I have spent my investing life evaluating the culture of innovation at companies in different industries. Innovation is necessary in every industry – but naturally more urgent in some than others. Because I seek out sustainable growth through innovation, I tend to hold a number of businesses in leading-edge industries – biotechnology, for example.
Innovation, execution and reinvestment
Biotech is a complex and ever-changing world, which means a focus on quality companies is very important. Celgene Corp., a 20-year old New Jersey-based biopharm business, has emerged as one of the world’s most successful biotech firms – a powerhouse in oncology and immunology.
From an investment point of view, the firm ticks each of the innovation, execution and reinvestment criteria boxes that I focus on. I’ll write here about the three main components of my investing thesis on the company:
- Culture of innovation and partnership
- Robust product portfolio
- Attractive stock valuation
A culture of innovation
Celgene has created a strong internal culture through its own internal research work, plus an aggressive program of partnering with companies at the forefront of new technologies. These strategic partnerships are unique in that they give us exposure to smaller, less-established businesses in a diversified way. For example, Celgene has 30 discovery partnerships1 with companies that have pushed scientific understanding of the complex metabolic pathways associated with cancer and immunological disorders.
The current product shelf is robust, and I believe it will drive revenue growth for the foreseeable future. Earnings will likely outpace this growth.2 The depth of the product pipeline ensures that when a patent expires it will be more than offset for at least the next decade, providing a clear trajectory of sustainable growth.
The company’s success stems from its first blockbuster product, REVLIMID®, which treats multiple myeloma (cancer of plasma cells) and has annual sales of approximately $6 billion.3 Clinical trials are currently underway to confirm if the drug is also effective in the treatment of other hematological cancers.
Beyond REVLIMID, Celgene produces a drug for rheumatoid arthritis and psoriasis that is well on its way to becoming a blockbuster, as well as many others that are widely prescribed treatments on the market.
My view of the company’s stock valuation is that it is very attractive relative to the high rate of organic growth and rapid buildup of cash that we’re seeing. The excess cash the business is generating can be used to fund further growth over time or returned to shareholders.
Trimark U.S. Companies Fund endeavours to invest in companies that we believe can sustain an attractive growth rate based on a culture of innovation. Celgene more than fits the bill – which is why the company is a 3.31% weight in the Fund (as at January 29, 2016).
Note: The above company was selected for illustrative purposes only and is not intended to convey specific investment advice.