Last Thursday, Celgene's (NASDAQ: CELG ) first quarter earnings call left the market with mixed emotions. Adjusted earnings per share of $1.67 beat estimates by just $0.02. Revenue grew 18.5% on year to $1.73 billion, $40 million less than the Street was expecting.
This has been a rough year for Celgene investors, and a mixed report didn't help matters any. Following the call Thursday morning shares fell about 5% before finishing the week down about 2%.
The industry wide sell-off that began at the end of February has been particularly hard on stocks carrying high multiples, and Celgene hasn't done much to endear itself to a sour market. On a trailing twelve month basis net income has fallen by more than 13% this year. Making things worse, the company lowered 2014 GAAP EPS guidance by 11.7%, from a midpoint of $5.73 given in January to just $5.06 last Thursday.
It's hard to blame anyone for overlooking a company with earnings on the slide and a P/E ratio over 40. But if you take a closer look, Celgene is performing far better than its bottom line and sinking share price suggest. Its top selling product is still gaining steam. A push into psoriasis is under way, and an expanding pile of cash is available for increasing shareholder value.
Pattern or slowdown?
Net income has fallen significantly, but it isn't due to Celgene's ability to ramp up sales of Revlimid. Global sales of the company's top product rose 14.1% year-over-year to $1.14 billion.
The rise of Revlimid has been spectacular, but there are signs that growth is beginning to level off. First quarter US sales of $641.8 million were a bit lower than the $663 million recorded in the fourth quarter of 2013. Fourth-to-first quarter sales patterns like this aren't unusual, and figures for patients treated with Revlimid suggest U.S. sales growth remains strong. Despite a 3.3% sequential drop in quarterly sales, the average daily number of new patients treated with the drug increased by 7%.
Psoriasis competition heats up
Last month Celgene took a big step toward reducing its dependence on Revlimid when the FDA approved Otezla for psoriatic arthritis. An application for the much larger plaque psoriasis indication is under review, and Celgene expects an announcement from the FDA this September.
If approved, Otezla is poised to compete heavily with anti-tumor necrosis factor biologics like Amgen's (NASDAQ: AMGN ) Enbrel. The injectible therapy includes a black boxed warning about life threatening infections associated with the entire anti-TNF class. This didn't stop Amgen from recording $924 million in first quarter US Enbrel sales, over a quarter of its total top line.
Novartis (NYSE: NVS ) is also aiming for the psoriasis market with its late-stage candidate secukinumab. The IL-17A inhibitor employs a different mechanism than Enbrel. Results released last year suggest it may be more effective. During a late-stage trial about 24% of secukinumab patients achieved completely clear skin, compared with 4% of Enbrel patients. Last month Novartis began a trial putting secukinumab up against Johnson & Johnson's Stelera. The company submitted applications for the promising therapy in the US and EU last year.
Celgene's net income has remained somewhat stagnant over the past few years, but cash generation has been strong. The company ended the first quarter sitting on $5.1 billion in cash and equivalents.
Celgene isn't about to start a dividend policy, but it has shown a good measure of shareholder appreciation lately. In the first quarter Celgene spent $1.6 billion repurchasing shares. In the chart below you can clearly see the effect the buybacks have made to EPS. Earlier this month the board authorized another $4 billion to keep it going.
Of course Celgene is buying more than its own shares. Last Thursday the company also announced the addition of another candidate to its stable of late stage programs. The company agreed to an astronomical $710 million upfront for an RNA antisense drug from Ireland’s Nogra Pharma.
The candidate has completed a phase 2 trial in 166 patients with active Crohn’s disease. The results are still under wraps, but Celgene thinks they’re good enough to begin a phase 3 registrational study. For the amount it’s paying, those results had better be pretty amazing.
Foolish final thoughts
Celgene has a lot going for it, even if this year's price performance thus far suggests otherwise. Revlimid still comprises about two-thirds of sales, but steps taken to reduce dependence on the top-seller look promising.
The wider plaque psoriasis indication for Otezla could be a big part of that strategy, if approved. With about 3% of the population afflicted with the condition, the pills have the potential to overtake Revlimid as the company's biggest seller. Unfortunately, possible competition with next generation antibodies, like Novartis' secukinumab, could cloud its future.
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