Once-tiny biopharmaceuticals maker Celgene (CELG) entered a powerful growth spurt — and joined the ranks of biotech’s big-caps — after regulators approved its key cancer drug in 2005. It’s been an exhilarating run-up, and many think the New Jersey company’s Cinderella story can continue.
Celgene Stock Chart by YCharts
But even as numerous Wall Street firms are touting Celgene as one of the sector’s most promising growth plays, YCharts’ Pro Rating system ranks it as overvalued.
That kind of disconnect can happen when early-stage, high-growth stocks are measured strictly on financial fundamentals better suited to more mature companies. Still, fast-growing Celgene has become a big company now, (if not a fully mature one) with a market capitalization just under $28 billion. And on the basis of its fundamentals, Celgene’s p/e of about 30 looks optimistic.
Spun off from Celanese in 1986, the company failed to show much momentum until it hitched a ride on one of the most infamous molecules in pharmaceutical history. Thalidomide, released in Europe as a morning-sickness drug in the late 1950s, was pulled from the market after researchers figured out it was causing catastrophic birth defects. But the drug’s ability to affect immune-system activity drew new research, and by the late 1990s thalidomide was being used to treat leprosy and certain cancers.
Celgene didn’t develop the original drug, but has a license to produce thalidomide-derived products and controls a number of related patents. The company’s revenues didn’t go into overdrive until its second-generation thalidomide “analog,” sold under the brand name Revlimid, got FDA approval five years ago as a treatment for the blood cancer known as multiple myeloma.
Celgene Stock Chart by YCharts
Earnings growth has been a bit less spectacular.
Celgene Stock Chart by YCharts
Treatment with Revlimid costs a ton – tens of thousands of dollars for the standard treatment – and part of Wall Street’s recent enthusiasm for Celgene has to do with growing evidence that cancer patients can benefit from a longer-term “maintenance” treatment. Sales of the flagship drug may also get a boost from the company’s bid to have regulators expand the class of multiple myeloma patients eligible to receive Revlimid.
Execs think Celgene’s internal R&D pipeline will start yielding a number of promising commercial products in four years; in the meantime, the company has used acquisitions, like its recent $2.9 billion purchase of Abraxis BioScience, to gain new oncology drugs and enter complementary markets.
On the negative side, a generic drugmaker recently challenged a key Revlimid’s patent, presaging a long legal fight. Some observers were unsettled when Celgene’s chief financial officer left unexpectedly three months ago, although nothing untoward has emerged since. And the Abraxis deal was priced so high that the combination had better prove to be a home run.
But those question marks don’t explain why the biotech company’s shares are overpriced. Celgene’s no-dividend policy hurts. So does its price-to-sales ratio, which is a lot less attractive than rivals Amgen (AMGN) or J&J (JNJ).
CELG, AMGN, JNJ Chart by YCharts
The same holds for Celgene’s earnings yield, a handy comparison to bond yields, which suggests Celgene shares are too rich.
CELG, AMGN, JNJ Chart by YCharts
In the end, investors will have to decide whether Celgene’s very real growth potential is substantial enough to outweigh the caution flags raised by its crummy metrics.
Disclosure: None
