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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


April 15th 2014 Celgene
Industry: Biotech
Price as of 4/15: $139.84

After a nice run up to start the year, the major averages have pulled back in the last month and a half. Investors are rotating into defensive positions like utilities and bonds. The best performing sectors from 2013 have been hit the hardest in this recent correction. Biotech is one of the prime examples as the sector is down 21% in the last month and a half after stellar returns the last four years. The recent number of small cap biotech IPOs have reminded some investors of the tech frenzy of the 1990s, but valuations for the large cap biotechs remain quite compelling. This week we'll highlight one of those large cap stocks, Celgene. Celgene is one of the top biopharmaceutical companies currently involved in researching, developing, and commercializing products for treating chronic diseases such as cancer and other conditions related to immune systems and inflammatory problems. The stock performed great last year more than doubling in price. A correction in the stock is understandable, but following a 19% pullback, the valuation has become very attractive for the long term. Investors with a long term focus might want to take a look at the large cap biotechs like Gilead, Celgene, and Biogen. With the recent pullback, many biotechs now trade for PEs lower than the market multiple and below their internal growth rates.
Back in January, Celgene delivered a 21% increase in revenue to $1.756 billion as product sales increased 22% to $1.725 billion from the year-ago period. Adjusted net income rose 13% to $649 million with adjusted EPS edging higher by 14% to $1.51. The strong sales were due to their anemia drug, Revlimid which accounts for roughly 65% of Celgene's total revenue. Sales of its blockbuster drug increased 13% worldwide to $1.14 billion with U.S. and international revenue growth coming in at 15% and 11%, respectively. Strong gains were also seen from cancer drug Abraxane, which benefited from an expanded approval to treat late-stage pancreatic cancer in 2013 and non-small cell lung cancer in 2012 in the U.S. Abraxane sales rose 90% for the quarter to $202 million with U.S. and international sales up 89% and 92%, respectively. The success of these drugs means the company is kicking off plenty of shareholder-friendly cash flow. Celgene's free cash flow has doubled since 2011, to $2 billion. Celgene also owns most of its core marketed drugs so benefits accrue more directly to the bottom line. Operating margins are also expected to rise from 48% in 2013, to 51% and 52% in 2014 and 2015, respectively. Looking toward fiscal 2014, Celgene reaffirmed its previous guidance calling for revenue of approximately $7.5 billion, representing a 15% year-over-year increase, and EPS to be in the range of $7.00 to $7.20, a gain of roughly 19% over fiscal 2013. The pipeline for Celgene is particularly strong which should accelerate earnings and sales in the coming years.
The analyst community is in love with Celgene with practice targets between $175 a share up to $205 a share with an average of $190 a share. That's 35% upside from current levels. With the recent pullback, the valuation is attractive. Currently Celgene trades for 19 times earnings, 14.5 times 2015 earnings, and 6 times sales. Put into context, J&J rose 2% today near a 52 week high after reporting earnings, but the stock trades for 15 times earnings even though earnings are only growing 7% and sales are growing 5%. Celgene trades for the same multiple, but is growing sales and earnings 3 to 4 times faster. In the short run, the markets and the biotechs may see more volatility, but in the long run, the strong growth prospects should reward shareholders in these fast growing biotech stocks.