Is Celgene Undervalued?

It is good to have some good news on a day the stock market is tanking; a little while ago the Dow was down 300 points.

Celgene reported robust revenue growth this morning for Q2 2007. This biotechnology company saw an 18.6% growth in revenue in a single quarter. Using year-over-year comparisons, revenues are up 76.4%.

Celgene is in a sweet stage. After years of work getting its cancer drug Revlimid, currently approved for multiple myeloma, discovered, tested, and approved, sales are going wild. And it is a good thing: this is not some marginal cancer drug, it has very real benefits for patients.

Some investors and analysts were concerned that Revlimid would simply be substituted for Celgene's (now) number 2 drug Thalomid. But Thalomid is maintaining sales while Revlimid sales grow rapidly.

The great thing is Revlimid sales are very likely to continue to grow quickly. The next spurt will come as it is sold in Europe; it received approval for that recently. Sales outside the Europe and the U.S. will come on line next, funding growth in 2008.

Physicians and patients seem to like the drug, so it will be moved up in the regimen (used 2nd instead of 3rd or 1st instead of 2nd). Meanwhile a huge array of clinical trials are being conducted or are planned for using Revlimid with various other drugs and on other forms of cancer. Revenues for this are not guaranteed, of course, but many preliminary results look good, so we could see further expansion of use in the 2009 to 2012 time frame.

Further out there is a pipeline that includes two limid class candidates as well as a class of anti-inflamatory agents.

This is a high-multiple biotechnology company so there are the usual risks:

Another drug, from another company, could become preferable to Revlimid.

Used on larger populations of patients, some safety concern could arise that was not seen in the clinical trials.

Another thing to note was that GAAP EPS was $0.13 (on net income of $54.9 million), a drop of 1 cent from Q1, but up from just $0.03 a year ago. This lack of sequential EPS growth was because of SG&A (marketing) spending needed to get everything in place to sell the drug in Europe. Of course the company also continues to spend a fair amound of money on R&D.

Against that the company gained $207 million in cash in the quarter. That is over three times reported net income, showing that many of the expenses leading to the EPS were non-cash.

I own a bit of this stock and plan to accumulate it if the price does not go up too quickly.

For a more detailed account see my summary of todays Celgene analyst conference.

More data: Celgene Investor relations page