Is Celgene Corporation Well Positioned To Outperform?

| About: Celgene Corporation (CELG)

Celgene Corporation (NASDAQ:CELG) is all set to release its fourth quarter and full year 2013 earnings results on 30 January 2014. On January 13th, 2014 the company provided preliminary, unaudited results for 2013 and an outlook for 2014 that shows the company's excellent financial health. After the announcement of the financial outlook and preliminary results the buy rating Celgene's stock has been reaffirmed by many analysts.

The analysts have reiterated the stock's ratings based on the company's strength in multiple areas such as: (1) robust revenue growth, (2) expanding profit margins, (3) the company's largely solid financial position, (4) solid stock price performance, and (5) its notable return on equity. Let us review each of these areas to determine Celgene's position and verify the analysts' decision.

Revenue Growth

In its preliminary 2013 results, Celgene expected the full year's total revenues to be $6.5 billion up 18% year-over-year while total net product sales are expected to be $6.4 billion. The main product sales drivers in 2013 were Revlimid, Abraxane and Pomalyst.

Revlimid, the oral immunomodulatory drug, contributed approximately 66% to the total revenue generation and its sales jumped 14% year-over-year. Abraxane, a solvent-free chemotherapy treatment, outperformed the market as the drug's year-over-year sales increased 52%. It contributed 10% to total revenues. The sales of Pomalyst reached $305 million reflecting a contribution of 5% to the total revenues. The drug received its first approval from the FDA and European Medicines Agency during 2013.

Source: SEC Filings

For 2014, Celgene's management has projected the full year's net revenues to reach $7.5 billion reflecting a growth of 15.4% compared to 2013's net revenues.

Over the past 7 years (2007 to 2013), the company's top line has shown robust growth. Although the YoY revenue growth plunged during the 2009 recessionary period the growth still remained positive. The company's current YoY growth of 18% is quite impressive versus the industry growth of 10.59%.

Expanding Profit Margins

Although Celgene's top line growth in 2008 was 60.39% its bottom line growth was at an all-time low as its margins dropped to the worst levels. However, from 2009 onwards the company considerably improved its margins and recovered its income growth. In 2012, and during the first three quarters of 2013 the company experienced the best operating margin since 2009.

The operating margin during the first three quarters of 2013 dropped slightly by 41 basis points due to higher acquisition related charges, restructuring costs, and collaboration-related payments to partners in 2012.The full year 2013 adjusted operating margin is expected to be up by 30 basis points year-over-year. This would eventually improve the company's full year net margin and enhance its net earnings. Celgene's adjusted per share earnings for 2013 are expected to be $5.96 reflecting a 21% year-over-year increase.

Even though Celgene's margins have improved over the year its margins are still lower than the industry's margins. Therefore, the company needs to cut its costs and expenses further to bring the margins to the industry levels.

Solid Financial Performance

Celgene lags behind in its industry in terms of margins but the company has a considerably healthier balance sheet than the industry. The table below shows that Celgene has a better liquidity position as well as current and quick ratios than its industry rivals indicating that the company is in a better position to meet its short-term obligations.

The company's operating cash flows during the first three quarters of 2013 have also grown by 3.55%, boosting the company's liquidity and enabling it to make future investments without external financing.

Source: money.msn

Similarly, Celgene has an edge over its industry competitors in terms of the debt level. Both, Celgene and the overall industry have a desirable level of debt-to-equity ratio but Celgene's debt-to-equity level is even better than the industry.

Return on Equity

Another point given by analysts to support Celgene's stock is its notable return-on-equity that reveals how much profit the company generates with the money that shareholders have invested in it. Celgene's profitability has been increasing from 2009 to 2012 as the amount of net earnings returned as a percentage of equity also increased during these years.

During the trailing twelve-month period, the company's profitability has declined compared to results garnered over the last two years. Moreover, if we compare Celgene's return-on-equity to the overall industry average then we can realize that the company is less profitable than its peers in the industry. The company's management needs to improve their operational efficiencies and widen their margins to enhance the profitability.

So with regards to the company's ROE I do not agree the analysts.

Stock Price Performance

Over the last year, Celgene's stock price has appreciated by 70% reaching $167.04 from $100.03 in 2012. This is quite appealing, as the company's stock has performed significantly better than the S&P 500 index in the comparable period.

Source: YCharts

With regards to the stock's performance in the last month there is some disappointment as the stock has depreciated by 0.26% below the S&P 500 index. If the company continues to perform well in 2014 and posts full year 2013 earnings results according to analysts' expectations then the stock will start appreciating again.


In the first week of 2014, the company's metastatic pancreatic cancer drug, Abraxane, got approval from the European Commission "EC." The mortality rate of pancreatic cancer is high, making it the fourth deadliest cancer for both men and women. The incidence rate of this cancer is the highest among Europeans particularly in males in Central and Eastern Europe. Unfortunately, little progress has been made in improving outcomes for the patients affected by this. Now Abraxane, in combination with gemcitabine, is the first treatment in Europe to be approved for pancreatic cancer in nearly seven years. These statistics indicate the drug's demand in the region and guarantees a good revenue stream for Celgene in the coming years.

Another one of Celgene's drugs, Apremilast, that was supposed to be launched earlier in 2013, is now expected to be approved by the FDA in March of 2014. The drug would be facing competition from many of the rival drugs already present in the market but the main competition would come from Johnson & Johnson's (NYSE:JNJ) Stelara that got approval in September of 2013. The drug is usually used in combination with Methotrexate.

The big difference between these drugs lies in the side effects. Methotrexate carries a risk of liver damage and cancer whereas Apremilast has so far demonstrated a very mild safety profile. The most common side effects were diarrhea, nausea and headache. So it would provide an edge over Apremilast.

The worldwide incidence rate of psoriatic arthritis is quite high reflecting a great demand for Apremilast but to lower the competition Celgene needs to price the drug wisely.

Other than these two drugs, Celgene has many other drugs in its pipeline that could help the company to generate revenues in the future. The company's highest revenue generating drug, Revlimid, could continue benefiting the company beyond 2019, since the drug is protected by more than one patent. Its first patent will expire in 2019.The company's management expects Revlimid's net sales to be in the range of $4.9 billion to $5 billion reflecting an increase of 16% year-over-year based on the mid-point of the range.

On the other hand, Abraxane, the second highest revenue generating drug in 2013, will start facing generic challenges in 2014 as some of its composition of matter and method of use patents expired in 2013. Some of the drug's patents are protected until 2013.

Final Thoughts

Celgene's effective pipeline helped it to add considerable growth in the top line and is expected to continue adding significant growth in 2014 as well. The company has an excellent liquidity position that enables it to expand its research and development processes and made investments that could help in maintaining future revenue growth.

However, the company needs to significantly cut its costs and expenses to increase operational efficiencies and improve the returns to the shareholders. Overall, the company seems to be an attractive opportunity for investment purposes so like the other analysts I would also recommend buying the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by APEX Financial Consultants. This article was written by one of our research analysts. APEX Financial Consultants is not receiving compensation for this article (other than from Seeking Alpha). APEX Financial Consultants has no business relationship with any company whose stock is mentioned in this article.