about 40% of Revlimid sales now coming from abroad. Finally, Celgene has increased the resources spent on negotiating patient reimbursement with payors, which is not only adding to its operating strategy, but also contributing to the company’s mission to deliver truly innovative and life-changing drugs for its patients. Consistent with its commitment to patients is also the fact that 90% of last year’s growth was volume-based (as opposed to price-based). Given the pricing pressures in the healthcare industry, this adds another strength to Celgene’s operating model.
Path going forward:
Celgene’s close alignment of its business and operating models has led to exceptional results. The company has built a portfolio of multiple existing products with strong growth profiles, a promising pipeline, and various collaborations and partnerships. While Celgene is committed to continue to implement this strategy going forward, it has also adapted to its life cycle. As the company is becoming larger and more mature, it has increased its focus on commercialization and margins. Hence, I expect Celgene to further extend its dominating position in Biopharma in the future.
Celgene 10Ks and 10Qs
Celgene investor presentations: http://ir.celgene.com/events-archive.cfm