Up, Up, and Away for Celgene

The recent earnings announcement by biopharmaceutical company Celgene (Nasdaq: CELG  ) can best be described as "up, up, and away". Earnings per share were up 39% compared with the same quarter a year ago. Management raised full-year earnings guidance for 2012 -- another "up."

The real drivers for continued earnings growth, though, were hinted at in the company's expected milestones for the latter part of 2012. That isn't too far away in the future but enough to count as "away." Let's take a look at Celgene.

Up and over
Celgene's strong second-quarter earnings were driven by a 16% increase in revenue compared to last year. This growth stems primarily from four products:

Source: Company earnings announcements.

Revlimid continues to power Celgene's revenue. Sales for the drug, which is primarily used for treating multiple myeloma, increased 17%. The company's fastest sales growth stems from Vidaza, a drug used in treating myelodysplastic syndrome. Sales for Vidaza increased 24% in the second quarter.

You might wonder how Celgene increased earnings more than twice as much as revenue. The answer lies partially with Vidaza.

The company lost U.S. patent exclusivity on the drug in May 2011. That normally isn't good for pharmaceutical companies because it opens the door for others to sell generic versions of the drug. No one has stepped forward with a generic version of Vidaza yet, though.

The good news for the company's bottom line is that the end of U.S. patent exclusivity meant the end of accompanying royalty payments to Pfizer (NYSE: PFE  ) . Meanwhile, Vidaza keeps on selling -- especially internationally.

Celgene is also helping its bottom line by controlling expenses. The company expects expenses to track downward as a percent of revenue throughout the rest of 2012.

Away and beyond
The real story for Celgene has yet to be written, though.

Shares took a hit in June when European regulators rejected approval for Revlimid in treating newly diagnosed patients with multiple myeloma. The company withdrew its application but stated that it plans to resubmit "with more mature data" at some point in the future.

Celgene received more bad news from Europe in July. Regulators gave a negative opinion for the company's Istodax drug, which was intended for the treatment of peripheral T-cell lymphoma. The unfavorable decision cited a problem with a study on the drug and an oversight by Celgene in failing to provide a required certificate for the manufacturing site. Celgene is requesting a re-examination of the negative opinion.

Another big question mark affecting Celgene's future is regulatory approval for apremilast, a drug for treatment of psoriatic arthritis, psoriasis, and ankylosing spondylitis. The company announced positive results from the first rounds of testing of the drug. Celgene plans to submit apremilast for approval in the U.S. and Europe in 2013. Management refers to the drug as their next potential "global therapeutic franchise."

Smart acquisitions can play a role in the company's growth, too. Rumors flew recently that Celgene might bid on Human Genome Sciences (Nasdaq: HGSI  ) . British pharmaceutical company GlaxoSmithKline (NYSE: GSK  ) attempted a hostile takeover, reportedly resulting in Human Genome looking for a white knight. However, Celgene did not make an offer and Glaxo's takeover attempt ultimately succeeded on friendlier terms.

When questioned in the earnings conference call, management stated that they "don't believe that there's any reason for us to be considering any kind of major M&A at this time." Guidance for 2012 and forecasts for 2015 don't include any merger and acquisition activity. However, Celgene is sitting on nearly $2.3 billion in cash and short-term investments -- plenty of money if the right opportunity comes along.

All about the growth
Celgene's financial measures look good. Revenue, earnings and cash flow are all on the right track. Its debt levels appear to be well under control.

The stock trades at a trailing P/E of 20. That's on the low end of its P/E range over the last few years. By comparison, the two drug makers mentioned earlier, Pfizer and GlaxoSmithKline, trade at lower P/E multiples of 19 and 14, respectively.

The real key to whether Celgene is valued attractively or not, though, depends on its growth. Analysts' growth estimates give the stock a forward P/E of 13. If the analysts are right, the stock is cheap at current prices. However, more negative regulatory decisions could derail those growth estimates.

If you're looking to invest in Celgene, focus less on the ups of the past and make your decisions more on the future. Those prospects seem fairly positive right now, but investors should be aware of the risks.

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Fool contributor Keith Speights owns no shares in the stocks mentioned above. Motley Fool newsletter services have recommended buying shares of Pfizer. The Motley Fool has a disclosure policy.
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