Monday, February 4, 2008

Celgene (CELG) Optimism

Celgene (CELG) is a high price-to-earnings (PE) stock; I usually don't buy such stocks. But I bought some CELG in June 2007. PEs are guidelines; usually rapidly growing companies have higher PEs than slower growing ones. In my judgement Celgene's future was so bright that I was willing to pay the PE price at the time to add it to my biotechnology portfolio.

Then Celgene announced the Pharmion acquisition [See Celgene (CELG) and Pharmion (PHRM)November 24, 2007]. That took the price down, but I held onto my stock, even though I have been burned (at least short-term) by a merger and an acquisition of late (AMD/ATI and Marvell's purchase of Intel's cell phone processor division). I also bailed out of Microsoft when it announced the Yahoo takeover plan.

Celgene's analyst conference for Q4 2007 restored my optimism about this stock. I don't think the stock price is cheap right now, and I'd like to see numbers a full quarter after the Pharmion merger is completed, but here are some reasons for optimism. [For a longer report see my summary of the January 31, 2008 Celgene analyst conference.]

Q4 revenues of $414.6 million were up 18% sequentially and up 51% from year-earlier. Earnings are growing far faster than revenues because we are in the sweet spot where development costs are behind us and revenues are soaring and operating costs are relatively flat.

The wonder drug behind this is Revlimid, with sales up 100% from year earlier. At $247 million for the quarter, it accounts for nearly 60% of Celgene's revenues.

This rapid upward sales trend is likely to continue for at least the next 3 years. In the short run the main reason is international expansion. Revlimid was first approved in the U.S. It is now approved in Europe, where it is being introduced nation by nation. Eventually it should be prescribed on a global basis. That's the short run, for those rare investors who believe 2 years is a short run. In the long run Revlimid is highly likely to be approved for treating patients with conditions other than multiple myeloma and MDS, its approved uses in the U.S. There are numerous clinical trials underway to get further approvals, with some very encouraging results.

For the truly long run Celgene has a pipeline of drug candidates with some promising early results.

Acquiring Pharmion has a hefty cost but it is notable that it already has substantial revenues ($67 million for Q3 2007) and an international sales team that will be able to help with Celgene's marketing efforts. Celgene management thinks this is a great combination; I hope they are right.

I consider Celgene a moderately risky biotech stock in my portfolio because I don't like to project upward lines too far out into the future. But if it stays on it upward trend line for earnings, it is going to be a very good earner for me going forward.

Keep diversified.

See also my main Celgene page

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