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Mark Yu
Mark Yu
Articles (278)  | Author's Website |

Celgene: Is It a Buy?

Blood cancer specialist tumbles from record high

June 21, 2016 | About:

Celgene (NASDAQ:CELG), among other biotech companies, has fallen from its record high. The company has returned negative 15% for the past year, and negative 26% from its high of $134 a share back in July 2015 compared to its Tuesday morning price of $96.89 a share. The iShares NASDAQ Biotechnology Index ETF, on the other hand, has performed worst at negative 32% for the past year. Along with leveraged commodity ETFs, the biotech sector has experienced Mr. Market’s dark side. The Standard & Poor's 500 returned -2% in the same timeframe.

“If you can’t beat the market, be the market.” Seth Klarman (Trades, Portfolio)

Forecasting

Despite Celgene’s market price correction, its price-to-earnings (PE) ratio still indicates a great premium of 48. This figure would automatically eliminate Celgene as a candidate for most conservative investors. On the other hand, the company’s forward PE ratio brings a little comforting figure of 18. Forward PE is a measure of the PE ratio using forecasted earnings for the PE calculation (Investopedia).

Interestingly, Celgene had revised its forecasted earnings several times in the past year. This January, the company revised its sales and profits estimate a month before filing its annual report. Although the revisions appear to be warranted secondary to its $7.2 billion Receptos (RCPT) acquisition in mid-2015.

Being myopic and reviewing Celgene’s recent annual sales and profits forecasts for 2015 revealed that the company has been a bit more precise than can be expected. Celgene predicted that its sales would be $9.16 billion (a month before filing) accompanied by an adjusted earnings-per-share (EPS) of $4.71. According to its 2015 annual report, Celgene delivered $9.26 billion in sales and adjusted EPS of $4.71.

For 2016, Celgene expects an adjusted EPS range between $5.5 and $5.7 and sales between $10.5 billion and $11 billion while in 2017, the company expects its overall sales to be in a range between $12.7 billion and $13 billion and adjusted EPSrange between $6.75 and $7; these numbers after its revision (again) in April.

Further, Celgene expects to reach sales of $21 billion and adjusted EPS of $13 by 2020. Interestingly, these 2020 figures presented less than average growth in the past three years, 2013 to 2015, in reference to computed annual growth rate.

Celgene definitely has the right to play around with its numbers through forecasting. Further, I personally had difficulty figuring out how the company calculates its adjusted EPS, too. Nonetheless, Celgene was able to surpass Wall Street sales estimates in four of the past eight quarters and seven out of eight in its actual generally accepted accounting principles (GAAP) diluted EPS.

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” – Warren Buffett (Trades, Portfolio)

Revlimid

Currently, Celgene has one drug that had consistently been a bigger part (mid-60%) of its sales for the past decade, Revlimid. Revlimid seems to be an important drug product for Celgene whereby it had achieved several applications expansion involving several blood-related diseases over the past 10 years.

Revlimid was first approved by the Food and Drug Administration (FDA) in December 2005 with the aim of treating Myelodysplastic syndromes (MDS). MDS can also be understood as a form of blood cancer, whereby baby blood cells usually developing inside the bones (of human) fail to mature.The human body fails to develop normal oxygen carrying and foreign particle protectants, known as the red blood and white blood cells respectively. In return, the individual affected by the disease ended up immune-compromised or lacking innate immunity, self-defense, to foreign particle exposure and diseases.

Most patients ended up requiring regular blood transfusions, which may also have physiological adverse effects. Thus, Revlimid was practically needed and necessary for MDS treatment. According to a study by Ma (2012), MDS cases are more commonly observed as individuals age – 49.7 incidence per 10,000 people over the age of 85 affected by the disease compared to one MDS case per 10,000 in individuals between the ages of 45 and 49.

Six months after, Celgene received another FDA approval for Revlimid’s use in conjunction with Dexamethasone for patients with multiple myeloma (MM) who have received one prior therapy. MM is a lot less common than MDS; the disease affects 0.00068 people per 10,000. MM primarily affects the white blood cells, in which the body then fails to develop its immune system.

Overall, the disease trend has been increasing for the past several decades despite new treatment approaches. The blood disease is still considered incurable but treatable. Almost half of individuals diagnosed with the disease die after five years of disease discovery. This survival rate is an improvement; only 25% had been able to survive during the '90s.

According to its annual filing, Celgene saw a 67% jump in its overall sales in 2006 after Revlimid’s two FDA drug approvals.

In 2013, FDA approved Celgene’s Revlimid for treating Mantle Cell Lymphoma (MCL). MCL is another rare type of blood cancer that affects most individuals in their 60s. The disease affects 0.00015 people per 10,000. The disease is a rare subtype of non-Hodgkin’s lymphoma. The disease exhibits uncontrolled growth of white blood cells,specifically the B lymphocytes, which are primarily responsible for antibody development. In this case, the individual is expected to develop a poor immune system and is susceptible to diseases. MCL also appears to have a poor prognosis whereby there is a three- to five-year survival after the occurrence.

In 2015, Celgene received more good news from the FDA, which approved the use of Revlimid for patients newly diagnosed with MM. With these achievements, Celgene can be assumed to have a leading share in the MM market.

Nonetheless, Revlimid sales grew another 16% in fiscal year 2015, similar to the amount of growth in 2014.

(Revlimid treatment indications and market exposure, page 2 of Celgene’s recent annual report)

Besides this key drug, Revlimid, Celgene has several other drugs that contribute roughly the remaining 40% or so to its sales.

(Celgene’s Ecosystem, Annual Filing)

Other drugs

Abraxane: a multipurpose cancer drug that demonstrated 14% sales growth in 2015. Multipurpose because the drug can be used in different types of cancers, such as metastatic breast cancer, nonsmall cell lung cancer and late-stage pancreatic cancer. The drug contributes 10% to Celgene’s sales. Abraxane was first approved by the FDA for breast cancer treatment in 2005.

Pomalyst: another multiple myeloma drug approved by the FDA in 2013. Pomalidomidecan be used to treat patients with multiple myeloma whose disease progressed after being treated with other cancer drugs. The drug demonstrated 45% growth in 2015 and contributed 11% in sales.

Otezla: a drug for psoriatic arthritis. The drug was approved by the FDA in 2014. Otezla exhibited 576% growth in 2015 and contributed roughly 5% in Celgene’s sales. Psoriatic arthritis affects 0.0006 people per 10,000.

Thalomid: an old drug, which caused several children disconfigurations during the postwar era of the 1960s. The drug was first introduced to the world market to address sleepiness, but eventually its off-label use led to a devastating side effect to pregnant mothers. Mothers ended up giving birth to babies with shortened and sometimes totally without limbs, known as phocomelia.

(A child who has phocomelia, Helix Magazine)

Nonetheless, the toxic drug was approved to be used for treating multiple myeloma in 2006. The drug also can be used to treat skin lesions caused by leprosy. Thalomid used to contribute 32% to Celgene’s sales back in 2007, but contributed "just" 2% or $185 million in 2015 sales.

Vidaza: a drug approved in 2004 for Myelodysplastic Diseases (MDS). The drug grew – 10% between 2013 and 2015. Vidaza contributed 6% in 2015 sales.

Patent expirations

(Key patent expirations, p. 10 recent annual filing by Celgene)

Celgene has some years to go before its top sales contributor, Revlimid, experiences generic drug competition. Further, the company has a good pipeline developing.

(Celgene Product Pipeline, p. 1)

Balance sheet and cash flow

Based on Celgene’s recent quarterly filing, the company has a debt to equity ratio of 2.81. Celgene also had $915 in its free cash flow. The company claimed that it had $5.2 billion remaining in its share repurchase program. Celgene has spent $15.2 billion in its open share repurchase program since 2009. Celgene was able to reduce its overall share count by 12.5% or 117 million shares. The company has not issued any dividends for the past decade.

Valuations

Celgene currently has a PE of 48 and a price-to-book value (PB) of 15. The company’s valuation is comparably higher than its industry median of PE 29 and PB 3. The S&P 500, on the other hand, has the current valuations of PE 19 and PB 2.7.

In summary

Achieving breakthroughs in health care sciences can definitely be rewarding, Celgene demonstrated its dominance in providing treatment to the deadly blood cancer, multiple myeloma, among other diseases as it grew its sales by an average of 33% for the past decade. Further, the company also has been an active buyer of its own stock since 2009. Besides its growing share repurchase program, the company was also able to allocate its cash efficiently to its research and development (R&D) program for further drug expansion uses and new drug discoveries. As an example, Celgene had spent $3.3 billion buying its shares back in 2015 while spending a slightly more similar amount, $3.7 billion, for its R&D program.

Celgene has been running full steam to serve its shareholders and support its drug development; the company also had easily ramped up its debt in recent years – primarily because of its recent $7.2 billion acquisition of Receptos in mid-2015. Celgene sees potential in Receptos’ Ozanimod drug, which could deliver somewhere between $4 billion and $6 billion annual sales when and if the FDA approves the use of it.

Nonetheless, with its highly leveraged status right now, no dividend payouts, accompanied by lofty traditional valuations, I, therefore, ended up refraining from purchasing any Celgene shares for the meantime.

Happy investing!

Disclosure: I do not own any Celgene shares.

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About the author:

Mark Yu
A doctor in physical therapy (DPT) with a passion for finance. Value seeker. Long only. Global investing. Long-term investing.

Attempts to dissect company filings one company a day.

For quicker reading--jump ahead to an article's conclusion.

One company (review) a day keeps the speculation (hopefully) away.

Would typically invest $500 to $3000 of own money per buy recommendation.

"The only source of knowledge is experience"

"I have no special talent. I am only passionately curious." Albert Einstein

Visit Mark Yu's Website


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