Celgene (CELG) has recently hit its 52 week high after a long upward trend and has confirmed an expected 13% growth for 2013. So is Celgene a buy, sell or hold? I still think it is a buy at these levels and here is why.
Celgene is a biopharmaceutical company focused on treatments for cancer and immune-inflammatory diseases. Its market cap is $42.3 billion and currently trades at about $110.00 per share.
Over the past 5 years, Celgene has had revenue growth of 29% which is more than double the rate of the industry (13.6%). The EPS over 5 years has grown over 70% annually. Most recently, Celgene has beaten last year's earnings by 26.9% and revenue increased by 12.7%. The revenue should grow as more products are introduced internationally and developed to address vacant market niches. Celgene has continued to grow its free cash flow as well which is currently 35% of sales. This gives Celgene a good amount of cash to divert to R&D or acquisitions or any other place it deems necessary. Gross margins have grown to 94.5% and operating margin is 34.2%. Along with these good profit numbers, Celgene has plenty of cash. The quick ratio sits at 3.55 and 33% of the balance sheet is in cash; $3.9 billion in cash to be exact. ROE is 28% and ROA is 15% TTM, which is higher than other developed biopharmaceutical companies. So how about valuations? P/E is 27.8 while the industry is 46.3. P/S is 8.3 (Ind. 6.4), P/B is 7.4(Ind. 6.4), and P/CF is 22.3 (Ind. 26.5). The PEG is 1.47 while the industry is 1.22. So, overall Celgene is fairly valued compared to the industry. It is kind of surprising considering the good metrics.
Celgene has a good market position with its five major commercialized products: REVLIMID, VIDAZA, ABRAXANE, THALOMID and ISTODAX. They also have a licensing agreement with Novartis for royalties on FOCALIN XR and RITALIN, services though the Cell Therapeutics subsidiary and other agreements.
Revlimid is the largest selling of Celgene's products at $3.77 billion in sales while total revenue is $5.5 billion. Revlimid sales have increased by 17% over the year. I would like to see more diversification sales wise since nothing really comes close to this product. All other revenue streams combined do not even equal the sales from Revlimid. Celgene has also pulled the application to expand the indications for Revlimid in Europe as they are waiting for more mature data.
Vidaza lost U.S. regulatory exclusivity in May 2011 but a generic version has not been introduced. However, if one is to rise then sales of Vidaza will fall significantly. European exclusivity will continue through 2018. Vidaza sales are 220 million and increased by 14% over the year.
Abraxane is currently being tested for more cancers than just the breast and lung cancers it currently treats. The drug was unable to prove progression-free survival which impacts sales and has fallen over 9% over the past year but increased 90% internationally (3% increase combined). However, the testing for use in treatment of other cancers looks promising as it did well in a phase III study for pancreatic cancer. Release for the new pancreatic cancer use indication is expected in the first half of 2013.
Thalomid sales have decreased over the past year by about 12%. This is due to lower U.S. volumes offset by an increase in price.
Istodax has been shown to work for a variety of lymphomas. However, Europe has had negative comments about the drug and Celgene is currently working to reverse those opinions.
Celgene acquired Avila Therapeutics to enhance their portfolio of potential therapies and is in collaboration with Epizyme for HMT inhibitors. There is some risk as various pipeline decisions are to be released in 2013. Pomalidomide and apremilast are two candidates that Celgene will submit for approval this year. There are about 25 total ongoing phase III studies underway at Celgene. Many of Celgene's drugs have proven more effective and/or contain fewer risks than other competitors on the market, if there are any competitors.
The sales outside the U.S. typically have payment terms longer than 60 days thus increasing accounts receivable and the cash conversion cycle. Celgene has been expanding its products internationally over the past years and that explains the increasing cash conversion cycle. There is about $300 million in accounts receivable in the PIIGS, some of which is over one year past due. These balances are owed by government-funded hospitals. Some of these payments have been received however, and should continue as the PIIGS recover.
Celgene did have an increase in debt due to the issuance of $1.5 billion in senior debt (also helped increase cash on the assets side). I like the increase of cash with debt at these levels. Interest rates will probably rise over the next few years and now is the perfect time to secure some cash for use in acquisitions and share repurchasing. They still have board approval for $2.5 billion of share repurchasing.
Over the years Celgene has been consistent in proving they can deliver the results they need in the highly unknown field of pharmaceuticals. They have been able to reduce costs and raise revenue. Although there are risks that the new drugs may not prove effective, the rewards if they do are great. Much of the reward has been priced in due to the recent rise in Celgene's stock price. With Celgene still fairly valued, I would wait for an overall market decline and thus a pullback in Celgene. I would also use any negative news as a buying opportunity to capture gains by positive news. With so many potential drugs in the pipeline late in development, it would be a mistake not to own some of Celgene.
Disclosure: I am long CELG.