Sharp Drop Celgene Corporation Stock May Have Just Created an Entry Point

Investors are so wary of Celgene's prospects that they overlook the steady growth ahead and potential after 2020

Even though Celgene Corporation (NASDAQ:CELG) presents itself as changing the course of human health through bold pursuits in science, CELG stock is not acting that way. The shares have lost almost 16% since the company reported third-quarter earnings on Oct. 26. Management’s guidance, which was down a mere fraction, also spooked investors. Investors seem to have over-reacted.

Sharp Drop Celgene Corporation Stock May Have Just Created an Entry Point
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Celgene revised its outlook for 2017 despite the strong performance from Otezla. Management cited deep and persistent slowing growth in both the psoriatic arthritis and psoriasis markets. Together with discounting and poor execution of its managed care contracting, Celgene lowered its revenue expectations for Otezla to $1.25 billion from the $1.5 billion-$1.7 billion range.

Buying Back CELG Stock

Celgene’s discontinuation of GED-0301, a clinical trial for developing a treatment for Crohn’s disease also shattered investor confidence. Celgene now forecasts revenue in 2020 will top $20 billion, a 14.5% compound annual growth rate, and earnings of more than $12.50 a share (20% CAGR). For 2017, Celgene expects earnings (non-GAAP) of between $7.30 to $7.35 a share.


Management is taking advantage of the plunge in CELG stock by initiating a share repurchase program. This will put some of the $12.5 billion of cash on the balance sheet to good use. The timing is good for the company. The significant and progressive slowdown for drugs year-to-date through September is spooking investors and forcing management to lower its outlook.

Restrictive PBM formulary controls, combined with more discounts and a market slowdown is hurting Otezla’s performance this year. One bright spot for Otezla’s longevity in multi-year revenue for Celgene is a Phase 3 trial. Otezla met its primary and key secondary endpoints for treating active Behcet’s disease. This could give the company $100 million in peak revenue.

Growth After 2020

Celgene pushed back the timing of its view for accelerated growth because of when new products reach the market. The company will publish positive Ozanimod MS data. But the drug is still undergoing studies and will not add to revenue until after late-2020 at the earliest. Otezla will still grow well thanks to managed care contracting and growth internationally. Celgene’s thinking is that the tougher, more competitive U.S. market will weigh on growth.

Even though management is conservative with its outlook, it is underestimating the potential for Otezla. By the end of this year, Celgene will talk about the data for Otezla in treating ulcerative colitis. Ozanimod US’s enrollment is still active, so results will not come until 2020. So between now and 2020, Otezla’s revenue will grow in the single-digits. By 2020, Celgene thinks the drug will generate $2 billion.

Just as Gilead Sciences, Inc. (NASDAQ:GILD) acquired Kite Pharma, Celgene has a healthy enough debt/equity ratio of about 1.4 times to get financing. It may lever up its balance sheet and make a solid transaction that fits the company’s strategy. Previously, Celgene increased its debt significantly when it bought Receptos. Since then, its EBITDA growth and performance allowed it to par the debt levels.

Bottomline on CELG Stock

Until it continues to cut debt by even more and that it finds a good company to buy, the company will put its cash to better use. Today, buying back shares is the best way to maximize shareholder value.

CELG stock dropped as low as $94.55 before bouncing back to $100. At a forward P/E of 11.5x, a downward revision in growth will still push that multiple to discounted levels. Value investors with a time horizon of at least two or three years should give this beaten down stock another look.

As of this writing, Chris Lau did not hold a position in any of the aforementioned companies.

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