Celgene Punishment: Unwarranted


Severe market price drop is not warranted given the company’s historical growth performance

On Friday, Celgene lost a $15 billion of its market value after announcing its third-quarter results that ended in September.

This is a hell of a punishment while having determined that the company would not be able to deliver with its outlook by 2020.
The now $74.8 billion New Jersey-based biotech company has announced that it expects net product sales of $19 to $20 billion (from $21 billion) by 2020 and an adjusted diluted earnings per share (EPS) of more than $12.50 (from >$13). This indicates a rather pessimistic revenue change of $2 billion at most.
In addition, Celgene also revised its GAAP diluted EPS this year down to the range of $4.78 to $5.19 indicated a forward PE ratio of 19.2x (vs. three-year average 54.3x) suggesting a marked discount at current price levels of $95.64 (at the time of writing).
Reviewing its nine months revenue and profit changes, Celgene recorded 15.4% (3-year ave:20%) and a more impressive 92% (3-year ave: 11.3%).
A closer look indicated that Revlimid–Celgene’s top revenue generator–grew 16% in the recent nine months from last year (2-year ave: 18.4%) to $6 billion or 63% of net product sales. Pomalyst, meanwhile, the second most revenue generator grew 25.6% to $1.17 billion or 12.3% of total revenue (vs. 2-year ave: 39%).
Otezla, a recent product that was launched in 2014, grew 27.5% in the recent three quarters compared to an outstanding 115.6% in the fiscal year 2016.
Mark J. Alles, Chief Executive Officer of Celgene Corporation
“In consideration of certain market dynamics and recent pipeline events, we are updating our 2020 outlook, and remain confident in our ability to deliver industry leading growth.”
“Over the coming months, we look forward to sharing data supporting our innovative, next generation pipeline products and significant growth drivers.”
As of September 30, Celgene had $11.8 billion in cash (+$6.7 billion from same period last year), $14.3 billion in debt (-$38 million year prior), and equity of $9.85 billion (+$4.3 billion).
In the past three years, Celgene spent $10.6 billion in research & development, $697 in capital expenditures, raised $10.9 billion in debt, generated $8.6 billion in free cash flow, and repurchase represented 97.9% of the stated free cash flow.
Meanwhile, 34 analysts have an overweight recommendation with a target price of $148.43 a share vs. $99.86 at the time of writing. Using historical revenue growth and multiple averages and a 20% margin indicated a per share figure of $144.90.
In summary, Celgene is a buy with $145 target price.
Disclosure: I do not have shares at the time of this writing, and may buy accordingly.

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