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Leigh Baldwin & Co.

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Stock of the Week

Celgene

July 15th 2016

Celgene
Nasdaq Symbol: CELG
Industry: Biotech
Price as of 7/15: $101.42

 

The second quarter is off to a good start. After two pull backs in June, the major averages are up 6% to 8% from the June lows and up 2% to 3% for July. Brexit is in the rear view mirror, but there may be more ramifications going forward. Europe will have more issues with the EU, the UK and a number of banks in Italy and other countries with less than stellar balance sheets. Even though Europe has many issues, global growth is expected to improve in the second half of the year.  The US economy remains strong and should improve in the second half of the year which may mean at least one Fed rate hike. Earnings season has started and earnings are coming in better than expected, but in the short term, the major averages may not be able to go up much higher. The VIX index is down to $13 after jumping over 20 twice in June. The put/call ratio is down to 0.5 which means investors are too bullish with limited fear of a correction. August and September are statistically the worst two months of the year going back to 1990 so we may see another correction in the coming months, but it may not be a deep correction. What we may see is limited capital appreciation in the short term, but more sector rotation out of what has worked Utilities, Consumer Staples, and Telecom and into the sectors that have not worked, Financials, Technology, and Healthcare. This week we'll highlight a healthcare biotech recommended in Barron's a few weeks back. The featured stock of the week is Celgene. Celgene produces drugs and therapies to treat cancer and inflammatory diseases worldwide. The stock has come under pressure this year due to short term earnings pressure, but long term the fundamentals are bright. Barron's believes Celgene is the best positioned biotech for growth in the coming years. Today Stifel upgraded Celgene with a $138 price target or 35% appreciation potential. Investors with time horizons of two years or more could see 50% upside in Celgene's stock.

As mentioned, Celgene has struggled to start the year with lower guidance following the first quarter. At the heart of Celgene's 2016 issues was dramatically slower growth for cancer drug Abraxane, which it acquired when it purchased Abraxis BioScience in 2010. Abraxane was first approved as a treatment for advanced breast cancer, but it has gained approval for advanced non-small cell lung cancer and advanced pancreatic cancer since Celgene's acquisition. Going forward, things look a lot better. The company has a strong management team with a solid track record of operational excellence and financial management. The company's Hematology & Oncology franchise has grown to rank among the top three players in Oncology anchored by Revlimid, the leading therapeutic for Multiple Myeloma and solid engine of future growth of Celgene. In addition, company has a growing franchise in Inflammation & Immunology, another high-growth area anchored by oral Otezla for psoriasis and psoriatic arthritis, which together with future launches such as ozanimod for MS (2018E) and GED-0301 for Crohn's Disease (2019E), could position company with unique portfolio breadth in oral autoimmune therapeutics.

Looking at the pipeline, Celgene today generates billions of dollars in free cash flow to be spent on new drug development, acquisitions, and stock buybacks. It expects to receive data from at least 18 late-stage clinical trials by 2018. Some of these are testing Revlimid for another cancer, lymphoma. Others are for medicines that treat immune-system and inflammatory conditions, where Celgene has a toehold with Otezla, a lucrative psoriasis drug. Even longer-term, Celgene has a distributed research platform, with collaborations with dozens of companies. Celgene has the potential for 50 product approvals through 2025, eventually extending to more than 100 uses.

Currently, Celgene trades for 6 times next year's sales, 18 times earnings, 14.5 times 2017 earnings. There is no dividend, but earnings are expected to accelerate over the coming years thanks to strong drug sales growth. Looking forward, Celgene trades for 12 times 2018 earnings. If the company can achieve its 2020 goal of at least $21 billion in sales and $13-plus in full-year earnings per share, the stock only trades for 4 times sales and 8 times earnings. Now 2020 is a ways off, but Celgene has the best pipeline for growth in the biotech industry according to Barron's magazine. With analyst estimates of $138 from Stifel and $140 from Jefferies, Celgene is well positioned to provide capital appreciation to shareholders.