Will Celgene Make its Investors Healthy and Wealthy?

By Ryan Guenette - July 31, 2012 | Tickers: AMGN, BMY, CELG, JNJ | 0 Comments

On July 26^th, Celgene Corporation (NASDAQ: CELG) reported second quarter 2012 operating and financial results. Celgene reported non-GAAP diluted earnings per share of $1.22, which represents 37% year over year growth, or GAAP earnings per share of $0.82, which represents 39% year over year growth. Both of these numbers were slightly above the average analyst estimates. On the revenue side, Celgene reported total revenue of $1.367 Billion. This statistic was also marginally above the street estimate of 1.35 billion, and represents a 16% year over year growth rate. Despite these upside surprises, the real star of the show in this earnings report was the fact that Celgene raised its 2012 non-GAAP earnings per share outlook from $4.70 - $4.80 to $4.80 - $4.85, or GAPP diluted earnings per share outlook from $3.52 - $3.67 to $3.69 - $3.80. Celgene has perfectly executed on its business plan and will continue to, but is down 1.59% year to date while the S&P 500 is up 8.1%. So is the lack of a rally in Celgene’s stock indicating a rare opportunity to snatch up this well-run pharmaceutical giant at bargain prices?

Healthy Growth

In 2010, Celgene reported earnings per share of $1.88. In 2011, Celgene stated that it had earned $2.85 in earnings per share. This increase in earnings per share displays a 51.60% year over year earnings per share growth rate. In 2012, the average analyst expects Celgene to earn $3.93 in earnings per share. This again presents an incredible 37.89% year over year earnings per share growth rate. In 2013, the street anticipates Celgene’s earnings per share to jump $0.81 to $4.74, representing 20.91% year over year earnings per share growth. Finally in 2014, the average consensus foresees Celgene’s earnings per share growing to $5.84, displaying 23.21% year over year earnings per share growth. Celgene’s growth can be characterized as consistent and superb. Is it not often that an investor spots a company which is expected to grow at a pace north of 20% persistently in the foreseeable future. Much of Celgene’s growth is expected to be drawn from its vastly diverse array of drugs such as revlimid, abraxane vidaza, and pomalidomide. The chart below displays Celgene’s sales, operating profit, net income, net margin, operating margin, and earnings per share over the coming years.

Is Celgene The King of the Pharmaceuticals Industry?

Compared to some of its competitors such as: Bristol Myers Squibb Company (NYSE:BMY), Amgen (NASDAQ: AMGN), and Johnson & Johnson (NYSE: JNJ), Celgene compares satisfactorily in the majority of the sectors.

Earnings per Share Comparison

Earnings per share analysis will allow the investor to see the underlying business’ growth fundamentals, and growth consistency. 

Based on $1 Starting Point

Celgene’s ability to grow earnings per share is unmatched by any other competitor in the industry, converting $1.00 of earnings per share in 2010 into $3.12 of earnings per share in 2014. Celgene’s rate of growth is rivaled by no other company in the industry, as all companies other than Celgene are only able to generate less than $1.50 in earnings per share in 2014. Celgene’s earnings per share growth will allow the company to create more free-standing cash that it can be used to reinvest back into research and development, as pharmaceutical companies are highly dependent on fresh and innovative drugs that can help cure diseases. Additionally, Celgene could utilize the money to acquire companies that possess drugs that offer substantial opportunity.  

Book Value Growth Comparison

Book value growth comparison will enable the investor to determine how much book value is priced into each share, and determine how much book value, or underlying value, will be produced in the future.

Based on $1 Starting Point

Celgene’s abiltiy to create book value at a rate far superior to any of its competitors is a highly beneficial characterisitic in the company, as the more book value Celgene creates, the less investors will be forced to pay for future earnings. Celgene converts $1.00 of book value in 2010 into $2.09 of book value in 2014. Johnson and Johnson, Amgen, and Bristol-Myers Squibb all fail to turn $1.00 of book value in 2010 into at least $1.50 of book value in 2014. Celgene is the clear cut champion of the industry in terms if growing book value.

The Pomalidomide Factor

Most pharmaceutical companies have one drug in their pipeline that will storm the world and fulfill a gaping hole in the market. Celgene’s next blockbuster drug is known as pomalidomide, and is being filed to the U.S. Food and Drug Administration as a treatment for relapsed and refractory multiple myeloma. According to the Dana-Farber Cancer Institute, “Relapsed and refractory multiple myeloma (MM) constitutes a specific and unmet medical need. Median survival ranges from as little as 6 to 9 months, and responses to treatment are characteristically short. Patients with relapsed/refractory disease are defined as those who, having achieved minor response or better, relapse and then progress while on salvage therapy, or experience progression within 60 days of their last therapy. In the era prior to the development of novel biologically based therapies for MM, relapse from successive treatment regimens resulted in progressively shorter response durations, which typically reflected emerging drug resistance, as well as changes in disease biology within each patient, with tumor cells expressing a more aggressive phenotype, higher proliferative fraction and lower apoptotic rates. Both bortezomid- and lenalidomide-based therapies are expecially active, with bortezomib in particular being shown to provide a platform for combinations able to overcome resistance in this setting. The addition of novel and conventional agents to the treatment backbone of lenalidomide, thalidomide, and bortezomib are areas of active study, with participation in clincial trials a clear priority for such patients. Clinical challenges in the relapsed/refractory population include light chain and IgA isotype, renal failure, extramedullary disease, hyposecretory myeloma, and advanced bone disease.” This displays the incredible cavernous hole in the market for a drug that can treat this horrible disease. Celgene’s management is extremely excited about the future of pomalidomide, as the chief execeutive officer of Celgene, Robert Hugin, expects pommalidomide to be Celgene’s next “blockbuster”, which indicates Hugin expects pomalidomide to produce sales of at least $1 billion. Pomalidomide is still yet to be approved by the FDA, but is heavily expected to be approved by the end of 2012 or the beginning of 2013, and when approved, will become a huge source of revenue for Celgene.

The Foolish Bottom Line

The pharmaceutical industry can sometimes turn into a wild rollarcoaster ride, rising and falling with every statement the FDA releases, but Celgene is highly diversified, with a wide array of drugs. Celgene’s next huge source of revenue is highly anticipated to be derived from pomalidomide, a drug expected to reach well over $1 billion in sales. Celgene’s growth in earnings per share and book value both point to the fact that Celgene’s future will become brighter than its past. Celgene’s incredible growth and blockbuster drug will fuel its long-term upward move, making its investors healthy and wealthy.