Source: U.S. Department of Agriculture via Flickr.
Following another successful quarterly report, investors and shareholders of Celgene (CELG) have to be wondering if anything can stop this stock from heading higher.
For the quarter, Celgene reported a sales increase of 18% to $1.98 billion as its adjusted per-share profit scorched an even more impressive 24% higher. Both figures were good enough to squeak by Wall Street's expectations. Perhaps best of all, Celgene's gains came because of organic, not acquisition-based, growth.
Five things Celgene's management wants you to know
Of course, reading a few paragraphs from an earnings report typically isn't good enough to give investors a true sense of how well or poorly a company is performing. In order to get a more complete picture you need to be able to dig deeper into a company's conference call and really listen to what its management team has to say about its current and upcoming prospects. Having read through Celgene's conference call, courtesy of S&P Capital IQ, here are the five most important things that you need to know.
Organic growth? Yeah, we got that covered!
"With more than 100 planned and ongoing studies designed to expand the opportunity for these agents and deliver new therapies, our Hematology/Oncology franchise is well positioned for long-term growth." – Mark J. Alles, President and Chief Operating Officer
Just in case you forgot, Mark Alles wants shareholders to know that Celgene is thinking about its future and how it'll move beyond Revlimid's inevitable loss of exclusivity, which is in itself many years away still.
Celgene's primary plan of attack is the label expansion of already approved drugs, including widely expanding its anti-inflammatory drug Otezla into a number of new indications, such as Crohn's disease, ulcerative colitis, and rheumatoid arthritis, to name a few indications. Additionally, gaining new indications for blockbusters Revlimid and Abraxane will allow sales of both drugs to improve as well as extend their patent life into the future. This isn't to say Celgene isn't working on boosting its collaborative research or discovering new in-house drugs like GED-0301 for Crohn's disease, but its path of least resistance for now is label expansion.
Who needs price increases?
"Similar to previous quarters, volume accounted for much of our annual sales growth, contributing 15 of the 19 percentage points. Price contributed the remaining 4 points of growth and reflects the full impact of the U.S. price increases taken earlier this year, in addition to a relatively stable international pricing environment." – Peter Kellogg, Chief Financial Officer and Executive Vice President
Not only did Celgene put up a phenomenal third quarter, but it did so with little need for price increases. Aside from some increases in the U.S., three-quarters of its revenue increase came from improved demand for products like Revlimid, Abranxane, Pomalyst/Imnovid, and Otezla.
Celgene Q3 presentation slide. Source: Celgene.
A majority of biopharmaceutical companies have decent pricing power to begin with, so a biotech company claiming revenue gains from price increases can often times be washed out by Wall Street analysts and investors. However, a 15% increase in volume is nothing to sneeze at and demonstrates that Celgene's marketing team is doing an excellent job of drumming up interest in its products among physicians and the public.
Or share buybacks!
"Earnings growth was entirely driven by operating income." – Peter Kellogg
Another point Celgene's management wants investors to be aware of is that the company's growth this past quarter came entirely from operating improvements. Peter Kellogg noted that foreign exchange hedges and higher interest associated with a $2.5 billion bond offering in May cancelled out the effect of its share repurchases, which allowed its operating income growth to do all the talking.
But, you're still not getting a dividend anytime soon
"[I] can assure you that once the needs of the company strategically are satisfied and once we assure ourselves of good long-term growth, then we will be very aggressive in making sure that we're returning cash to shareholders." – Peter Kellogg
But, investors also have to understand that while Celgene is rolling in cash flow now, it's not intending to return that cash to shareholder anytime soon.
Celgene's plan of attack begins with expanding its labels for existing drugs, as well as developing new therapies and forming partnerships with other promising biopharmaceutical companies. Though Celgene has proven successful at its game plan, it'll require significant capital to pull it off. Running dozens of clinical trials is expensive, and collaborative pacts often require an upfront payment. Its collaborative pact with OncoMed Pharmaceuticals (OMED), for example, cost Celgene $155 million upfront, plus a $22.25 million common equity investment. If OncoMed's pipeline hit every last regulatory milestone established in its licensing deal, Celgene may also be on the line for more than $3 billion in milestone and regulatory payments!
Celgene certainly has the cash flow to cover these expenses, but shareholders are likely years away from seeing any shot at a dividend.
Otezla is an early superstar
"Now if we look specifically at the PsA market, based on our most recent data, OTEZLA outperforms all branded competitors for PsA in terms of new patient initiations, ahead of established brands like HUMIRA and ENBREL, and at just 5 months post-launch" – Scott Andrew Smith, President of Inflammation & Immunology
Finally, it's still early but all signs are pointing toward Otezla outperforming. As Scott Andrew Smith noted during the conference call, in the smaller psoriatic arthritis indication Otezla is outperforming well-established brands such as AbbVie's (ABBV -4.58%) Humira, the world's best-selling drug at the moment, and Amgen's (AMGN 0.22%) Enbrel in terms of new patient market share. The implication would be that this success in psoriatic arthritis might transfer over into its recent approval in psoriasis, which is a much larger, chronic indication.
Celgene Q3 presentation slide. Source: Celgene.
Furthermore, Smith addressed what minor concerns may have existed regarding Otezla gaining insurance coverage, noting that "formulary coverage remains favorable." Generally, the quicker a drug can garner favor with insurance companies, the quicker it'll fly off pharmacy shelves.
Can anything stop Celgene?
It's quite plausible to expect competition to heat up in a number of the indications that Celgene's drugs operate in, but I don't expect that to be much of a concern for Celgene's large and growing portfolio. With a projected growth rate of roughly 20% through 2017 and the expected doubling of EPS between now and then on an annual basis there's plenty of reason to believe Celgene will keep marching higher.
