Are Celgene and Amgen Undervalued By the Market?

The market correction continues to test investor resolve, but longtime market watchers know that sometimes, the best money-making decisions come from buying great stocks at great prices. Often, that means buying when everyone else is selling.

If that's the case, the current market slide may be creating an opportunity for investors who have wanted to own biotech giants Celgene (NASDAQ: CELG  ) and Amgen (NASDAQ: AMGN  ) , but have been afraid of overpaying for them.

With that in mind, let's take a look and see how cheap these two biotech darlings have become.

CELG Chart

CELG data by YCharts

Valuing cash flow
Biotech companies are always pumping money back into drug development programs to discover the next blockbuster therapy. However, many of those promising therapies fail during trials, exposing biotech investors to greater risk than if they had invested in tried-and-true industries like consumer goods.

Arguably, that risk should keep most value-oriented investors at bay. However, there are some rare, exceptional companies, like Celgene and Amgen, that are enjoying a seemingly endless string of hits.

Celgene's Revlimid is one of the most widely prescribed therapies for myeloma patients, generating $4.2 billion a year in sales. And Amgen's Neupogen is one of the globe's best-selling cancer drugs, with sales of $5.8 billion worldwide last year.

The success of those drugs means that these two companies kick off plenty of shareholder-friendly cash flow. As you can see in the following chart, Celgene's free cash flow has doubled since 2011, to $2 billion, while Amgen's has steadily remained north of $4 billion.

CELG Free Cash Flow (TTM) Chart

CELG Free Cash Flow (TTM) data by YCharts

Since shares are retreating, Celgene is trading at less than 30 times its free cash flow, and Amgen is trading at less than 16 times free cash flow. To put that in perspective, Coca-Cola trades at 22 times annual free cash flow. That suggests that neither of these two companies are arguably off-the-charts expensive -- at least in terms of the cash they generate.

Valuing earnings
But how pricey are Celgene and Amgen in relation to their earnings power? Price to earnings is one of the most commonly used measures of value, and that ratio, which divides the market price by the trailing, current, or future earnings, can help investors see when markets may be too optimistic or pessimistic.

Personally, I like to consider P/E ratios over time to see if they're near five-year highs or lows. Looking at how much investors are paying for trailing 12-month earnings today suggests that both companies have become more attractive, but aren't cheap.

Celgene's P/E ratio is the lowest since last fall, but at 42 times earnings, it's still high. Amgen's is trading at 17 times earnings, which puts it on the low end of its one-year range, but still handily above levels from 2011.

CELG PE Ratio (TTM) Chart

CELG P/E Ratio (TTM) data by YCharts

While both companies are arguably pricey on trailing earnings, investors are typically best served looking forward, not backward.

If we consider analysts' future earnings estimates, Celgene shares are trading at about 22 times earnings, while Amgen investors are paying about 14 times earnings for shares. Those ratios aren't bad, but they aren't as good as they were in 2011. However, those ratios may underestimate the potential of both companies, given earnings forecasts often don't model in profit from drugs awaiting approval.

That could suggest that analysts' estimates don't fully reflect the potential for Celgene's Otezla, a recently approved drug for psoriatic arthritis that could also win approval for moderate-to-severe psoriasis. If Otezla's label is expanded, Otezla could win additional market share away from multibillion blockbuster treatments like AbbVie's Humira.

Similarly, analysts may be under-appreciating the potential for Amgen to expand the label for Kyprolis, its own multiple myeloma drug that posted sales of $73 million in the fourth quarter.

Valuing Sales
Another way to consider these companies is to look at their price-to-sales ratio. That tells investors how much they're paying for every dollar of revenue. While the measure has dropped for both companies, neither appears a great bargain. At 6.2 times forward sales, Celgene is well above the four times valuation investors were awarding it three years ago; Amgen's price-to-sales ratio is the highest in five years.

Biotech companies typically get granted higher price-to-sales ratios based on the potential for pipelines to produce future top-line growth. Celgene has been actively financing emerging biotech companies working on innovative early- and mid-stage cancer therapies that could eventually bulk up its top line. And Amgen could win FDA approval in the coming year for evolocumab, a new cholesterol-battling drug that may drive sales higher.

If we set those potential revenue drivers aside, and turn our attention to how investors are valuing earnings and expected growth, both companies look much more intriguing.

Celgene's forward P/E to growth, or PEG, ratio is 1.17 and Amgen's is 0.93. Both fall near the one times level many growth-at-a-reasonable-price, or GARP, investors find intriguing.

Fool-worthy final thoughts
It's tempting to think shares are cheap simply because they've fallen from their recent peak, but that's not necessarily a recipe for success. That's especially true now given that biotech stocks had been taken sharply higher to historically heady levels.

Instead, it's better to evaluate companies over a longer period. That approach suggests that, while Celgene and Amgen have blockbuster products that are kicking off substantial cash and could have potential winners in their pipeline, they're not nearly as inexpensive as they were just three years ago. As a result, the two still appear more attractive to growth, rather than value, investors. 

These 2 stocks have a great chance for growth, but these 6 ideas may be even better
They said it couldn't be done. But David Gardner has proved them wrong, time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently, one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.


Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 11, 2014, at 3:32 PM, biotech101invest wrote:

    CELG / Large Cap biotech 2 yr PE's are now trading at a 22% discount to big phama despite having 4x's the growth. It has the highest gross margin in the entire S&P 500 - better than GOOG, Apple, GILD - the other 499 co's....they just got Otezla approved in PsA, Psoriasis approval coming, AS Ph 3 data (2.5 mill patients) on earnings call. CEO on CNBC said near term positive/excited about this yrs guidance so Q1 WILL BE GREAT. Working on 5 separate billion dollar a yr drugs soon plus 200 Ph 2 and 30+ phase 3 trials and they own drugs and equity of the most innovative early stage bios in the world including XLRN, EPZM, BLUE, MPSYY, AGIO and MANY others (CEO said they own 14% of the biotech IPO's). Best CFO in all of healthcare who is buying back billions in stock that will be accretive forever (buying growth at 70% discount with 2017 PEG ratio of 0.3). Markman briefs out this week derisk the patent case significantly per Leerink, Baird, RBC (80%+ chance of settlement per RBC)...CELG is not one of the most compelling cheap growth stocks in the industry now trading at Value PE's less than the S&P 500 and Big Pharma despite the 4x's EPS growth vs those.

  • Report this Comment On April 11, 2014, at 3:37 PM, biotech101invest wrote:

    TYPO CORRECTED

    CELG / Large Cap biotech 2 yr PE's are now trading at a 22% discount to big phama despite having 4x's the growth. It has the highest gross margin in the entire S&P 500 - better than GOOG, Apple, GILD - the other 499 co's....they just got Otezla approved in PsA, Psoriasis approval coming, AS Ph 3 data (2.5 mill patients) on earnings call. CEO on CNBC said near term positive/excited about this yrs guidance so Q1 WILL BE GREAT. Working on 5 separate billion dollar a yr drugs soon plus 200 Ph 2 and 30+ phase 3 trials and they own drugs and equity of the most innovative early stage bios in the world including XLRN, EPZM, BLUE, MPSYY, AGIO and MANY others (CEO said they own 14% of the biotech IPO's). Best CFO in all of healthcare who is buying back billions in stock that will be accretive forever (buying growth at 70% discount with 2017 PEG ratio of 0.3). Markman briefs out this week derisk the patent case significantly per Leerink, Baird, RBC (80%+ chance of settlement per RBC)...CELG is now one of the most compelling cheap growth stocks in the industry now trading at Value PE's less than the S&P 500 and Big Pharma despite the 4x's EPS growth vs those.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2911354, ~/Articles/ArticleHandler.aspx, 8/20/2014 4:43:09 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement