Has Celgene Entered Bargain Territory?
- By John Engle
The last few years have been a difficult ride for investors in large-cap biotech Celgene ( CELG ). The stock is down 37% year-on-year and is testing five-year lows. Celgene is currently trading around $68 per share and has a market capitalization of $48 billion.
Warning! GuruFocus has detected 2 Warning Signs with CELG. Click here to check it out.
The intrinsic value of CELG
This decline has been partially driven by regulatory filing mishaps and market skepticism over management's ability to weather headwinds. However, the stock now trades at just 6.5 times earnings, which is a significant discount relative to industry rivals.
Has Celgene now entered value territory?
Financials
Despite the falling share price, recent financials have been encouraging. On the company's latest earnings call, Celgene reported topline growth of 18% year-on-year, resulting in earnings per share growth of 20% year-on-year and earnings per share of $2.29 for the third quarter (beating expectations by 5 cents). Total product net sales grew 18% year-over-year to $3.9 billion. This growth was primarily driven by a volume increase of 14.7% and price contributing 4.3%.
Fundamentals driving down price
To understand the value story behind Celgene, it is important to chart how the stock got this low in the first place. There are several important factors behind the decline.
Trial failure. Celgene suffered a major setback in October 2017 when it scrapped a phase 3 trial of inflammatory bowel disease (IBD) drug candidate GED-0301, an acquisition the company paid $710 million for in 2014. This resulted in a precipitous 31% drop in stock price, not only because the drug had to be removed from sales forecasts, but also because this failure undermined Wall Street's confidence in Celgene going forward.
Regulatory troubles. In addition to scrapping GED-0301, Celgene went through an embarrassing mishap in February 2018 with its FDA filing for ozanimod, an immunomodulatory drug for the treatment of multiple sclerosis. The agency rejected the application, stating that it was incomplete, which was surely an avoidable mistake. Celgene is currently in the process of re-submitting the application in the U.S., as well as filing for approval with regulators in the EU, and is forecasting sales of between $4 billion and $6 billion.
Expiring patents. A more long-term reason for the decline is the approaching deadline for when Celgene's exclusive right to produce Revlimid, the company's blockbuster blood cancer drug, runs out. Generic competition is set to hit the market by March 2022. Currently, the drug accounts for more than 63% of Celgene's revenue. To complicate matters further, the company's Revlimid patents are being challenged in court. An unfavorable ruling, or even a settlement, could open the floodgates to competition even earlier.
Reasons to buy
It's cheap. The stock currently trades at 6.5x forward earnings, significantly less than biotech giant rivals Gilead ( GILD )' 9x earnings, Biogen ( NYSE:BIIB )'s 11x earnings and Amgen ( NYSE:AMGN )'s 13x earnings. For a company with a number of promising candidate drugs in the pipeline, this makes for a compelling valuation.
Recent positive trial data. At the recent American Society of Hematology (ASH), Celgene presented extremely promising data for its liso-cel treatment for chronic lymphocytic lymphoma (CLL), a cancer of the blood. Eighty-one percent of patients responded to the treatment, and 43% showed a complete response. Liso-cel is a CAR-T gene therapy, which in a nutshell involves transforming a patient's immune cells to make them more effective at targeting cancers. There is a lot of excitement in the oncology community around CAR-Ts, and there is currently no CAR-T treatment for CLL, which puts Celgene in a unique position.
A diverse and promising pipeline. In addition to the liso-cel data, Celgene has a number of promising treatments in development. Despite the forecasted decline in sales for Revlimid, the company should be able to continue to produce good returns for investors. Celgene has four treatments in the pipeline (not counting liso-cel), all of which have the potential to be home runs: bb2121, fedratinib, luspatercept and ozanimod.
Verdict
While it is essentially impossible to pick the bottom of a stock movement, there are reasons to believe that the current price level constitutes and attractive entry point.
Yes, Celgene faces a number of industry headwinds, and has suffered some embarrassing losses in the last few years. But shares are extremely cheap relative both to historical levels and industry rivals, and there are reasons to be hopeful about the next generation of treatments in its pipeline.
There is definitely value in this biotech giant.
(This article was co-authored by Stepan Lavrouk, director of research at Atreides Capital LLC and a former research analyst for Almington Capital Merchant Bankers.)
Disclosure: No positions.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Signs with CELG. Click here to check it out.
The intrinsic value of CELG
