There is always a disclaimer appended to every write up/press release that includes future guidance by a corporate entity. This serves as a cautionary note that guidance should be taken with a pinch of salt every time you read one no matter how plausible it sounds. However, sometimes companies come up with a guidance that appears to be too good to be true.
In a press release this January, Celgene Corporation (CELG) reaffirmed that it is targeting adjusted diluted EPS of $8-$9 in 2015 on a total net product sales of $8 - $9 billion. Along with that, the 2013 guidance mentions adjusted diluted EPS of $5.50 - $5.60 on total sales of $6.0 billion with REVLIMID (Celgene's cancer drug for multiple myeloma) accounting for $4.2 billion. Guidance for 2017 was for earnings of $13-$14 per share. The present reported EPS of the company is $3.30 on $5.50 billion in revenue. If the company is able to achieve its targets, it would indeed be a phenomenal achievement.
Is this a case of over-optimism? It may be too early to tell as a lot of things may happen between now and 2015 but some recent news can potentially influence the performance of the company in the coming years.
Approval for Pomalyst
On February 6, 2013, the company announced U.S. FDA approval for Pomalyst (brand name for pomalidomide) for patients with multiple myeloma who have received at least two prior therapies including lenalidomide and bortezomib and have demonstrated disease progression on or within 60 days of completion of the last therapy. Pomalidomide is a derivative of thalidomide that is anti-angiogenic and also works as an immunomodulator.
Angiogenesis is a physiological process necessary for growth and development and wound healing. It is also fundamental to the transformation of dormant tumors into malignancies. Anti-angiogenic drugs are used for fighting cancer and malignancies. Immunomodulators, on the other hand, is a collective term used to refer to active agents of immunotherapy for enhancing resistance in the immune system.
Pomalyst is contraindicated in pregnancy and in the U.S. will be available only under a restricted distribution program called Pomalyst REMS. REMS, or Risk Evaluation and Mitigation Strategy, is requirement of the FDA for ensuring that the benefits of a drug or biological product outweigh its risks. More information about REMS is available here.
New Inroads for Revlimid
Revlimid (brand name for lenalidomide another derivative of thalidomide) was approved by the FDA in 2006 for use in combination with dexamethasone for treating patients with multiple myeloma who had received at least one prior therapy. In a February 11, 2013, press release, the company's subsidiary, Celgene International Sàrl, announced that the United States FDA had granted priority review of its application for Revlimid in patients with relapsed or refractory mantle cell lymphoma (MCL) after prior therapy that included bortezomib. The Prescription Drug User Fee Act date has been set for June 5, 2013.
In the same announcement, the company also announced that China had granted full approval, which includes an Import Drug License, to Revlimid.
Setback for Celgene's Apremilast
Celgene has been involved in the development of apremilast, an orally available small molecule inhibitor of phosphodiesterase 4, for treatment of ankylosing spondylitis, psoriasis, and psoriatic arthritis. The drug was in Phase III clinical trials for three indications. Celgene was hoping that apremilast had the potential of becoming the next blockbuster drug for treatment of psoriasis, an autoimmune disease.
On March 2, 2013, Celgene presented the results from the company's Phase III study in psoriasis. Earlier, the company had announced that 41% patients had experienced 75% reduction in psoriasis. The recent announcement, however, reported that only a third of the patients had 75% reduction in psoriasis, shattering its dreams of apremilast becoming a blockbuster discovery.
Celgene is a biopharmaceutical company engaged in discovery, development and sale of therapies for treatment of cancer and immune-inflammatory related diseases in the U.S., Europe and other countries. The company's existing products include Revlimid (for treatment of patients with multiple myeloma and transfusion-dependent anemia), Abraxane, (treatment option for metastatic breast cancer), Vidaza (for myelodysplastic syndrome) and Istodax (for cutaneous T cell lymphoma).
It has a market cap of $44.23 billion with the stock trading at $105.62, or 7.79x book value of $13.57 per share. Trailing P/E ratio of 32.01 and forward P/E (December 31, 2014) of 15.46 suggests that the stock is overvalued. However, the company has been repurchasing its shares and has bought back shares worth $5.05 billion in the last four years. This February, it entered into an accelerated share purchase agreement with an investment bank for the purchase of shares worth $600 million. YTD repurchases amount to $385 million and the company still has $1.45 billion pending in its repurchase program.
Celgene competes with companies like Clovis Oncology Inc. (CLVS) and Threshold Pharmaceuticals Inc. (THLD). Both companies are much smaller than Celgene but involved in development of drugs for use in oncology.
Clovis is a United States biotechnology company engaged in the development of anti-cancer agents. Incorporated in April 2009, it became a public limited company after an initial public offering of 10 million shares at $13, which was at the lower end of its target range of $13-$15. At CMP of $21.81, CLVS is now valued at $570.10 million. The company has yet to report earnings and does not expect any revenue until 2014. The future of the company depends largely on results of studies of its pipeline candidates, which include CO 101 for treatment of metastatic pancreatic cancer.
Threshold, on the other hand, is engaged in the discovery and development of drugs targeting the microenvironment of solid tumors and the bone marrows of some hematologic malignancies (blood cancers) as treatments for patients living with cancer. Like Clovis, it is a relatively new company that has still to show positive results. Its candidate for cancer is TH-302, which is still being studied for efficacy. The company has a license agreement for development and commercialization of glufosfamide for treatment of cancer in humans and animals. Valued at $266.13 million, the company has a negative EPS of $2.74.
It is too early to speculate on the guidance given by Celgene but one thing I know for sure is that the term EPS can be used to mean whatever a company wants to. Earnings per share can be expressed in different ways and corporate spin doctors come up with numbers that the company wants the media to focus on, which may be higher than the EPS reported in the 10-Q. Maybe this is why companies use adjectives such as adjusted/diluted EPS rather than reported EPS. Reported EPS is the number derived from GAAP or generally accepted accounting principles and is the 10-Q reported EPS.
It is critical for investors to read carefully and know what type of earnings is being used in the EPS calculation. In my understanding, adjusted EPS is "core EPS" that is excluding onetime expenditure/s or non-recurring expense or extraordinary events. These are usually not known in advance. However, if the company expects any onetime charge, it needs to be specifically mentioned.
Personally, I would rather rely on information gathered from independent sources, which is more likely to be objective and unbiased, rather than depending solely on guidance issued by the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.