Celgene: Money Will Flow Back

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About: Celgene Corporation (CELG)
by: Stone Fox Capital

Summary

Celgene dipped to multi-year lows of $70.

The major culprit was biotech sector weakness causing money to flow away.

The net payout yield has surged to 17%, providing a buy signal.

The good news for Celgene (CELG) is that a lot of the weakness in the stock over the last three months is related to general biotech sector weakness. The bad news is that the stock is still down 15% whether the fault of the company or not. Absent any evidence of company-specific issues, the stock dip is another opportunity to buy alongside a strong biotech.

Celgene logo Image Source: Celgene website

Market Weakness

A quick look at the S&P Biotech ETF (XBI) and one sees why Celgene was so weak during October. Even after the recent rally, the biotech ETF is still down nearly 11% over the last three months.

Chart CELG data by YCharts

This general news snippet from November 1 suggests that the general biotech sector rallied ahead of the American Society of Hematology Annual Meeting next month. So again, a lot of data points just point to money flowing out of the biotech sector and one of the bigger players in Celgene being a source of funds during the period.

Strong Numbers

Regardless, Celgene is still weaker than at least this one general view of the market. A 15% loss over such a short period for even a biotech is perplexing. The company even recently beat analyst estimates by $0.05 and raised full-year EPS guidance by an equal amount to $8.75 to $8.80.

The question always remains with the long-term story of whether drug prices take a hit from the U.S. government that's a big part of the sector weakness or if the company can replace Revlimid sales in out years. A lot of the positives in the Q3 sales guidance are related to strong sales from Revlimid that doesn't actually help the stock. Even a small boost from Otezla wasn't enough to alter the view of the market. Too much dependence on the one drug is the ultimate problem.

Revlimid is forecasted (via Bloomberg) to see peak sales in 2022. The market is fretting this issue despite the fact that revenue projections support a sales level in 2025 equivalent to the current 2018 levels.

So Celgene has seven years to replace the sales of a drug that generates the vast amount of corporate profits for a company approaching $9 per share now. The issue is the failures of MS drug ozanimod back in February and mongersen about a year ago, casting doubt on a strong pipeline.

An investor has to decide whether the company can generate substantial sales from five new late-stage drugs expected to launch through 2020. All of the drugs have been forecasted to reach blockbuster status in excess of $1 billion.

One ultimately has to decide whether to trust a new management team with an earnings stream and a strong pipeline or lean heavily on recent drug failures.

Surging Yields

The net payout yield concept hasn't always worked the best for the biotech sector, but Celgene has some impressive yields and the company repurchased shares close to the recent levels. The concept combines the forward dividend yield and net stock buyback yield to generate a yield representative of the capital returned to shareholders in comparison to the current market cap. In essence, a large yield signals a very cheap stock.

Celgene has seen the net payout yield surge to over 17% due to the stock weakness. The company repurchased a total of 24.0 million shares via the accelerated share repurchase program. At an average price of $83.53, the company paid roughly $2 billion to buy shares not far from the current price.

Chart CELG data by YCharts

Investors could easily be critical that the BOD bought shares nearly $8 above the current lows, but one can hardly argue with the valuation. The stock only trades at ~7x '19 EPS estimates so the value was incredibly low when the biotech bought shares at those slightly higher prices.

Chart CELG PE Ratio (Forward 1y) data by YCharts

One negative is that the balance sheet isn't the greatest after these buybacks. Celgene has $4.4 billion in cash and about $20.2 billion in debt for a net debt position of $15.8 billion. The biotech can't be that aggressive on share buybacks now despite the lingering weakness in the stock.

Annual income in the $6.4 billion range will help alleviate any problems in a short manner.

Takeaway

The key investor takeaway is that Celgene has mostly been beaten down due to weakness in the sector. Investors should continue using the weakness to own the high-yielding biotech.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Disclosure: I am/we are long CELG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.